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National Security and Chinese Businesses

National security fears.

With two large Chinese projects being halted or terminate in the US this last month (ANT and Huawei), the specter of Chinese state sponsored corporate espionage was center stage. US and Chinese analysts are all pointing to a “trust gap” in the US with Chinese investors. Specifically, the fear is that “decisions are not being made by Chinese businessmen in China, but rather government interests in Beijing.”

China shouldn’t be surprised about politics influencing business and trade when just about everything in China, from rap music to computer hacking, can be officially considered political activities. The investment and business environments in China are equally controlled by the State and participation is often highly political for both domestic and international corporations.

Additionally, he US has legitimate fears about CCP influence in large Chinese Tech companies: e.g. the 5 year and long-term plans to dominate global tech markets, a recent history of extensive corp espionage, “made in China 2025,” laws that force Chinese companies abroad to have CCP reps as board members, opaque corporate ownership laws, government involvement in erstwhile private Chinese companies, government sponsored hackers, tech companies linked to military (Huawei), etc.

The standard Chinese response is that the US either misunderstands the situation in China or that the innocent Chinese businesses are being used as political pawns to keep China down and the US on top. Specifically, the Chinese claim that that most investment money coming to the US is from entrepreneurs and corporations looking for legitimate business opportunities and that the US is simply a hegemon in decline or racist or both.

This fact that there is legitimate monies coming from China to the US is both true and misleading at the same time. Yes, most Chinese investors in any international businesses venture are entrepreneurs and likely have honest and even deeply capitalistic intentions. No doubt many of them want as little interference from either the US or Chinese government as possible as well. But that is defiantly not always the case for a significant percentage of Chinese entrepreneurs. Three specific caveats need to be made when discussing Chinese businessmen and business and their relations to various levels of government in China.

First, what is a private company in China?

You might think that private means just that, private: no public shares and no governmental investment or official ownership connections. And in the US you’re correct. But you’d be wrong to conclude that private in China means the same as it does in the US. There are a number of reasons why this is so. To begin with China has only had aspects of a market economy for less than 40 years. This means that until the early 00s almost all corporations either came from former SOE’s, TVE’s, the military, or governments. Most private companies are still tightly connected to government or military at some level. And while many private companies do not have overt connections to the state, most are connected personally, professionally (as suppliers, partner-companies, buyers, borrowers from or lenders to) to the various levels of government and as such have responsibilities to the state that would not be expected in the US. Indeed, in China more than 50% of a “private” company can be owned by government investors (individuals or agencies or their representatives) and still be considered private (Huang, 2008). Government connections and ownership are  especially common for any company from sensitive or priority industries (banking, finance, electronics, automotive, aerospace, communications, et al). Additionally, in China, these and many other industries are fiercely protected from foreign competition.

Second, Red Hats.

An astonishing percentage of Chinese entrepreneurs are also voluntary members of the CCP—as many as 70%! In China these party-member entrepreneurs are called Red Hats (红帽). Joining the CCP isn’t like joining a political party or registering to vote in the US. Joining the CCP means that you swear (even if it’s insincere and purely practical) allegiance to the CCP, denounce any religion, and pledge to support the Chinese state, among other promises. These Red Hats can be, and increasingly are, called on to fulfill their covenants outside of China–just last week HNA sponsored a meeting for the swearing in of Party member-employees across their offices in China. More on that below. Xi has recently called on all CCP members, specifically businessmen overseas, to represent the party and the state and stay loyal and true to their commitments to the party. What does that mean exactly?

Many of the Chinese that I’ve interviewed, as well as accounts I’ve read in academic publications (Huang, Pei, others), all point overwhelmingly to the fact that membership in the CCP provides access to government projects, loans, inside information, and to necessary and important individuals. Membership is a practical necessity in China—if you want to do business in China, you need to have access to the connections, officials, money, and whatnot that is part of doing business with the bureaucracy in a socialist state. Indeed, many conclude that corruption (political connections) are one of the major reasons for the growth and stability of the Chinese 40-year economic miracle. Without the social connections that party membership provides, non-Red Hat businessmen are eliminated from the limited opportunities that are provided via local governments and national 5-year plans.

