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COVID-19 Casualties Among Foreign Companies in China 

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COVID-19 Casualties Among Foreign Companies in China 

After three years, foreign managers are now returning to China – only to find that their businesses are no longer run according to the founding principles and practices.

COVID-19 Casualties Among Foreign Companies in China 
Credit: Depositphotos

COVID-19 not only wreaked havoc on individual lives, but also on companies around the world, which could not access their foreign-based subsidiaries, and had to count on local management and staff to keep them going.

Nowhere is this more evident than in China, which had the strictest and most stringent no-travel policies of any major country in the world, barring the vast majority of foreigners from traveling to China. That ban lasted more than three years.  

There are lessons to be learned from the experiences of some of the foreign companies based in China whose foreign management, directors, and owners are now returning to China only to find that their businesses are no longer run according to the principles and practices under which they were originally founded and operated.

The disruptions highlight not only the normal risks of doing business in China, but the further risks of doing business and then leaving all operations in the hands of those who may not have foreign owners’ interests in mind as major decisions are taken and implemented.

The failure of some Chinese subsidiaries of foreign companies to continue to operate according to the business culture and dictates of their foreign owners also highlights a startling new development: Chinese law is beginning to carry power and validity in the minds of ordinary Chinese, and to permeate the consciousness of Chinese business managers in ways that even 10 years ago would have been unlikely.  Chinese businesses are increasingly relying upon Chinese laws to advance their interests.  

Introducing the law into a business controversy is in itself a relatively new concept in China. Originally it was not law but access to the closed system of power – 关系, loosely translated as relationships, but in practice meaning relationships that bring power to one’s side – that one sought to advance one’s interests.

This is not to say that either Chinese companies or citizens have much increased faith in the overall rule of law in China. Everyone knows that law can be overruled by fiat and power politics within the Chinese Communist Party. But China is displaying a greater level of dependence at an operational level on the mechanisms of law in business.

Take, for example, the case of a foreign company whose subsidiary has been successfully operating in China for the better part of 20 years. The company’s Chinese customers are nearly all state-owned enterprises (SOEs). It goes without saying that the business depends on its relationships with customers and local officials as much as it depends on the quality and price of its products.

Due to the inaccessibility created by COVID-19 travel bans, the company’s foreign owners relied on financial statements and accounting audits to manage from a distance for more than three years. Meanwhile, the local staff in China continued to operate the company despite frequent and onerous lockdowns.  

Toward the middle of the COVID-19 travel ban, financial discrepancies began to arise – first in small ways, then suddenly in larger, more obvious transactions. Indeed, it appeared that managers on site in China were beginning to pay themselves huge bonuses, duly reported in payroll, yet completely arbitrary and unauthorized by senior management overseas.

When questioned, the local managers in China justified the payments and took the position that the bonuses were in their purview to approve and pay. And thus began a lengthy and ever-escalating process of acrimony and accusations that has already lasted a year and is likely to continue for at least another 12 months. 

Throughout, Chinese management has used the law as its defense. They wave around the Articles of Association; they hired a lawyer (with company funds) to protect their personal interests. Chinese company law is cited, chapter and verse.  

Attempts to fire the violators have proven fruitless in practice; they still go to the office. Indeed, although the foreign owners have named a new board, members of that board are not recognized, and are barred entry to the Chinese premises. In every act of defiance, the Chinese side has referenced China’s Company Law, labor laws, and even criminal laws as the basis for its actions.

Indeed, as Major Ronald Alcala, Lt. Colonel John Gregory, and Lt. Colonel Shane Reeves, all professors at the United States Military Academy at West Point, pointed out in their June 28, 2018 article for Just Security, “The Communist Party of China has been leading an extraordinary effort to transform the country into a fazhi (法制) nation or ‘a country under the rule of law.’ The phrase ‘fazhi’ has become ubiquitous in China, where it is heralded in all forms of media, from simple banners and posters, to pop-up ads on the internet.”

However, they pointed out, “Despite the Party’s current encouragement of ‘rule of law’ and its celebration of the Constitution, Chinese rule of law… differs fundamentally from rule of law as internationally understood.”

“Accordingly,” they write, “rather than promote basic principles such as the supremacy of law, legal accountability, judicial independence, and fair treatment before the law, fazhi is instead used as a rhetorical tool to legitimize the Party’s rule.”

That’s a given. It doesn’t take spending a long time in China to realize that the rule of the Communist Party is pretty much absolute, and that, with a monopoly on media, each and every message is designed to promote the party’s interests. First among those interests is to remain in power.

Most Chinese are accustomed to the party’s rhetoric, however. They know by instinct, having been taught it from the nursery on, that all roads lead to the party, and the party is their leader. Such is the incessant repetition of this message that it has all but lost its power.  

So, when ordinary Chinese, faced with the dilemma of how to justify actions that are clearly wrong, whether in violation of edict or of law, use the law to protect themselves, is represents a sea change in the society of modern China.  

And the extent of that change may be one that the party wasn’t expecting.  

To find an ordinary Chinese technician shaking the Articles of Association of the company for which he works as a defense against what he saw as an unwarranted and illegal infringement of his rights in a Chinese company in China is an order of magnitude beyond what one would have expected prior to the pandemic. And yet, Chinese are turning to what top leader Xi Jinping has promoted as an increasingly reliable method of asserting their rights: the law. 

The lawyer for the foreign side in the case just described says that, in his caseload, this is one of many similar instances in which the Chinese side of a company has gone adrift during COVID-19 and the foreign side is attempting to restore balance and authority over the operation. This is just one lawyer’s experience. Given the exponential rise in the number of Chinese lawyers over the last four decades – from just 200 in the early 1980s to over half a million today – it is likely that the story of dissonance between the Chinese and foreign sides of a business during COVID-19 became a common occurrence. And it is equally likely that one or both sides are seeking relief through the good offices of a lawyer and his or her ability to apply Chinese law to the case.

Thus, although the assertion that China is now a fazhi nation “under the rule of law” is highly flawed when it comes to applying that law to the Communist Party itself, it is a concept and now, more than ever, a tool that everyday Chinese citizens are turning to in order to find remedies for unsatisfactory situations. One byproduct of COVID-19 in China is clearly an increased use of Chinese law to assert – and fight for – rights for both Chinese and foreign interests in the country.  

Now that the cat is out of the bag, how long until clever lawyers begin to use fazhi principles to challenge the right of the party’s supremacy itself? COVID-19 may have helped to accelerate that process, leaving as it has the ground ripe for the use of law in China.