China’s Demands for Loyalty Are Bad for Business

The standard advice for foreign investors in China used to be that they should stay out of politics and focus on business. Now that dictum has been flipped on its head, as companies face growing pressure to align with the Chinese government or lose access to the world’s biggest emerging market.

The recent resignations of Cathay Pacific Airways Ltd.’s highly regarded chief executive Rupert Hogg and Chief Customer and Commercial Officer Paul Loo are the latest evidence of the Chinese Communist Party’s influence over the corporate world. On the face of it, Cathay’s climbdown represents a win for Beijing. It furthers the central government’s political objectives in Hong Kong and sets an example for other companies to follow.

If China pursues this approach, however, it will be highly damaging not just for foreign investors but for the mainland’s own economy.

Multinational businesses have no good options. If they are too easily pushed around and can’t select their own management, they will lose credibility with staff, investors and customers. If they resist Chinese pressure, they risk losing access to a huge and still fast-growing market.

Investors used to see companies such as Cathay Pacific and HSBC Holdings Plc, which angered the government by cooperating with U.S. prosecutors investigating telecoms group Huawei Technologies Co., as lucrative bridges between China and the West. Now these bridges have become contested border zones, where snipers can take potshots. The Global Times, a nationalist tabloid owned by  the People’s Daily, led the campaign against Cathay Pacific and now has the Big Four accounting firms in its sights because of ostensible democratic sympathies among their Hong Kong employees.

And Hong Kong isn’t the only point of conflict. A board member of Hong Kong-listed First Pacific Co., a Southeast Asian conglomerate that owns Indonesia’s largest maker of instant noodles, was barred from entering Hong Kong for a board meeting in June. The man in question, former Philippines Foreign Affairs Secretary Albert del Rosario, presumably had upset Beijing because of his resistance to China’s expansive claims in the South China Sea. He resigned from the board shortly afterward.

So why shouldn’t China celebrate its ability to change the behavior of companies operating from London to Jakarta?

First, its actions will put off foreign investors, at a time when its economy is slowing and the intensifying showdown with the U.S. is dampening business sentiment. Under such conditions, even if trade tensions subside, the costs and risks of doing business will rise as profitability is squeezed.

Second, such pressure weakens the ability of firms such as Cathay Pacific’s parent company Swire Pacific Ltd. and HSBC to act as honest brokers between China and the West. In the future, they may seem more like unconvincing hostages pleading on behalf of their captors.

Third, the strategy undermines the extensive and expensive campaign by Huawei and China to convince the world that the telecoms group is independent from government interference. For if the Communist Party can influence who will run Cathay Pacific or sit on the board of an Indonesian tycoon’s investment vehicle, who would believe that it doesn’t have significant sway over a Chinese company that is crucial to the nation’s technological and economic development?

Ultimately, China risks becoming a victim of its own success. It clearly understands the self-interested nature of foreign corporations. Most would rather give in to pressure in order to protect short-term benefits than join forces to press for a better long-term business environment. No doubt Cathay’s rivals will be thinking of how they can poach its staff and customers, while HSBC’s competitors will jostle to show their loyalty to Beijing at this difficult time.

Over time, however, the size of the pie will shrink and that is to no one’s benefit. While Chinese leaders love to talk about win-win cooperation, a campaign to demand loyalty from foreign companies is likely to be a lose-lose enterprise.