Western Corporations’ “Short March” Back To China: Bad Business, Awful Public Relations, Dangerous Policy

From the perspective of the Chinese government, a far more important casualty of its recent, brutal crackdown than the loss of life among pro-democracy demonstrators has been the flight of Western businessmen and investment. Unless quickly reversed, this development seriously jeopardizes the already tenuous condition of China’s economy. It is for this reason that the Chinese leadership has made every effort to reassure the sources of vital technology and capital in the West that investments already made in the PRC are secure and that the opportunities for high profits in the future are better than ever.

Indeed, so great is Beijing’s desperation for renewed economic, financial and technological assistance from the industrialized democracies that it has adopted a most unsubtle "carrot and stick" approach. Businesses and governments are being promised, in the words of observers on the scene, "quick progress on stalled deals, meetings with once-unavailable Chinese officials and even concessions and terms heretofore undreamed of."(1) At the same time as these blandishments are being offered, the Chinese government is putting out the word that those who left in haste will "regret it one day."

The Businessman’s Conundrum:

For these and other reasons (for example, sunk investment, concerns about legal liability for failure to honor contractual commitments, fears of mismanagement by Chinese partners currently running joint enterprises without benefit of the supervision of the involved Western companies, etc.), many businessmen in the United States and elsewhere are currently considering a speedy return to China. However, there are three important reasons for rejecting an early return that should be uppermost in the minds of Western corporate decision-makers and bankers: It stands to be bad for business, poor for corporate public relations and detrimental to U.S. policy interests.

Bad Business

China’s economy is steadily deteriorating. The retrenchment in China’s economy was apparent months before the Beijing massacre of pro-democracy students and workers. Serious economic dislocations are emerging due to a 30-percent rate of inflation, a nationwide cash squeeze, shortages in foreign exchange and raw materials (particularly coal), and massive corruption. In May, China’s National Material Work Conference concluded that the doubling of energy prices was seriously constraining the development of the national economy. China’s State Council has reportedly cancelled all but the most pressing construction projects.

The crisis is particularly acute in rural areas, where farmers are already forced to accept "IOU’s" as payment and to sell grain to the government at prices well below market. In fact, the Chinese government has been using credits to pay for grain since last September — further contributing to inflation. Discontent over mismanagement and oppressive behavior on the part of the Chinese government has manifested itself in thousands of cases of peasants using force against tax collectors over the last few years.

The Impact of the Massacre

International reaction to the June 4th Tiananmen Square massacre has greatly exacerbated China’s already serious economic difficulties. Significant repercussions will be felt from: the resulting suspension of World Bank and Asian Development Bank loans and projects as well as bilateral foreign aid programs; disruption of Chinese bond offerings; the sharp downturn in a $2 billion annual tourist trade; a range of new economic sanctions likely to be applied by the United States; and sanctions already imposed by the European Community and Canada, including the suspension of official investment guarantee schemes and restrictions on certain high-technology transfers.

China’s seriously overtaxed transportation system was severely interrupted when the army descended on Beijing, blocking all rail lines and placing heavy demands on the civilian air transport system. The resulting supply bottlenecks may not be worked out until the end of the year. Furthermore, some analysts are predicting a 15 percent loss in Chinese exports for 1989 as result of the upheaval.

In short, China’s ability to "earn its way" out of the current downturn is currently marginal, at best. The situation is sufficiently dire that a substantial possibility exists that China will face the need for a formal or informal debt rescheduling within the next several years. Due to political constraints or adverse developments, Western creditors may not be in a position to enter into the kind of Paris Club and private commercial bank reschedulings needed to achieve an orderly stretch-out of Beijing’s debt repayments. Barring such an orderly rescheduling, Western corporations investing in, or trading with, China could well face late payments — or worse yet, have to settle for only partial payments for services rendered or equipment sold.

The Prognosis is for More Instability

There is considerable potential for the political and economic situation in China to become even more inhospitable to Western business interests. As the regime grows increasingly doctrinaire politically, there are indications that — its present statements notwithstanding –the lesson it has learned from recent experience is that pressures for political liberalization necessarily emanate from expanded entrepreneurship and private enterprise. The Chinese government will consequently be less tolerant of the sort of flexible and forthcoming arrangements needed to promote profitable investment and ventures in the PRC. Such an attitude on the part of the government will, in turn, reduce the willingness of Chinese businesses and state managers to experiment with such economic reforms. At a minimum, the business environment in China will be an unstable and unpredictable one for some time to come.

What is more, a number of developments could potentially exacerbate present problems for Western businesses in China. It is worth noting, for example, an event largely overlooked in the Western press in its preoccupation with the pro-democracy demonstrations and Sino-Soviet summit — the May 1989 trip to China of Iranian President Khameni. Khameni termed his visit in the PRC — which included a side-tour to Xinjiang, where China develops and tests its ballistic missiles and nuclear weapons — "a turning point in Iranian-Chinese relations." Expanded Sino-Iranian cooperation in the military arena could cause further souring in U.S.-PRC relations.

