Wednesday, November 03, 2021

[The Diplomat] China’s Neo-Nationalism Poses Risks for International Businesses

Companies and firms that used to straddle both the West and China with ease – like LinkedIn and Mayer Brown – are now finding themselves in uncharted territory.

By Charles Mok and Dennis Kwok

November 02, 2021

The policies and regulatory decisions coming out of Beijing nowadays show that nothing is too big or too small for the Chinese state to exert control over. Critics of the film “The Battle of Changjin Lake,” a film that glorifies the Korean War against the United States, promptly faced criminal prosecution for dishonoring national heroes. The launch of a new product by Sony was heavily fined by the Chinese authorities for coinciding with the anniversary of the Marco Polo Bridge incident in 1937, marking the Japanese invasion of China. The rise of neo-nationalism within the country increasingly drives the many actions taken by the state against the private sector.

This wave of Chinese neo-nationalism is increasingly putting international firms and companies in a precarious position. Companies and firms that used to straddle both the West and China with ease are now finding themselves in uncharted territory.

In October, the U.S. law firm Mayer Brown accepted instructions to act on behalf of its client, the University of Hong Kong, in its attempt to remove the statue “The Pillar of Shame” from the campus. The statue was put there nearly a quarter of a century ago to commemorate the Tiananmen Massacre in 1989. It was not only a fixture but also a symbol of freedom in the campus of Hong Kong’s oldest university. The institution helped nurture the likes of Dr. Sun Yat-sen, Professor Benny Tai, and Edward Leung, who fought for democracy and freedom (the latter two are now both in jail). After outcry overseas, Mayer Brown eventually and rightly withdrew its representation from the University of Hong Kong. This in turn led to angry pro-Beijing politicians in Hong Kong calling on all Chinese firms to boycott Mayer Brown. The firm has a long history in China with many clients in the region.

Another global company facing the same dilemma of staying in the China market under increasing pressures would be the career-oriented social network LinkedIn. On October 14, Microsoft, which owns and operates LinkedIn, announced its decision to cease its present LinkedIn China service by the end of the year, citing a “significantly more challenging operating environment and greater compliance requirements in China.”

In March of this year, China’s internet regulator, the Cyberspace Administration of China (CAC), told LinkedIn to improve its content moderation — i.e. censorship in China’s context — and the company was ordered to temporarily halt registration of new users. Since then, scores of scholars and journalists have seen their profiles blocked in China, and an outcry from affected users ensued on social media all over the world.

But such censorship is hardly anything new for LinkedIn, which has operated in China since 2014 under a joint venture arrangement with its Chinese partners. For years, LinkedIn was an exemplary case of a model favored by Chinese authorities, so as to maintain operational, financial, and data control on internet services provided by foreign companies. Since the beginning, LinkedIn users have found that certain content is blocked in China, and some users were even summarily told that their posts would not be seen in China. One of the authors of this piece received notices from LinkedIn back in 2014, when the company admitted users’ “public activity visibility” in China would be limited under “specific requirements within China to block certain content.” In short, it was a notice that a user’s posts are banned in China.

Western media and politicians would probably have continued to turn a blind eye to such practices, but their hands were forced thanks in part to China turning up the heat in its recent campaign against other Chinese internet and tech companies. It began last year with actions targeting Ant Financial and Tencent, and continued this summer with action against Didi Chuxing for its IPO in New York. A Yahoo Finance app was recently taken down in China in an attempt to control financial news about China’s economy and markets.

However, it must be pointed out that many Western reports have mistakenly characterized LinkedIn’s move as an “exit” from the China market, comparing it with Google’s termination of its search engine business in China in 2020. Such comparison are inaccurate, given that the company also said it would replace its existing service with a new recruitment-only portal called InJobs, without the fuss of news and social networking, for its Chinese mainland users. In fact, LinkedIn’s China chief issued a “clarification” on the same day of its headquarters’ global announcement, but in China only. On Weibo, China’s Twitter-like service, he reassured Chinese users that LinkedIn was not leaving China, and would focus on providing value in “connecting job opportunities” for users in China, with InJobs. This “for-China-only” message apparently was not made available in English and hence was largely overlooked by Western media, which chose to report on the company’s move as an “exit.”

