"This time is different": The ESG problem for China's boycotts of foreign brands, UN wants “unfettered access” to Xinjiang, & Philippines finds new installations in SCS -- China Boss News 4.05.21
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"This time is different": The ESG problem for China's boycotts of foreign brands
I quickly lost count of the number of news stories flying off the press this week on China’s massive outrage targeting H&M and other foreign brands. But the best analysis of what the future might hold for Western companies in China comes from The Economist, “Swept up in a storm: Consumer boycotts warn of trouble ahead for Western firms in China”:
Previous spats have blown over, but the split over Xinjiang is both more intractable and more expansive . . .
Emphasis added.
We’ve all seen the inherent contradictions in the positions in which foreign brands now find themselves. Western brands want to sell to, both, Western and non-Western - in this case Chinese - customers. However, the values these companies must uphold to do business in the West, pit them against the Chinese government’s policies and priorities in Xinjiang.
Yet, something less widely discussed, is that foreign investors who sign covenants to use their money to improve environmental, social, and governance standards of businesses are also important in the outcome of this controversy. ESG investing, a.k.a. “sustainable” investing, is an increasingly sought-after wealth-building strategy. It follows a different rating system where, according to Forbes, investors seek out “companies that score highly on environmental and societal responsibility scales as determined by third-party, independent companies and research groups.”
Reuters reported last week that - after learning that some foreign companies had succumbed to political pressure and changed their website statements to openly support or be less critical of the Xinjiang cotton industry - a “group of more than 50 investors, backed by the Interfaith Center on Corporate Responsibility” was “in the process of contacting more than 40 companies, including H&M, VF Corp, Hugo Boss and Zara-owner Inditex, requesting more information about their supply chains and urging them to quit situations that could lead to human rights abuses.”
This is significant because the investors were not mom-and-pop, but institutional investors with very deep pockets who are currently “putting companies on the spot.”
Per Reuters:
Assets in sustainable funds hit a record $1.7 trillion in 2020, based on data from fund management industry tracker Morningstar.
The Investor Alliance for Human Rights has more than 160 institutional investors and other organisations as members, representing more than $5 trillion in assets under management currently, its website said.
Emphasis added.
Other groups, like BlackRock Inc and Vanguard Group Inc., have also “ramped up their ESG efforts by publishing more details of their engagements and proxy votes at portfolio companies and by introducing new funds using ESG criteria to pick holdings,” according to Reuters.
That’s why this time feels different.
The Chinese government’s human rights abuses in Xinjiang might be the proverbial “nail in the coffin” for many foreign firms in China. Unless, President Xi does a 180 - which seems unlikely - it will become very difficult, if not legally and commercially impossible, for thousands of companies to operate in the Chinese market or do business with Chinese companies.
The “writing has been on the wall” for Western firms doing business in China, since at least 2019 when the New York Times and the International Consortium of Investigative journalists published a trove of 400 official Xinjiang documents spilling the government’s beans.
The massive leak contained directives with scripts on what local authorities should tell the family of Xinjiang detainees about compulsory “re-educations,” as well as “nearly 200 pages of internal speeches by Mr. Xi and other leaders, and more than 150 pages of directives and reports on the surveillance and control of the Uighur population in Xinjiang,” as well as “references to plans to extend restrictions on Islam to other parts of China.” In sum, foreign firms and their investors were put on notice, as we lawyers say, with sufficient cause for concern.
And cotton is just the beginning.
While, China’s cotton industry is huge, it is far from the only commercial enterprise in Xinjiang. The list has been expanding for years and runs the gamut from car manufacturing, to polysilicon in solar panels, technological components, and, even, beer-making. For a mind-blowing reference, just take a glimpse at the number of industries represented in this 2019 China File report which lists “68 European companies with ties to Xinjiang” on the Euro Stoxx 50 index of large companies and the Global Fortune 500 list. In case you think I mean to single out Europe, here’s the list of American firms doing business in Xinjiang for the same year. Better fix that drink, now.
