Dealing with China’s New Policies on Business

Recent economic policy changes in China are likely to have significant implications for non-Chinese companies doing business there. To discuss what may be coming, GLG’s Jenna Moore recently met with Craig Allen, President of the U.S.-China Business Council, and George Magnus, an independent economist and Research Associate at the China Centre at Oxford University and at the School of Oriental and African Studies in London. This article was drawn from an interview that followed a GLG Remote Roundtable focused on the same topic.

In what ways will the new “Common Prosperity” agenda affect companies conducting business in China?

George Magnus: “Common Prosperity” is not a new theme or slogan in China. But, Xi Jinping has placed a renewed a focus on it. In a nutshell, it reflects the idea that everybody in China should participate in the nation’s rising fortune and prosperity. The idea has returned because there are still 600 million people in China earning less than $140 a month, and the proportion of gig workers and low-paid, low-skill workers in China has risen sharply in the last 10 or 15 years. What’s more, disparities in income and wealth in China are greater than virtually anywhere else in the world. The renewed emphasis on “Common Prosperity” could well translate, therefore, into new property taxes and other taxes on capital as opposed to taxes on labor, though the debt crisis enveloping the property developer Evergrande and the likelihood of a bear market in property this decade may put cold water on the idea of a property tax again.

Also, we should note the general crackdown on many private companies and private entrepreneurs. It entails a whole array of new regulations on data security, privacy, storage, and usage, and whether companies can export that data or use even the internet. The role the Communist Party will play at private firms in terms of recruitment, research and development, compliance, management, and in other areas — whether those firms are Chinese or foreign — is also likely to be more marked. These changes may not happen tomorrow or next month, but Xi Jinping wants big things in place before the next Party Congress in the fall of 2022.

Craig Allen: From a purely political perspective, “Common Prosperity” is a magnificent slogan. It’s an amalgam of Confucian virtue, communist virtue, and populism, and touches on many values common in China. It will be very effective for Xi as he prepares for the twentieth Party Congress next year given China’s inequality. That said, thus far, the operations of American and European companies in China have not been affected and I’m not sure they will. The big question is whether “Common Prosperity” is a short-term, politically expedient phenomenon or something that lasts a long time. If the latter is the case, it is reasonable to ask what the second-, third-, and fourth-order effects would be on GDP growth. If it were to have a significant effect, I expect it would fade away following the election of the next party leader in October 2022. If it did not have a large effect on GDP growth and remains popular, it may turn out to be a longer-term campaign.

George Magnus: We should note a few things. First, there is no doubt Xi Jinping will be nominated for a third term. Second, while certain business sectors may seem to have escaped becoming specific targets, that doesn’t mean they aren’t affected by the data privacy laws, data security laws, intellectual property legislation, and other regulations that are coming and which will have a profound impact on what companies are and aren’t allowed to do. Those rules are not sector-specific, and there is no question that multinationals will be affected by them in some way. Third, China has laid out the red carpet for foreign financial firms to do investment banking and wealth management, asset intermediation, and so on. But that should not lead to complacency. They may see the effects too, and may already be experiencing tougher business conditions.

Craig Allen: One thing is certain, even if hard to quantify: the additional regulation and oversight will mean having to hire a lot more people for data security and compliance, and cross-border data flows will become much more complex. And the possibility of breaking a growing and conflicting set of laws increases every day.

How do you see China developing a strategy around innovation and R&D?

Craig Allen: The Chinese government has a great deal of financial, technological, and human resources available to dedicate toward research and development, and they intend to use them. They will challenge the United States geo-strategically and militarily, and how we deal with that at the national and corporate levels is a huge challenge. Many of my member companies are importing technology into the United States from China as well as exporting technology to China. This is brain circulation, not brain drain. Just as German universities challenged us in the early nineteenth century, the Chinese system is challenging us today. How we respond is enormously complex and important, and I don’t know the answer.

George Magnus: I’d just like to draw a distinction between invention and innovation. Invention is doing clever stuff with technology. And there’s no question that China in many, but not all, areas is a rival to liberal-leaning democracies in invention. But China is not that great at innovation, which is about management, branding, commercialization, and leveraging the benefits of technology and science from the producers of the products into the boring bits of the economy that make everything more productive. That’s where educational attainment of the workforce is critical, and that’s where China lags. It could take a generation or more to correct this if it can be corrected. But the governance system that’s being put in place now is something that is not ideally suited to accelerate innovation. In fact, in some respects, it’s quite the contrary. Still, that doesn’t detract from China’s capacity to do smart things with science and engineering.