China’s New Economic Order—And How It Affects Your Business
China is in a time of critical transition. Events are unfolding rapidly and will affect everyone doing business in China as well as the entire global economy.
Chinese leader Xi Jinping’s anti-corruption and antitrust campaign has touched every economic sector in China—from finance to energy, auto to telecommunications, transportation to media, pharmaceutical to entertainment, food to real estate.
In 2013 alone, the Central Commission for Discipline Inspection conducted over 170,000 investigations across government departments and businesses.
Foreign corporations are also being affected, including giants like JPMorgan Chase, Microsoft, and GlaxoSmithKline—in seemingly arbitrary ways.
According to a recent report by the U.S. Chamber of Commerce, there is a growing perception among foreign companies in China that they’re facing “selective and subjective enforcement” using “legal and extra-legal approaches.” Further they feel that rules for foreign companies are shifting “in ways that are highly opaque and difficult for local managers to anticipate or adapt to.”
The shift, however, isn’t arbitrary. It is a highly systematic effort by Xi to clean house, to dismantle the vast web of influence wielded by former paramount leader Jiang Zemin, and to break his monopoly over economic sectors.
Jiang rose to power in 1989 after he proved willing to send tanks into Tiananmen Square to crush students’ hopes for democracy. In 1999, he launched the brutal persecution of 70-100 million Falun Gong meditators. Jiang escalated the persecution using the now-purged ex-security head Zhou Yongkang to build an internal security apparatus bigger than the Chinese military’s. Among other crimes, Jiang presided over killing so-called “enemies of the state” to sell their organs for huge profit.
Xi’s administration is looking to disassociate itself from Jiang’s political and economic legacy—in fact, not one member of Xi’s top leadership team was involved in the persecution of Falun Gong.
In short, China’s economic order is being restructured.
The target of the campaigns is businesses that have thrived on ties to Jiang’s web of “guanxi” (connections). Relationships that once guaranteed prosperity in China are becoming toxic.
Epoch Media Group is the authority on the changes occurring in China. Thanks to our well-placed sources, we alone predicted the process of Jiang’s downfall, and we have forecast almost every major political development in China in recent years. This includes the arrest of many high-profile Party members, the so-called “55 Big Tigers”—officials so high and so connected that they were thought untouchable. Xi himself and those close to him are known to closely follow our media, in particular our political analysis programs like NTD Television’s Daily Clicks.
China is still open for business—the question is who are you doing business with. Only through understanding the power shift inside China will you be able to successfully navigate this period of transition. Epoch Media Group provides the critical information that one needs to make the best decisions related to the Chinese reality and to be well-positioned for future success in China.
The bottom line: The arrangements made with Jiang’s web of influence no longer provide the security and benefits they once did—indeed such relationships are very likely to have the opposite effect. Many enterprises in China, largely local but also many foreign, felt the sharp end of Xi’s stick this year as this new reality was taking hold. Consider these Fortune 500 companies:
Microsoft began operating in China in 1995. The company’s entry into China was personally handled by Jiang Zemin; Bill Gates’s relationship with Jiang was highly promoted in state media.
Jiang’s son, Jiang Mianheng, owns 50 percent of MSN China’s website business through his company Shanghai Alliance Investment.
In July 2014, Chinese authorities suddenly opened an antitrust investigation against Microsoft. In November, Microsoft was accused of tax evasion—the first time for a major foreign corporation—and ordered to pay $140 million in back taxes and interest.
As a strong signal of Microsoft’s changing fortunes, the day after the tax evasion ruling, the Financial Times reported that 1 million employees of the state-run China National Petroleum Corp.—previously chaired by prominent (and now arrested) Jiang ally, Zhou Yongkang—would be shifting its email accounts from Microsoft to a domestic provider.
JPMorgan Chase’s business in China took off after 2001, when the bank’s former CEO and Chairman Bill Harrison met with former Chinese leader Jiang Zemin. In 2007, Chase was hired to help take the state-owned China Railway Group public, raising $5 billion. Controlling the railway ministry and overseeing China’s massive high-speed rail expansion was Liu Zhijun, a prominent Jiang loyalist.