The Economist describes the predicament perfectly:
Those obligations [to avoid using banned Xinjiang cotton] may soon multiply.
The Uyghur Forced Labour Prevention Act, currently wending its way through Congress with bipartisan support, assumes that all Xinjiang products are made with forced labour. Companies will have to prove otherwise if they want to export to America.
“It’s like having to prove a negative,” sighs one representative of American industry. The consequences could be dramatic. Nearly half of the polysilicon in solar panels globally comes from Xinjiang. China’s largest wind-turbine maker, Goldwind, is based there. Xinjiang’s oil and gas power factories around China.
Then there are the new viscose (a.k.a. “rayon”) fiber plants, “located within miles of suspected detention camps,” according to the South China Morning Post.
Per SCMP:
Xinjiang produces between 10 and 18 per cent of the world’s viscose, according to various estimates.
Chinese corporate records show the region’s top viscose manufacturer is a state-owned company that built its factories in areas dominated by the Xinjiang Production and Construction Corps (XPCC), the sprawling quasi-military organisation that was sanctioned by the US last year for human rights abuses.
The region’s viscose factories sit alongside huge industrial estates, just miles from suspected detention camps, which Beijing has described as job training centres.
More succinctly, the taint of Chinese forced labor and genocide in global supply chains is potentially so large in scale, that it could implicate thousands of foreign companies with connections to it.
The massiveness of the abuse is another reason the Chinese Communist Party and Xi Jinping are digging in their heels. In my LI post, “Why the EU-China investment deal will not succeed," I explained how the local Xinjiang economy, as well as that of Chinese industry, in general, is propped up by the state’s forced labor subsidies:
Again, to ban forced labor, Xi Jinping would have to order the entire detention camp system in Xinjiang dismantled.
The Xinjiang detention system is designed to incarcerate hundreds of thousands of Uighurs and Kazakhs in China on trumped-up and false charges in order to supply the labor that enriches the local government whose profits from the slavery of these ethnic minorities, then, spill over into the local economy and fund an unknown number of state-owned companies which, in turn, invest their proceeds into domestic and international transactions. -- ALL deeply tainted and intertwined with FORCED LABOR.
Xi Jinping would never dispose of such a highly profitable system of free labor that props up the entire Xinjiang economy, as well as a number of industries throughout China and the world. Pure fantasy.
And so, this time, things REALLY do seem different because: To put an end to forced labor in China means President Xi would have to overhaul China’s business model of relying on forced labor to remain competitive in certain industries and, then, somehow “restructure” and re-brand China, Inc. But, China’s long-term economic development is already stunted and that is, most certainly, a political risk too great, even for the “Accelerator-in-Chief.” Consequently, if foreign companies cannot operate in a country that fails to remedy forced labor conditions, they must retreat. Some may try to bifurcate their supply chains - how, remains to be seen, but others will just throw in the towel and leave.
Law and International Xi
UN in “serious negotiations” for “unfettered access” to Xinjiang
Reuters reports that the UN is in “serious negotiations” with China for “unfettered access” to investigate allegations that Uyghurs are being abused by the state. Michelle Bachelet, UN High Commissioner for Human Rights, has called for a “thorough and independent assessment” of the situation inside China and said “that talks on organizing a visit had begun but no agreement has yet been reached.”
Here’s China’s position taken from MOFA spokesperson Zhao Lijian’s March 29th press conference:
AFP: Got a question on Xinjiang. Antonio Guterres, UN Secretary-General, said this weekend the UN is holding negotiations with China for UN visit in Xinjiang. He said this visit should be without restrictions. Can you confirm the negotiations? Is China ready to welcome the UN without restrictions in Xinjiang, or do you think there should be conditions or restrictions?