This is capitalism as Chinese have known it for the past 40 years. And this understanding becomes important when going abroad because Chinese don’t automatically flip a switch and assume that everything in country X is going to fundamentally different than what they are used to—and when going to lesser developed countries many of their prior experiences in China are repeated. Like anyone, prior successful behaviors are repeated until they prove unsuccessful.

Third, “Follow the Money.”

While doing research on Chinese companies overseas, I had the ex-military, Red Hat founder of a Chinese tech company in Guangdong Province give me this piece of advice. If you want to know who is now and who will be soon making money, “look for the piles of money.” Meaning, look to government investments priorities, contracts, incentives, projects, plans, and sponsored industries for China’s economic leaders. The people that know where the government is spending money are now or soon will be rich/successful, he said. With some insider-information and the right connections “the money flows like water.” Though he complained that this hurt truly independent startups, he was also actively chasing government money (and was himself fantastically wealthy).

This doesn’t mean that all private contractors that work on Chinese government projects are “insiders” or CCP plants or even Red Hats. But most of them are at least well connected to the government AND are Party members.

Fourth, The United Front.

In the last year alone, governments in AUZ, NZ, the EU, andthe US (as well as a few African nations) have proposed laws against foreign influence in politics, focusing specifically on Overseas Chinese who have been accused of illegal influence in domestic political spheres. These cases have lead to high profile political resignations in AUZ and NZ. Chinese journalists may soon be required to register as foreign agents in the US too. Reading the details, these cases highlight how private citizens are supported by the CCP and encouraged to promote Chinese interests abroad (i.e. subvert domestic interests in favor of PRC positions).

These government-supported subversive activities are not just limited to political activities either. Student groups, “privately held” Chinese newspapers, businesses, academic journals, among many others are all areas where CCP influence is being promoted, encouraged, and where individuals that do not support the “correct positions are being threatened. One unique example is the fleets of private fishing vessels in the South Chinese sea that are paid to act as a de facto floating militia—purely private in ownership, but available for political/military activities and financially supported by the state. Competing businesses, with Taiwanese ownership or sympathies, are often blackballed (other Pro-Chinese businesses and individuals are encouraged to freeze them out of markets). Another example is the Confucian institutions that are slowing spreading to universities around the world.  On campuses students and professors are “encouraged” to support and research pro-PRC issues, and those that do not are ostracized, limited in access to funds or research opportunities in China, or are directly or indirectly (via their families back in China) threatened with other consequences for not being loyal to China. When the largest financial supporter of China-centered research on campus is the Confucian Institute, pressures to support specific positions carry significant weight.

Called The United Front, propaganda and influence activities (covert and otherwise) are all part of an overt official international campaign to unite overseas Chinese with the PRC. At the recent Global China Town Hall, I asked about the influence of Chinese politics limiting scholarship and/or individuals at universities in the US. The topic was immediately dismissed out of hand and my question was not discussed further. In private follow-up conversations with professors and students at multiple universities it is acknowledged as both real and a growing influence. Some universities have closed existing Confucian Institutes and others are denying the formation of new ones—but the money that backs these institutions is extremely hard to ignore.

Add to the culture of Red Hats entrepreneurs and the active United Front campaign the increasingly international electronic surveillance of the new social credit systems and you have a global 24/7 Orwellian network tracking calls, chats, friends, business and social and political activities, monies, and the locations of Chinese businessmen and their families and employees. How is Chinese business not political?

Certainly not all Chinese are part of a global CCP conspiracy and not all Chinese companies are actively participating in corporate espionage either. But many are active in supporting PRC positions out of a sense of both patriotism and personal opportunity (and maybe even a sense of self preservation as well). Many Chinese under 40 are increasingly nationalistic as well. The US and other countries are right to be wary of the fact that loyalty to the CCP is likely a practical if not personal priority of many Chinese that want to be successful and/or want return to China and continue in business or politics at some point.