In any case, LinkedIn’s move casts doubt on the business environment for foreign companies in China, and in particular the viability of the Chinese joint venture model for service operations in China by foreign firms – the same model that LinkedIn excelled in before its demise. Microsoft’s cloud service, Azure, and its Office 365 and Dynamics 365 platforms still operate with a local joint venture partner in China, and so does its chief global cloud competitor, Amazon’s AWS, with its own local Chinese partners. Likewise, Apple operates its iCloud service for Chinese users at its data center in Guizhou province with another local Chinese partner. Will the “more challenging environment” and “greater compliance requirements” LinkedIn pointed to cause these Western tech giants to also reconsider their China-based operations? Time will tell, and it may not take very long.

China’s Data Security law creates a new layer of data called “national core data.” As defined by Article 21, this category consists of data that is vital to national security, national economy, people’s livelihood, and major public interest. A more stringent regulatory system is in place to regulate this “core data.” Intermediaries who deal with such core data are also subject to strict regulations. Given the broad definition of this new category of “core data,” many forms of data held by international firms would be subject to this stringent regulatory system.

The same applies to Wall Street finance firms that are moving more of their operations and investments into China. The financial data held by these firms would likely be subject to regulation as “core data” given that financial security is a key part of national security as pointed out by Xi Jinping in a 2017 speech. In addition, the process of data export management would be subject to the Cybersecurity Law and require approvals from the relevant authorities in China. Foreign firms who wish to export data stored in China to overseas servers or branches would be well advised to follow such legal requirements. Fines could go up to 10 million renminbi plus criminal liabilities may follow, putting China-based employees directly at risk.

From the point of view of the Chinese Communist Party (CCP), the main political motivation behind enacting such laws is to manage and control data security that poses a potential threat to national security. The fear is that if foreign governments and regulators could obtain access to these data, they could be used against the Chinese state. The other aim is to rein in domestic tech firms that have grown too big and too powerful which threatens the position of Xi and the CCP, as well as foreign tech firms that the regime would trust even less.

With the recent reappearance of Jack Ma in Hong Kong and Europe, many wonder whether this is a sign that the recent waves of controls and regulatory actions by the CCP on the private sector will ease up. Wall Street is divided on whether to invest in or avoid the China market, with major firms such as Blackrock and UBS recommending investors to double down on China.

Another developing front for companies invested in China is increased pressure from the West stemming from a new emphasis on environmental, social, and governance (ESG) factors. Many international firms and companies have signed on to ESG pledges. Traditionally, however, very little attention has been paid to the “S,” including human rights considerations. There is now the beginning of a conversation to change this.

Speaking at Hong Kong Watch’s report launch at the Conservative Party Conference on Sunday evening, Baroness Helena Morrissey, the chair designate of AJ Bell, recently spoke about why ESG investors must start taking their human rights commitments seriously, particularly in the context of China.  Morrissey said it is time to “call out investor hypocrisy” and that investors must “rethink their dealings in areas where there are clear human rights abuses.” She referred to a range of international standards to illustrate that investors have a responsibility to protect human rights, including the U.N. principles for responsible investing, the U.N. Guiding Principles on Business and Human Rights, the elaboration in 2017 of a reporting framework on business and human rights, and just over a year ago, the development of further guidance for investors.

From now leading up to the National People’s Congress of March 2022, we predict that Xi will continue to drive up nationalism by using populist policies against private enterprises. Political considerations for the CCP would be paramount, trumping economic ones. Foreign firms would find themselves ever more at risk in this new market environment, as they continue to be squeezed between the West and China.

Published by The Diplomat, November 2 2021

https://thediplomat.com/2021/11/chinas-neo-nationalism-poses-risks-for-international-businesses/ 

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