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Doing Business in China: Political Play Adds Unique Flavor to Chinese Business Mix

By Doug Young

Recent tensions between the U.S. and North Korea seem like a good starting point to broach the subject of political risk, which has always been an important consideration for anyone doing business in China. Political risk exists in any country, though obviously the levels tend to be lower for governments that are more stable and operate with higher degrees of transparency.

Even relatively stable places like the U.S. are prone to such risks, as many businesses are now finding out under the administration of President Donald Trump. Clearly there’s little or no risk of anything radical happening in the U.S., at least not just yet. But smaller risks created by Trump’s protectionist moves are causing many businesses to rethink their respective global strategies.

Back here in China, the risks are of a different variety that you don’t see as much in the West. One of the biggest involves Beijing’s diplomatic relationships with other countries, which have an uncanny way of working themselves into the business world when tensions occur. Another is the sometimes-abrupt changing of government officials, which can cause headaches due to the importance of relationships in doing business here.

Let’s begin with a look at the broader picture, which has nearly everyone agreeing that political risk in the China of today is much lower than it was when the country first began opening up to the outside world. Back then, the country’s most powerful figure, Deng Xiaoping, didn’t even have a major formal title and was often referred to simply as “paramount leader.” That’s hardly a well-defined position, and couldn’t have been too comforting for any foreign business thinking of plunking down millions of dollars in the market.

Today the positions are much more formal, including a president and premier at the top, and well-defined bodies and official positions beneath that. The selection process for many of those officials is still a bit murky, but there are certainly more signals today about what’s happening behind the scenes, mostly showing up in foreign media.

Middle of the Pack

I asked a number of people in a wide range of businesses to rate the current political risk level on a scale of 1 to 10, with 1 being the lowest risk and 10 the highest. I wasn’t too surprised to find that nearly everyone put China right in the middle of the pack, with most giving it a 5 or a 6. One thing that did surprise me slightly was the relative lack of concern about political risk among the people I polled. One respondent who has headed several major multinationals’ China operations said he didn’t really think about political risk at all, though he guessed that perhaps people in the global headquarters had contingency plans for any unexpected turns.

That said, two of the biggest areas to watch out for seem to be the pair I mentioned above — namely, diplomatic tiffs and campaigns within the government.

The diplomacy effect is relatively unique to China, and sees political spats often spill out into the business realm. South Korea has been the latest to feel the heat over such tensions following its decision to install a U.S.-supplied anti-missile system that Beijing opposes. Seoul says the system is purely defensive, while Beijing worries it could be used for spying.

Following those tensions, South Korean retailers and car sellers suddenly found their sales dropping sharply, as Chinese consumers boycotted such businesses. Many Chinese cruises to the country were abruptly canceled, wreaking havoc on popular tourist destinations. And at least one South Korean-owned chain found that many of its stores were suddenly being shut down for safety violations.

Others to feel the fallout from similar clashes over the years include Vietnam and Japan, both following flare-ups in their territorial disputes with China, and various Western countries that play host to people that Beijing considers hostile.

Next there’s the risk from government campaigns, which has manifest itself lately with Beijing’s current anti-corruption drive that also frowns on lavish spending. One of my contacts described his own company’s boom and subsequent struggles over the last five years that were directly linked to the anti-corruption drive and illustrate what this kind of risk looks like.

The company was set up in 2012 as a booking platform for the nation’s booming golf industry as a new generation of wealthy individuals took to sport. Golf courses initially rejected the platform because they had no problem finding their own customers, a significant number of them officials from government and big state-owned companies.

All that changed around 2014, when the frugality and anti-corruption campaigns took off in earnest. As courses suddenly saw their business drop, the booking platform saw its own business boom and signed up 157 new clients in a single year. But just a year later, the winds suddenly shifted again, as the government started shutting down golf courses to crack down on excess.

In terms of how to minimize fallout, people didn’t have much advice beyond staying attuned to such political factors and rolling with the punches. One contact did point out that goodwill through efforts like programs to help the poor might be able to cushion some of the effects. But it does seem political risk will remain a moderate issue in China for the foreseeable future, and one contact astutely pointed out that could partly explain why many Chinese companies are so quick to pile into new areas with relatively little thought for their long-term development.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com.

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