A further complication could be uncertainties concerning the safety of Western corporate representatives in Beijing. The possibility of kidnapping or even official detention of Americans by the Beijing government on trumped-up charges cannot be precluded should it adopt heavy-handed methods to force the release of leading dissident Fang Lizhi now in the American embassy. An example of a similar action was the Soviet Union’s seizing of U.S. reporter Nicholas Daniloff in 1983.

There are, moreover, a significant number among the current Chinese leadership who favor rolling back the economic reforms implemented to date. In a speech made to the CPC Central Committee and the State Council on June 13, Li Peng made several points that bode ill for Western-style business interests in China:

 

• "Production in large state-owned enterprises has grown slowly, while that in collective enterprises has grown too rapidly." In other words, state-owned enterprises are going to receive priority over the private sector.

 

• The government blames growth of consumer goods output as a primary cause of inflation. "Continued efforts should be made to stabilize commodity prices. The work of stabilizing commodity prices remains quite arduous and we should not relax in the slightest in this regard." That vital sector of the private economy can be expected to be curtailed as inflation continues unabated.

 

• "It should be noted that [mistakes on the part of a few comrades] is the result of bourgeois liberalization that has spread unchecked over an extended period." Translation: The problem is not simply the pro-democracy demonstrations; it is the whole series of reforms that underpin the political reform movement — and the atmosphere required for sound business investments in China.

Finally, U.S. governmental assistance in minimizing the risk or otherwise facilitating American companies’ participation in Chinese business opportunities may become more problematic in the future. (Already, the Overseas Private Investment Corporation has suspended its programs in China.) In this respect, congressional sentiment figures prominently. Particularly noteworthy in this regard is the 29 June resolution calling for expanded economic sanctions against China that was adopted 418-0 by the U.S. House of Representatives. U.S. businesses choosing to expand their investments — or even pursue those already made — have been put on notice: they will increasingly have to do so at their own peril.

Undesirable Corporate Public Relations

Those interested in quickly restarting business dealings with China in the aftermath of the bloody crackdown must carefully calibrate the bitter sentiments most Americans feel toward the perpetrators of these outrages. It is not unreasonable to expect that such feelings will be readily transferred to those who would — wittingly or unwittingly — help the "Butchers of Beijing" as they seek to consolidate their hold on power.

American firms that choose to reengage or expand their presence in China in the aftermath of the Tiananmen Square massacre and other brutality will likely be tainted by the government’s repressive activities. Indeed, a number of Western companies have already learned to their chagrin that the Chinese leadership has systematically sought to exploit their continuing involvement in the PRC. They have been used as part of a propaganda campaign aimed at both domestic and foreign audiences, designed to underscore the regime’s contention that business is back to normal, while bolstering the authority of the ruling cadre.

In particular, those companies that are perceived as being more concerned with corporate profits than fundamental human rights and decency may invite significant recriminations and possibly, even selective economic retaliation by the American people (e.g., consumer boycotts). This danger can only grow if, as must be expected, the present climate in China gives rise to further bloodshed, show-trials, evidence of torture, publicized executions, mass "relocations" to China’s interior, and other examples of state-sponsored repression — much of it possibly being documented by network television.

In such an atmosphere, neither the American public nor their elected representatives are likely to give much credence to businessmen who contend that their activities in China should go forward because they are designed to aid the Chinese people and not the government. Even were this true, such sentiments would be discounted by many in the Congress, the press and the public at large as a transparent subterfuge intended simply to protect such entrepreneurs’ investments in the PRC. What is more, compared to the intensified repression and economic deprivation imposed by the Chinese government itself in the aftermath of the June 4th brutality, the adverse impact of suspended Western assistance on the people of China (as opposed to the powerful impact likely to be felt by the government itself) seems slight.

Denying Leverage for Real Reform

Finally, the fact that the Chinese government is so anxious to reinvigorate Western capital and technology flows indicates just how important a lever such assistance can be — if managed properly — in promoting real, systemic reform. Despite assertions to the contrary by Beijing and its apologists elsewhere, the reality is that access to the West’s economic, financial and technological resources is of enormous importance to the future viability of the Chinese economy.

The West accordingly faces a potentially decisive choice. If it persists under present circumstances in providing undisciplined credits and technology flows to the PRC, its largesse can easily serve to retard the possibility of genuine economic and political liberalization there (just as it does in the Soviet Union and elsewhere). On the other hand, if Western nations now act in concert to demonstrate that their willingness to provide assistance of this sort to China will be determined by and conditioned upon real systemic reform there, they can unquestionably encourage movement in that direction.

Recommendations

The "bottom line" must be that, at present, the political and economic situation in China is simply too fluid — and, potentially, too hostile — to Western business interests to warrant an immediate return of those enterprises who pared down their operations in the aftermath of the massacre. Before restoring their activities in the PRC to pre-June 4 levels, Western corporations and banks should carefully evaluate the considerations outlined above.

Under current and foreseeable circumstances, adopting a "wait-and-see" posture, rather than one of "business as usual," is the more prudent course. Accordingly, facilities in China should be operated on a "maintain-only" basis, with no new commitments or contracts undertaken until a new track-record of Chinese performance is established, including solid progress toward greater political freedom.

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1. "Beijing Increasing Pressure on Foreign Firms to Return," by Amanda Bennett and James P. Sterba, The Wall Street Journal, 19 June 1989.