In the rightwing fantasy world described in Tom Clancy’s military action novels, US President Jack Ryan establishes diplomatic relations with Taiwan despite vehement objections from Communist China.
Mr Clancy, who died in 2013, never explored the ramifications for US multinationals of President Ryan’s action. But thanks to Donald Trump, American executives may soon get to see how such a decision would affect them in the real world. The US president-elect is publicly mulling over and tweeting about discarding the “One China” policy that has underpinned Sino-US relations for more than 40 years.
And that is just one of the troubles facing US multinationals. They are also grappling with Chinese regulators’ recent imposition of capital controls, including tighter vetting of dividend remittances.
These are significant new risks for the China operations of foreign investors accustomed to sending millions if not billions in profits home to headquarters after their year-end board meetings. Foreign executives in China, especially US executives, are suddenly having to think about and prepare for unprecedented scenarios.
“We do not take an outbreak of a US-China trade war as our baseline case,” wrote Zhiwei Zhang, economist at Deutsche Bank, in a recent report. “But the . . . US election clearly show[s] how the conventional wisdom in economics may backfire these days. We need to think of previously unthinkable risk scenarios.”
Companies most at risk from the restrictions on dividend remittances include large automakers GM, Volkswagen and Toyota, for whom China is their largest and most profitable market. Their share prices often rise or fall depending on the strength of their China monthly sales figures. So far, however, no major carmaker has reported problems with dividend remittances.
Overseas executives feel that they are being unfairly targeted by China’s State Administration for Foreign Exchange (Safe). As one senior multinational executive told the Financial Times last week: “The measures definitely sent shockwaves through the system. Safe injected an element of uncertainty into something that had been a routine board matter — every year we pay taxes and then send the dividends back home.”
Left to its own devices, the ruling Chinese Communist party would rather not restrict foreign investors’ dividends or punish American multinationals, even if Mr Trump does indeed upend Sino-US relations. The party’s grip on power depends largely on urban job creation and with the economy growing at its slowest annual rate in a quarter-century, China’s leaders need all the help they can get. Last week the party’s politburo identified “actively attracting foreign investment” as one of its key “economic work tasks” for 2017. Stability will also be paramount ahead of a party congress that will set the stage for President Xi Jinping’s second five-year term.
According to people familiar with the exchanges, over recent months Chinese officials have even emphasised economic co-operation with their Japanese counterparts, who are more often treated as convenient punching bags for slights ranging from territorial disputes in the East China Sea to historical grievances.
The risk for US multinationals lies in the fact that the Communist party is not entirely free to decide how it reacts to foreign “provocations”. The party’s hand can be forced if an increasingly nationalist public feels the leadership is not being assertive enough in defence of territorial interests.
Yum Brands recently blamed nationalist-inspired protests outside some of its Chinese KFC and Pizza Hut outlets for denting third-quarter sales. The protests were set off by an international arbitration ruling in July that undermined Beijing’s expansive claims in the South China Sea. In 2012, a perceived slight by the governor of Tokyo sparked demonstrations by tens of thousands of Chinese protesters nationwide, leading to a two-year hiatus in senior diplomatic contacts and a steep fall-off in Japanese investment.
But as serious as the 2012 protests were, they would be nothing in comparison to the likely public reaction in China if Mr Trump dramatically alters Washington’s policy over Taiwan, the third rail of Chinese geopolitics. If he were still alive, Clancy would probably be tempted to write a novel about it.
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