The east is red for multinationals after China’s Party Congress

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18 October 2017. By Toh Han Shih.

Companies, including multinationals, face increasing enforcement and political interference under the future direction of China's anticorruption campaign. That was the message spelled out by Chinese President Xi Jinping in his opening speech at the 19th Chinese Communist Party Congress today.

The party gathering in Beijing, which occurs every five years, started today and ends on Oct. 24, a day after which a Chinese leadership reshuffle will be unveiled, with Xi expected to increase his power to rival that of the so-called "great helmsman" Mao Zedong. Xi's speech lasted more than three hours and covered many topics, among which political themes and the anticorruption campaign featured prominently.

Political control and the fight against corruption were closely interlinked in Xi's speech. He said: "The political construction of the party must be put at the forefront. Supervision of the party must be strengthened. The political environment of the party must be fully cleaned up. There is zero tolerance towards corruption."

Xi's speech indicated that there will be no let-up in the anti-graft campaign he launched in late 2012. He said: "The anticorruption campaign must be resolutely maintained, with no restrictions, complete coverage and zero tolerance. We will unswervingly catch tigers [senior officials], flies [minor officials] and foxes [overseas fugitives]. Our objective of making people not dare to be corrupt is starting to take shape. The cage that prevents corrupt acts is getting stronger. The dam against thinking of being corrupt is being built. The overpowering nature of the anticorruption campaign has taken shape and is growing.

"No matter where corruption fugitives have fled to, we must take them back with the long arm of the law," Xi said.

The Chinese president called for the promotion of national anticorruption laws. The government is currently amending existing anticorruption laws. 

Julia Coym, a senior China and Northeast Asia analyst at Control Risks, a British risk consultancy, told MLex: "After the 19th party congress, we expect anticorruption enforcement to continue unabated. The fundamental drivers of the anticorruption campaign remain the same — people wanting reliable government services, safe food, affordable healthcare and clean air, all of which corruption undermines.

"After the 19th party congress, foreign companies will remain subject to greater government and media scrutiny, as they are often held to higher standards than their domestic peers. Generally, the Chinese government's expectation of multinationals in abiding by anticorruption rules is higher than for local companies," Coym said.

Under China's so-called "new normal," companies that are not compliant will be exposed to far greater legal, regulatory, financial and operational risks, such as being blacklisted and fined, she added.

Coym cited an example last month, when the Shanghai municipal government released regulations for healthcare companies. According to the regulations, healthcare companies will be blacklisted for committing bribery, and they will be included in a database kept by the city's government. Those companies will be banned from public procurement for two years. Since most of China's healthcare industry is public, this is a big loss of business, Coym said. "You'll see that used a lot more in egregious cases," she added.

The Chinese government investigated GlaxoSmithKline, the UK's biggest drugmaker, for bribery in 2013, mainly in Shanghai, resulting in prison sentences for some of its former senior management in 2014.

Xi said the political role of party cells must be increased in companies, institutions and research institutes. The coverage of party cells must also be expanded, he added. The functions of party cells include propaganda, implementing the party's decisions and pushing reform, according to Xi's speech. Importance must be given to cultivating party members within the private sector, industry and agriculture, Xi said.

Xi's speech indicates that party cells will influence the operations of the companies in which they are embedded. A company's party cell may influence investment decisions or demand access to its intellectual property, if corporate and party interests conflict, according to Steve Vickers, the founding chief executive of Steve Vickers & Associates, a Hong Kong risk consultancy.

Party cells already exist in private companies, including the China-based operations of some multinationals, Vickers told an American Chamber of Commerce seminar in Hong Kong yesterday. After the party congress, more multinationals would have party committees, he added.

The proportion of private companies in China with party cells rose to 70 percent in July this year, compared to 52 percent of bigger private companies having party cells in early 2015, Vickers said. "The congress will formalize these changes. The political strictures on business inside China will increase," he said.

Large Chinese state-owned enterprises have long had party cells, including big state-owned banks with offices in Hong Kong, Singapore, New York and London.

	Eliot Gao