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Op-Ed

Fear and Loathing in China’s New Economic Normal

On November 11, Chinese President Xi Jinping addressed a group of 1500 global business executives at an APEC event and called for a new era of economic openness and inclusiveness. In elaborating on the “new normal” of Chinese economic growth, he pledged to redouble efforts to tear down regional barriers to trade and investment and “forge a partnership of mutual trust.” There was also encouraging bilateral economic news at APEC in the form of more open visa policies and progress on expanding the Information Technology Agreement to reduce Chinese trade barriers.

President Xi’s remarks and the good news at APEC sounded a contrasting note to those he made just a month earlier, when he praised the “positive energy” of a popular Chinese blogger who rails against foreign engagement in the Chinese economy. They were also out of tune with the well-chronicled anxieties of foreign investors about the souring business environment they face in China.

Foreign pharmaceutical companies have faced unprecedented fines for bribery. Foreign food service companies have been charged with violating Chinese food safety laws. And a range of companies from automotive to computing firms have come under investigation for alleged anti-competitive practices. To be sure, a number of private Chinese firms have also been swept up in the crackdown on business, but the most prominent and most significant targets have been foreign multinationals.

China has always been ambivalent about the role of foreigners and foreign businesses in the country, but has seemingly taken a turn toward outright xenophobia of late. Xi’s “positive” blogger, Zhou Xiaoping, conjures up centuries of humiliation by the West in his anti-foreign rants. State-run media are quick to blame “hostile foreign forces” for any societal disturbance. Foreign firms from Starbucks to Wal-Mart have been subject in recent years to sensationalized media reports for otherwise common business practices. Longtime foreign business professionals in China increasingly wonder, as one American 30-year resident of Beijing put it, “is it worth all this hassle?”

By any reasonable measure, the contribution of China’s foreign business community to the growth of the Chinese economy has been significant. Foreign invested enterprises (FIEs) have been responsible for between 20-35 percent of Chinese industrial output for over a decade. FIEs are responsible for over 20 percent of China’s exports. With its economy facing significant structural challenges, there are good reasons for China to maintain foreign business confidence. But growing concerns about the business climate in China have clearly spooked overseas investors. In September, the Ministry of Commerce announced that foreign direct investment (FDI) slipped to its lowest level since the height of the financial crisis.

It doesn’t have to be this way. The foreign business community reacted with guarded but increasing optimism to Chinese President Xi Jinping’s first year in office. President Xi had been given high marks by foreign interlocutors for his openness and understanding of the strengths and weaknesses of the Chinese economy. He assembled a group of respected globalists as his primary economic advisors. And the economic reforms unveiled in the lead up to and at the Third Plenum of the 18th Central Committee in November 2013 suggested a sweeping path toward a more open and liberalized Chinese market. More recently, actions at the Fourth Plenum pledged greater transparency and accountability in China’s bureaucratic and judicial systems, something that any foreign businessperson should cheer.

To be sure, President Xi has many more concerns than the interests of the foreign business community. He has an ambitious agenda. He has taken on leadership of China’s military, security, diplomatic and technology policy. His “new normal” economic policy requires dramatic structural shifts in the relations between government, business and Chinese citizens that challenge entrenched political interests.

While not all of his motivations are clear, he appears to be responding to a sense among Chinese citizens that the Chinese government is primarily dedicated not to protecting their interests, but to engaging in rent-seeking behavior. To that end, he has in embarked on a multi-front effort. One aspect of that effort is his high-stakes anti-corruption campaign. Yet another is the primary theme of the Third Plenum: to make the market the decisive factor in economic decision making. The Fourth Plenum highlighted a third front: to reduce local regulatory and judicial decision making autonomy.

Xi’s vision seems to involve a fundamental shift in how the Chinese government regulates economic activity. That role for most of the past 35 years has been to act as initial arbiter of what is and is not permissible; to grant or deny an application to conduct new business and take a sporadic oversight role once a license to do business is granted. Xi’s new approach suggests that most economic activities will be presumed permissible, and government agencies will act – as they do in most developed economies – to play a more concerted role to ensure that businesses are operating in line with Chinese law and regulation. That would be a sea-change in administrative practice.

