Chinese Communist Cells in Western Firms?

The legal and regulatory risk of doing business in China could soon become much greater. The China Securities Regulatory Commission is making changes to its regulations on publicly offered securities investment funds. Those rules include forcing foreign-owned fund managers like BlackRock and Fidelity to set up Communist Party cells if they operate in China.

Many foreign investors assumed that these rules would only apply to Chinese companies and state-owned companies. However, China analysts 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 been pushing for state-owned companies and subsidiaries of foreign-owned companies to set up cells under the provisions of the Chinese Communist Party’s charter.

In September 2020, the General Office of the Communist Party Central Committee issued the “Statement on Strengthening United Front Work of the Private Sector in the New Era,” calling on the country’s united front work departments to strengthen their involvement in enterprise management. In response, the European Chamber of Commerce in China warned that strengthening the role of party cells “could have a significant impact on business sentiment and prompt foreign companies to reconsider future and even current investments in China.”

Western financial firms nonetheless pushed into China, lured by the prospect of high returns and Chinese contacts cautioned that cooperation with the Communist Party is the price of business. Since 2018, foreign businesspeople have reported being approached by the party about establishing party cells. The secrecy of the United Front Work Department makes it impossible to determine how many such cells exist. In January 2021, HSBC manager Noel Quinn was unable to confirm to the UK Parliament’s Foreign Affairs Committee that the bank had no party cells at its Hong Kong and mainland branches.

It is difficult to assess exactly what role these cells play. Their existence has been dismissed as purely for organizing and representing workers, but under Mr Xi’s reforms, party cells have increasingly been given a greater role in strategic decision-making and recruitment. Some Chinese companies have even amended their articles of association to state that “the board of directors shall first seek the opinion of the company’s leading party group” when making important corporate decisions.

For two years, Western companies investing heavily in China have dismissed “stakeholder” concerns about forced labor or gross human rights abuses, arguing that their duty is to their shareholders. If Mr. Xi has his way, these companies will be accountable not only to their shareholders but also to party officials.

Such blurred lines expose these companies to unprecedented risks. Ordinary investors, whether pension funds or private individuals, would not be able to tell whether the boards of 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, major fund managers accepted such exposure to the Communist Party as a price for doing business. With deteriorating relations between the West and Beijing and the prospect of military operations against Taiwan, the risks are now much greater.

BlackRock, for example, is the world’s largest wealth manager and one of the leading advocates of deepening financial ties with China. Given BlackRock’s size and influence, if BlackRock were forced to accept a party cell, most established Western financial firms would be forced to go along with it.

If these Western financial firms, responsible for the savings of billions of retirees, were compromised and forced to accept a Chinese Communist Party cell as the price for continued access to Chinese markets, their boards would be forced to steer clear of strategic decisions to consult the party. China’s domestic political risks are quickly exported to the western financial industry.

Mr. Kwok is a senior fellow at the Kennedy School of Government at Harvard and a former Hong Kong legislator. Mr. Goodman is Director of Policy and Advocacy at Hong Kong Watch and Executive Director of the China Risks Institute.

Journal Editor’s Report: The best and worst of the week from Kim Strassel, Allysia Finley and Dan Henninger Photos: Three Lions/Getty Images/AP/AFP Composite: Mark Kelly

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