Dennis Kwok and Sam Goodman penned a July 11, 2002, op-ed in the Wall Street Journal on the new legal and regulatory risks facing international companies with operations in China. An excerpt:
The legal and regulatory risk of doing business in China may be about to get a lot higher. The China Securities Regulatory Commission is implementing changes to its rules governing publicly offered securities investment funds. These rules include requiring foreign-owned fund managers such as BlackRock and Fidelity to create Communist Party cells when operating in China.
Many foreign investors have assumed these rules would apply only to Chinese businesses and state-owned enterprises. China analysts, however, have been warning since 2018 that these laws could soon apply to foreign-owned companies operating through Chinese joint ventures. Since 2016, Xi Jinping has pushed for state-run companies and subsidiaries of foreign-owned companies to establish cells through the provisions of the Chinese Communist Party’s Articles of Association.
In September 2020, the General Office of the Communist Party’s Central Committee issued the “Opinion on Strengthening the United Front Work of the Private Economy in the New Era,” which called on the nation’s United Front Work Departments to strengthen their involvement in corporate governance. In response, the European Chamber of Commerce in China cautioned that the strengthening of the role of party cells would “have a considerable impact on business sentiment, and could lead foreign companies to reconsider future and even current investments in China.”
Western financial firms piled into China anyway, attracted by the prospect of high returns and advised by Chinese contacts that engagement with the Communist Party is the price of doing business. Since 2018, foreign businessmen have reported being approached by the party about the establishment of party cells. The secrecy of the United Front Work Department makes it impossible to establish how many such cells exist. In January 2021, HSBC executive Noel Quinn was unable to confirm to the British Parliament’s Foreign Affairs Committee that the bank had no party cells in its branches in Hong Kong and the mainland.
It is hard to gauge the precise role these cells play. Their existence had been dismissed as focusing purely on organizing and representing workers, but under Mr. Xi’s reforms, party cells have increasingly been given greater roles in strategic decision making and recruitment. Some Chinese companies have even amended their articles of association to say that in key corporate decisions, “the board of directors shall first seek for the opinion of the leading party group of the company.”
For two years Western companies investing heavily in China have dismissed “stakeholder” concerns about forced labor or gross human-rights violations, arguing that their duty is to their shareholders. If Mr. Xi gets his way, these companies will answer not only to their shareholders but to party officials.
Such blurred lines expose these companies to unprecedented risks. Ordinary investors, whether pension funds or individuals, would be unable to discern whether boards in these companies are making strategic decisions based on commercial judgment or at the direction of Communist Party apparatchiks. Of particular concern are forced technology transfers from foreign-owned companies to Chinese subsidiaries and theft of intellectual property and personal data.
In the 2010s, large fund managers would accept such engagement with the Communist Party as the price of doing business. Given the deteriorating relationship between the West and Beijing, as well as the prospect of military operations against Taiwan, the risks are much higher now.
BlackRock, for example, is the world’s largest asset manager and one of the leading advocates for increasing financial ties with China. Given BlackRock’s size and influence, most of the established Western financial firms would be forced to follow along if BlackRock were compelled to accept a party cell.
If these Western financial firms responsible for billions of pensioners’ savings were compromised and forced to accept a Chinese Communist Party cell as the price of continued access to Chinese markets, their boards would be compelled to seek advice from the party on strategic decisions. Chinese domestic political risks would quickly be exported to the Western financial industry.