Foreign companies in China confronting unprecedented threats, executives say

A woman in a protective suit tries to buy goods from a shop behind barricades of a sealed-off area during lockdown, amid the COVID-19pandemic, in Shanghai, China, May 4. Reuters-Yonhap

Multinational companies operating in China face unprecedented risks as US-China relations crater, supply chains swoon and hardline nationalism on both sides of the Pacific intensifies, US executives and a senior government official said Friday.

Russia's invasion of Ukraine is likely to compel China to reconsider any possible invasion of Taiwan as Beijing watches Moscow struggle, panelists at a Committee of 100 conference in Washington said. But they also noted that the conflict illustrates that geopolitical threats once viewed as minuscule can no longer be discounted.

"One more risk ... and it's a big one, is the risk of a catastrophic collapse in U.S.-China relations," said Robert Daly, director of the Wilson Center's Kissinger Institute and a former U.S. diplomat in Beijing.

"I don't think it's a high probability, but it's not trivial, and it's growing."

The pandemic, meanwhile, has done more than cripple global supply chains and industries ― seen, for example, with auto production in Shanghai ― as Beijing enforces a zero-COVID strategy.

It has also eliminated most official, cultural and corporate visits that can reduce miscommunication and address problems before they grow too large.

"Now is the time of maximum risk in your business lifetimes with China. And I think we should anticipate that will probably get worse," said Craig Allen, president of the U.S.-China Business Council and a former U.S. diplomat in China.

"Political risk has really become the most important factor, mainly the interaction between the two governments, which is increasingly adversarial and aggressive and hostile."

On other fronts, companies increasingly must navigate tough Chinese rules on how data is exchanged and stored, and risk seeing Beijing decide on short notice that a particular sector is no longer desirable ― as seen in September when it banned the $100 billion for-profit tutoring industry.

The U.S. and Chinese flags are displayed outside a hotel in Beijing In this May 14, 2019, file photo. AFP-Yonhap

"It's really a regulatory rodeo," said Melanie Hart, a senior China adviser at the U.S. State Department, citing secondary risks U.S. companies face if they also operate in Lithuania, which China is punishing for strengthening ties with Taiwan.

Beijing seeks to isolate diplomatically the self-governing island, which it views as a renegade province to be eventually reunited with the mainland, by force if needed.

"China has made it very clear it's willing to use supply chains as a weapon," Hart said. She added that the US is not trying to contain China or keep it from developing economically, but seeks to ensure that its rules are transparent and do not discriminate against foreign companies.

A raft of bills working their way through the US Congress threaten to further undercut economic ties. Various measures would impose more sanctions on China, tighten export controls and restrict U.S. investments in the world's second-largest economy.

Punitive trade sanctions, many imposed under the administration of former president Donald Trump, now affect some 1,100 Chinese companies, panelists said.

"Tariffs are an example of how the so-called cure can be a lot worse than the so-called problem," said Allen, who estimated that these have cost 250,000 U.S. jobs.

Washington is also going too far in efforts to remove China wholesale from many supply chains, he added. "When you politicize it, making it a national security issue is not going to solve it."

Wei Sun Christianson, a Committee of 100 board member and senior adviser at Morgan Stanley, predicted that China's zero-COVID strategy would ease late this year, after the fall Party Congress ― in which President Xi Jinping is expected to gain a third term ― and more older Chinese have been vaccinated.

Until then, COVID-19 measures will continue to undercut the Chinese economy and global supply chains, she said, citing a Morgan Stanley estimate that China's economy will grow 4.2 percent this year compared with Beijing's stated goal of around 5.5 percent.

Despite all this, many sectors of U.S.-China trade are doing well. U.S. exports to China rose 21 percent in 2021, including 35 percent for agricultural shipments.

U.S. demand for imports from China has also surged, as the U.S. trade deficit with China expand by 14.5 percent in 2021 over 2020 to reach $355.3 billion.

Increasingly, as positions and rhetoric hardens on both sides of the Pacific, companies find themselves caught in the crossfire, panelists said.

A single post on Twitter by an employee can spur a huge backlash from Beijing and Chinese consumers even as social media outside China punishes multinationals for complying with controversial Chinese rules, panelists said.

"With increased patriotic sentiment coming out of China, and noise from social activism abroad, you have to handle each of these groups at the same time, and the interaction of the two," Christianson said.

"Not only is the list getting longer, but the magnitude of issues and I think the speed of issues that can translate into problems, even crises, is getting quicker."

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