Zhao Lijian: I've noted the report. I want to point out that the door of Xinjiang is always open. We welcome the visit of the UN High Commissioner for Human Rights to Xinjiang. China has extended invitation long ago to the UN High Commissioner for a visit to Xinjiang and other places in China, and the two sides have been in communication. The purpose of the visit is to promote exchanges and cooperation between the two sides, rather than to conduct the so-called "investigation" based on presumption of guilt. At the same time, we oppose political manipulation to pressure China on this matter.
Follow-up: You mean the UN Secretary-General want to do political manipulation in China? Is that what you mean?
Zhao Lijian: That is your understanding. Some Western countries have been using the visit of the UN High Commissioner for Human Rights to Xinjiang to engage in political manipulation and put pressure on China. China welcomes anyone free of prejudice against China to visit Xinjiang, but firmly opposes the so-called "investigation" based on presumption of guilt.
So, here’s what I think: China will continue to “welcome” the UN Human Rights Commissioner in order to downplay concerns at home they have something to hide. Local officials can also use the time to remove more obvious signs of forced labor in handpicked cotton - something I think is quite doable - by making the switch from 80% to 100% machine harvesting, for example. But the party will still insist on limiting the Commissioner’s visit to the worksites it wants her to see.
Meanwhile, scores of cotton ginning factories, as well as plants in a myriad of other industries associated with forced labor will still be brimming with human rights abuses. A quick fix, here, is unlikely, as automation takes a lot of time and cash to install - something other regions in China are trying to do, but that Xinjiang officials had put off because they could, simultaneously, profit from the “re-education” of Uyghurs and keep them out of “trouble.” Chinese authorities will only want to show Bachelet the automated facilities, which are few, and any others where a handful of Uyghurs operate as middle-men oppressors and are paid for their services. The rest of the visit will be song and dance, literally and figuratively.
Geopolitics
Philippines concerned about China’s “swarming” and discovers new installations in South China Sea
On Sunday, Reuters reported that the Philippines was “sending light fighter aircraft to fly over hundreds of Chinese vessels in disputed waters near Whitsun Reef in the South China Sea.” The Philippines has been monitoring the situation closely and describes it as a “swarming and threatening presence.”
Then on Thursday, Manila said it found new installations in the Union Banks reefs close to where the Chinese vessels had been moored. In a statement seen by CNN, Philippines Lt. Gen. Cirilito Sobejana said:
The Laws of the Sea gives the Philippines indisputable and exclusive rights over the area. These constructions and other activities, economic or otherwise, are prejudicial to peace, good order, and security of our territorial waters. These structures are illegal.
The White House issued a statement describing a call on Wednesday between National Security Advisor Jake Sullivan’s and his Philippine counterpart, Hermogenes Esperon, in which both “discussed their shared concerns” over China’s recent behavior and “agreed that the United States and the Philippines will continue to coordinate closely in responding to challenges in the South China Sea.”
China denies that the vessels are militia, calling them fishing boats and saying they were docked in the area to avoid inclement weather.
However, the Philippine military has released images and video of what look like brand new boats sitting for days at the same spot. Speaking to NPR, Gregory Poling, head of the Asia Maritime Transparency Initiative at the Center for Strategic and International Studies (CSIS), said “the boats [were] tied up ‘with military precision’ beside each other” and:
You can't trawl while sitting still. So, if these were commercial fishermen, they'd all be bankrupt.
Jay Batongbacal, law professor at the University of the Philippines told Aljazeera in an interview:
[The boats] are fairly large 55-60 meters and the number as you've seen is huge.
These maritime militia vessels are specially designed for the particular purposes for which they're employed and that's basically to establish ostensibly civilian presence and and activity to make it appear non-military, but actually its completely under the control of the military apparatus in China.
They look like fishing vessels, but these are steel hulls. They are made specifically to be very durable and they're designed for ramming.
