Beijing’s approach to business grows increasingly muscular

WHEN AMERICA slammed sanctions on Huawei, barring its firms from supplying the Chinese telecoms-gear titan on national-security grounds, China’s state media predicted this would spur innovation in the local technology industry. In time, it may well do. For now, much of the innovating is taking place within the Chinese state, as it toys with a new system of control over Chinese business.

On January 9th the Ministry of Commerce struck back against American sanctions. It said it may force Chinese firms to stop complying with “unjustified extra-territorial application of foreign legislation” (in Beijing’s eyes, virtually all of it is). It also let companies sue foreign and domestic firms that have complied with some foreign sanctions for compensation.

This is part of a broader trend, as the Communist regime adopts a more muscular stance towards the private sector. In November it halted the $37bn flotation of Ant Group, the payments affiliate of Alibaba, China’s biggest e-commerce giant, days before it was due to list in Shanghai and Hong Kong. That month the State Administration for Market Regulation (SAMR), set up in 2018 from three regulators, issued rules to rein in e-emporiums. In December it opened an antitrust probe into Alibaba. On January 10th the Communist Party’s body for political and legal affairs vowed to take trust-busting more seriously.

The antitrust build-up has spooked investors—Alibaba’s share price is down by a quarter since October. Beijing’s new stance creates more uncertainty for business in two other ways.

First, who is in charge of one of the world’s biggest companies? Jack Ma, the tycoon who co-founded both Alibaba and Ant, has not been seen in public since he likened Chinese state banks to pawn shops three months ago. He owns just 4.8% of Alibaba and stepped down as chairman in 2019, but is thought to control strategic decisions. Even if he does resurface soon, as other AWOL tycoons have in the past, after showing contrition and “assisting” investigators, the episode sends a chilling signal.

The blowback could destabilise Alibaba. Like many mainland tech firms, it uses an offshore legal structure that lets foreigners invest in Chinese assets that would otherwise be off limits. Regulators have tolerated the arrangement, without fully endorsing it, for two decades. But last month SAMR fined Alibaba and Tencent, another online behemoth, for not seeking approvals for past acquisitions. A sustained regulatory onslaught could raise doubts about the viability of these complex foreign-ownership arrangements. This would spook outside investors even more.

The other immediate source of instability is the battle between the superpowers over their extraterritorial legal reach. In 2019 the commerce ministry dabbled with this by creating a list of “unreliable entities”. It has yet to be filled with prominent foreign companies. Rumours that it would include HSBC, a British bank that played a role in an American investigation into Huawei, turned out to be wrong. If the ministry acts more decisively this time, its proposed measures could pose an impossible dilemma for Western multinationals in China: either face fines in America for breaking sanctions, or end up in a Chinese court. Wang Jiangyu of the City University of Hong Kong imagines that the new rules will force global businesses to do something they would love to avoid: take sides.

The measures are a mixed blessing even for Chinese firms, which they are meant to help. Many could, it is true, seek damages from partners. But some may be damaged themselves, such as mainland banks operating abroad which have heeded Uncle Sam’s sanctions over the years to avoid fines and maintain access to the dollar-clearing system, the backbone of global finance. Those that have had to shut Hong Kong accounts for blacklisted Chinese companies and individuals could come under fire. Carrie Lam, Hong Kong’s leader, who has overseen a crackdown on pro-democracy activists, has said cash is piling up in her flat because American sanctions prevent her from putting it in a bank.

In the short run, says a trade lawyer in Washington, the Ministry of Commerce rules are “more likely to sow discord than actually help Chinese companies”. This is not exactly conducive to innovation. Nor is the long arm of the Chinese state, especially as it grows ever longer and stronger.■

This article appeared in the Business section of the print edition under the headline “A chill descends”