Liu was found guilty of bribery and abuse of power in July 2013, receiving a suspended death sentence.
In May 2014, Fang Fang, former CEO of investment banking for JPMorgan Chase China, was arrested by Hong Kong’s anti-corruption agency. Fang was allegedly at the heart of the Sons and Daughters hiring program that sparked a still unresolved SEC investigation and contributed to Chase apportioning an extra $4 billion to fix risk and compliance issues.
Fang Fang, as a Jiang ally, was part of the Chinese People’s Political Consultative Conference, a Party-affiliated advisory body. Fang is also close to Zeng Qinghong, a top Jiang loyalist responsible for Hong Kong affairs, who was himself arrested in July 2014 in Xi’s anti-corruption campaign.
GlaxoSmithKline flourished in China under Jiang Zemin. Several companies that later merged to become GSK China established themselves in the 1990s. In 2007, GSK was named Most Advanced Foreign Company in Tianjin and in 2011, GSK was honored as one of the top 10 Most Admired Companies in China.
In September 2014 GlaxoSmithKline was found guilty of bribery and fined nearly $500 million—the largest corporate fine ever levied in China. Former GSK China chief Mark Reilly was given a three-year suspended sentence and faced deportation.
Huang Fengping, a top Chinese official tied to the GSK case, was tried and sentenced for corruption, bribery, and failing to account for $2.5 million in cash and property. Huang was the deputy director of the Shanghai Municipal Commission for Health and Family Planning and a Jiang loyalist. He had “close relatives working at GlaxoSmithKline and some family members have migrated to Canada,” reported the 21st Century Business Herald newspaper.
Huang was removed from the list of leaders on the website of the China’s health commission.
Audi, Mercedes-Benz, Toyota, BMW, General Motors, Chrysler
One of the most lucrative industries associated with Jiang Zemin, the auto industry, is under intense scrutiny under Xi’s antitrust campaign. Many players in the industry have been hit: executives are being investigated, offices raided, fines levied, and foreign manufacturers forced to drop prices. The state mouthpiece Xinhua features the auto industry in its antitrust campaign special section on its website, indicating it as a priority sector in Xi’s campaign.
State-owned First Auto Works (FAW) Group in Changchun is where Jiang started climbing up the political hierarchy. Jiang’s personal ties with the FAW have enabled the auto group to amass phenomenal wealth, particularly from joint ventures with highly-taxed foreign brands like Volkswagen.
Jiang Zemin’s son, Jiang Mianheng, is on the board of directors of the other state-run auto giant in Shanghai, Shanghai Automotive Industry Corporation (SAIC). SAIC has joint ventures with General Motors, Volkswagen (Audi), and others like Mercedes-Benz through its subsiduaries.
Approximately 50 executives at FAW have thus far been targeted in the anti-corruption campaign.
In August 2014 Li Wu, former deputy general manager of FAW-Volkswagen in Changchun, and Zhou Chun, deputy general manager of the Audi sales department, were investigated.
In September, 2014 Party secretary of Tianjin FAW Toyota Motor Co, Wang Bing, and assistant general manager of the FAW Group, Wang Gang, were punished for misusing public vehicles.
Huachen Automotive (or Brilliance Auto Group), the biggest foreign partner of BMW, was controlled by Jiang protégé Bo Xilai. The Politburo member and Party secretary of Chongqing, was sentenced to life imprisonment on Sept. 22, 2013, for accepting bribes, abuses of power, and other charges.
U.S. Treasury Secretary Jacob Lew sent a letter of complaint on behalf of the auto industry to Beijing in September 2014.
Core to the mission of the Epoch Media Group is helping decision-makers understand China. With our well-placed sources and expert analysis, we are the authority on China. We have predicted almost every major political development in China in recent years. Please contact us for more detailed information about how your business can position itself for success in China’s future.