In US-China relations, the SCS situation is on par with Taiwan’s security. Both issues have been frequently cited by analysts in recent news as quite dangerous, in terms of their potential to escalate into military conflict.
The Week’s Best China Reads
China’s unrestricted war on India (Foreign Affairs)
A wild ride that opens with the day China turned off India’s power grid. Chilling.
From Norwegian salmon to basketball, a brief history of China’s patriotic consumer boycotts (Quartz)
Jane Li, tech reporter: “In China, the fate of a foreign company can change over night.”
EU-China deal spells trouble for Macron at home (Politico)
Macron’s fighting for his political career in France, and his backing of the EU-China trade deal isn’t helping.
Middle Kingdom Surreal
Why - for Chinese leaders - “Sorry seems to be the hardest word."
Why won’t Chinese officials just own up to what they’re doing in Xinjiang and say they’re sorry? As it turns out, giving an official apology seems to be quite difficult for many governments, not just China’s. The simple words “I’m sorry,” rarely occur in public statements, even in societies with the political freedom to hold their leaders accountable for official failures and wrongs, and when they do, there is, generally, a legal and political benefit obtained by saying them. Morality may even be a non-issue.
But in the case of the Chinese government’s human rights abuses against ethnic minorities in Xinjiang, the apology takes on a greater, existential significance. Micheal C. Wenderoth’s 2019 article in Forbes gave three good reasons why Chinese leaders still won’t right the wrong of using the nation’s military against college students in Tienanmen Square. I think they’re equally applicable, here.
Reason #1 Why China won’t apologize: It fears opening Pandora’s box.
The government fears an apology would unleash opposition voices, leading to greater unrest. . . to a far bigger threat, disaffected workers and oppressed groups.
What that reveals: China deeply fears social instability, which has brought down leaders throughout its history.
…Reason #2 Why China won’t apologize: It fears being seen as buckling to the West.
Acknowledging Tiananmen [or Xinjiang] might be viewed as a partial concession in the trade war. Much of the 19th and 20th century is referred to in China as the “Century of humiliation.” China was poor, weak, divided – and forced into unfair concessions by Japan and Western powers.
What that reveals: Xi is best served by ending the trade war, which is dampening economic growth. But being bullied by a Western power is so anathema to the Chinese, that they are more likely to maintain their pride and not give in, on anything.
. . . Reason #3 Why China won’t apologize: It has yet to develop a coherent vision that explains their system and values to the world.
What that reveals: China’s leadership may not be as strategic and wise as many think. If they had a compelling narrative, they could put Tiananmen Square [or Xinjiang] in context.
Personally, I found Wenderoth’s third observation most insightful. It’s true that an apology is easiest when you understand yourself and what your values are. Nationalism is not really a value, it’s like rooting for the home team just because, and China is no longer communist in the true sense, but it is also not democratic. That leaves the gargantuan nation in a sort of ideological limbo, with a very weak narrative about what it wants to be beyond vague notions relating to status - like, superpower, “the best,” and Chinese.
For instance, does China represent equality? Can it really be the shining beacon of economic progress, when compared to Japan, Taiwan, South Korea and Singapore? Any efforts to pursue a policy of neutrality, like Switzerland, would be negated by its militarization of the South China Sea and violations of international law. Neither, can the Middle Kingdom rest on the title of “holy land” for one of the world’s major religions that might critically buttress its soft power, like Saudi Arabia or Israel.
When you know exactly who you are, it’s simpler to self-correct with an apology - you say I made a mistake, but this is not who I am: I can and will do better. But when you are not so sure - an apology becomes risky, as it commits you to values and a follow-up course of action you haven’t fully considered.
Still President Xi’s recalcitrance in his Xinjiang policy, while understandable, is appalling. Eye witness testimonies, video, satellite photos, troves of leaked official documents: He’s been caught red handed in crimes against humanity. The evidence is overwhelming, and it’s still mounting.
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To better times ahead. Enjoy your week.