Every Foreign Company in China Accepts CCP as Business Partner: Rep. Gallagher

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The Chinese Communist Party (CCP) is a partner of every foreign company doing business in China, a congressional committee warned on Thursday, as lawmakers and experts went to great lengths to explain how corporate environments in China are vastly different.

“There is no such thing as a ‘private company’ in China,” Rep. Mike Gallagher (R-Wis.), chairman of the Select Committee on the Chinese Communist Party (CCP), said during his opening statement at a hearing focused on the risks to American companies operating in China.

Mr. Gallagher said that different Chinese laws, including the CCP’s recently updated anti-espionage law and data security law, have “codified” what has always been true, which is that “Beijing reserves the right to swipe any data, seize any assets, and filch any IP it wishes.”

The Wisconsin lawmaker also made reference to Beijing’s longstanding practice of embedding communist party branches or cells in companies, institutions, schools, and other entities, which allow CCP officials to keep tabs on business operations and access confidential information.

“China’s Military-Civil Fusion policy means any private company can be effectively turned into an arm of the PLA or communist intelligence apparatus,” Mr. Gallagher added, referring to the Chinese military’s official name, the People’s Liberation Army. The CCP’s policy, which involves intellectual property theft, requires the private sector to support the PLA in its technological advancement.

In other words, Mr. Gallagher said that “every foreign business that enters China takes on a sometimes silent, sometimes not-so-silent business partner: the Chinese Communist Party.”

In recent months, Beijing began putting pressure on foreign auditing, consulting, and due diligence firms, including raids on three U.S. firms: Bain & Co., Capvision, and Mintz Group. The raids, according to Mr. Gallagher, clearly show that the CCP “considers sunlight and accurate business information in the hands of foreign companies operating in the PRC [People’s Republic of China] to be threats to its continued rule.”

“It’s time for American corporate executives to take off the golden blindfolds and stare with clear eyes at the growing peril of doing business in China,” Mr. Gallagher said.

Risks

Piper Lounsbury, chief research and development officer at Strategy Risks, a risk management firm that helps its companies manage their China risk, testified during the hearing that the CCP has created a “dangerous” environment for U.S. companies in China.

“The party’s goals are structured to promote Beijing’s stated objectives to eventually replace American firms and businesses while using them, or subjugating them in the near term,” Ms. Lounsbury said.

To achieve those objectives, Beijing has relied on “theft, coercion, and merger-enabled access to U.S. technologies, intellectual property, and data,” according to Ms. Lounsbury.

Speaking from her past experience, she said the CCP mayor of a high-profile Chinese mega city once made a direct threat to a Fortune 100 American CEO. The major told the executive to release the company’s latest high-tech intellectual property to its Chinese partner, or the American company would lose its market access for its other businesses in China.

In another case in China involving a joint venture between a U.S. company and a Chinese company, Ms. Lounsbury said the Chinese firm “blatantly stole IP” from its U.S. partner and established a local, state-funded competitor factory, according to Ms. Lounsbury. The Chinese firm also took its U.S. partner’s marketing and distribution networks and made it nearly impossible for the U.S. company to exist in the joint venture.

In 2017, the Commission on the Theft of American Intellectual Property estimated that the U.S. economy suffers an annual loss of between $225 to $600 billion each year due to the CCP’s IP theft.

During her testimony, Ms. Lounsbury also expressed concerns that individual data in the United States could be falling into the hands of the CCP.

“The identity technology service providers that we are using here in this country, have supply chain or manufacturing components or partners that are affiliated with the Chinese Communist Party,” she said. “I would highly recommend that we look at how do we manage due diligence on making sure that our personal information and biometrics are safely secured.”

In her written testimony, she elaborated that these identity technology service providers “have a track record” of providing equipment to China’s Ministry of Public Security (MPS).

In April, the FBI arrested two individuals accused of running a secret police station in New York City. The two defendants allegedly coordinated with the MPS while carrying out their transnational repression schemes on U.S. soil.

Stocks

The risk associated with American investors buying Chinese stocks also came under scrutiny during the House hearing.

“Many Americans believe they ‘own’ Chinese stock in their retirement plans and pensions. But they don’t ‘own’ anything,” Mr. Gallagher warned. “What they often hold instead are claims on VIE’s or variable interest entities, that give none of the traditional control of corporate governance or claim on assets as real equity ownership.

“VIE’s are, at best, just side bets at a CCP-run casino.”

Under the VIE structure, Chinese companies set up offshore entities for listing overseas, bypassing Chinese rules restricting foreign investments. In other words, investors own shares in shell companies and face risks such as a lack of legal remedy.

According to a report (pdf) from the U.S.-China Economic and Security Review Commission, 252 Chinese companies were listed on the New York Stock Exchange, NASDAQ, and NYSE American as of Jan. 9. Among them, 161 Chinese companies used the VIE structure, including Alibaba Group, Pinduoduo Inc., and JD.com.

Rep. Andy Barr (R-Ky.), a member of the Select Committee, asked during the hearing how Congress could better communicate the risks to Americans of investing in Chinese firms using the VIE structure.

“Let’s start with warning labels, the way you would put them on cigarette packets,” said Shehzad Qazi, chief operating officer and managing director of China Beige Book International, in response to Mr. Barr’s question.

“We need to warn investors, especially the average American … about the risk in a very simple way, by making sure they fully understand and most people do not,” Mr. Qazi said.

In March, Sens. Rick Scott (R-Fla.) and Chris Van Hollen (D-Md.) introduced a bill (S.855) that would require a special notion on VIE-listed companies’ exchange ticker symbols.

Mr. Barr suggested a U.S. ban on Chinese VIE investments.

“I think this committee ought to consider recommending a ban of VIEs into PRC companies,” Mr. Barr said. “This is a highly unconventional way for investors to take an equity stake in a company where they don’t have any material legal rights.”

Statistics

Mr. Qazi also told lawmakers of the Select Committee that the Chinese state’s economic data should not be trusted.

“For example, in 2020, China claimed a robust economic recovery after suffering a historic downturn earlier in the year,” Mr. Qazi said. “China’s statistical authorities created this illusion of strength by simply deflating baseline 2019 number—nearly 7 trillion yuan, about 1 trillion U.S. dollars’ worth of economic activity was just erased from 2019 statistics to show growth in 2020.”

He criticized Wall Street for publishing economic analyses by relying “almost exclusively” on China’s official economic data, alleging that doing so made it “a loudspeaker for Beijing’s economic and often political propaganda.”

“For example, Beijing’s falsified claims of a V-shaped recovery in 2020 … were carried far and wide by the research arms of investment banks, who simply turned a blind eye toward the serious manipulation in China’s official numbers,” he explained.

Americans are then exposed to the questionable Wall Street analysis via major newspapers and television networks, according to Mr. Qazi.

“I think it’s very crucial to point out that … Wall Street sets the public narrative on China because its analysis is quoted endlessly in major newspapers, and covered across major global media networks,” he added. “Therefore, Beijing’s ‘fuzzy statistics,’ if you will, get a stamp of reliability from investment banks, and invariably dictate the view of China’s economy held by millions of people in the U.S. and across the Western world.”

Currently, the Chinese economy is faltering, as evidenced by weak consumer spending and high youth unemployment.

Moving forward, Mr. Qazi said the years of the Chinese economy having six or higher percentage of growth are over.

“In the next several years, you might be looking at China realistically growing closer to 2 percent, 1 percent,” he said.