And this change in practice may have, in part, led to some notable cases in recent months of Chinese agencies engaging in aggressive regulatory behavior, ostensibly in the name of protecting Chinese consumers and citizens. Xi’s public and rumored exhortations to Chinese regulators have been uniform: go forth and enforce the law. While not all of the subsequent enforcement activity has been directed at foreign companies, the most prominent cases are. And that seems not just to be satisfying the new enforcement goals, but scratching the emergent, anti-foreign itch.

For example, the rash of investigations under China’s six-year old antimonopoly law (AML) has received considerable public attention in both the Chinese and Western press. During recent remarks at APEC in Beijing, President Obama said: “we look to China to create a more level playing field on which foreign companies are treated fairly so that they can compete fairly with Chinese companies; a playing field where competition policy promotes the welfare of consumers and doesn’t benefit just one set of companies over another.” European automakers have been investigated for price gouging, with Chinese regulators claiming the Chinese public believes foreigners are “just making too much money,” according to one European auto executive. American technology giants Qualcomm and Microsoft have been investigated for ubiquity in their respective markets. Both, for different reasons, have been the subject of Chinese grumbling about the royalty fees they charge for their products, although in the case of Microsoft, most of their products used in China are counterfeit copies.

Beyond regulating under the AML, China levied a $500 million fine for bribery on British pharmaceutical company Glaxo SmithKline. Foreign pharmaceutical companies have for years come under public and official criticism for aggressive intellectual property practices and perceived high prices. After an extensive investigation, GSK was accused of operating a sales-strategy that paid doctors to prescribe their products. The strategy has been standard (if illegal) practice in the industry for decades, but a foreign competitor was singled out first for punishment. An editorial in Xinhua after the fine was announced questioned: “Which country’s justice system can tolerate this kind of behavior when GSK bribes people, sabotages public interest and damages the market?”

Amid an ongoing series of alarming scandals about the safety of China’s food supply, Illinois-based food service company OSI, which supplies meat to fast food companies like McDonalds, was singled out for official scrutiny after a disgruntled former employee orchestrated a “gotcha” television investigation. The company now stands accused of violating China’s food safety laws and several of its Chinese executives have been imprisoned. This is all despite the fact that many of the practices for which they are being cited are standard procedure in developed countries and for which there is no scientific basis to suggest they are unsafe. And further, according to a foreign executive close to the investigation, many of OSI’s Chinese competitors are much more lax in maintaining proper food safety standards.

Ensuring fair competition policy and public safety is an important and legitimate role for any government. And the business practices of foreign firms in China are certainly far from unblemished. A regulatory framework that focuses on enforcement of transparent, uniform standards is something most foreign (and competitive Chinese) companies would undoubtedly welcome. These most recent regulatory efforts, however, seem to incorporate agendas other than simply enforcing the law.

Take the AML, for example. China’s domestic innovation strategy has set a target for foreign technology penetration at less than 30 percent. President Xi has not only been a vocal champion of local technological development, he has also, in the wake of the Snowden revelation, been quoted as saying “network security is national security.” Finally, local competitors of the companies under investigation have apparently been engaged by regulators to comment on the ongoing investigations. Small wonder many foreign observers question whether AML enforcement is simply about safeguarding consumer interests.

Common to most of the cases is an open-ended investigatory process with Chinese regulators seemingly fixated on finding a smoking gun to justify the regulatory inquiry. In many instances, it is far from clear not only what regulators are looking to achieve, but to which standards the companies under investigation are being held accountable. Due process, transparency and a clear path to resolution are notably absent. This lack of clarity invites the introduction of other agendas, whether industrial policymaking or individual rent-seeking behavior, or even darker xenophobic instincts, that President Xi’s otherwise laudable effort to transform the Chinese regulatory framework seems designed to curtail.

Changing the role of Chinese agencies from licensors to overseers is truly transformational and would seem to be a key plank in China’s new economic reform efforts. However, agencies cannot acquire the capacity or the roadmap to make that transformation overnight. Many Chinese agencies, in their rush to follow Xi’s guidance to enforce the law, seem to be operating according to rules being written on the fly. Deng Xiaoping famously summarized Chinese economic policy as “crossing the river by feeling the stones.” That worked wonders in getting China’s economy off the ground. It is not, however, a navigable path to Xi Jinping’s economic “new normal” of regulatory transparency and accountability.

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