German firms warn Chinese Communist Party’s drive to gain more control over business operations may drive them away

Diplomats and business leaders warn that push to establish party control over economic matters could force them to think about pulling out of the country

PUBLISHED : Friday, 17 November, 2017, 7:05pm
UPDATED : Friday, 17 November, 2017, 11:26pm

German businesses and diplomats have raised concerns about the Communist Party’s attempt to strengthen its influence in foreign enterprise, warning on Friday that it may force them to consider retreating from China’s market.

The practice of embedding party groups within foreign firms in China dates back to the 1990s, but the issue has become more of a problem as the party aims to strengthen its role in every aspect of society and economy.

The German Chamber of Commerce in China told a press conference on Friday to release its annual business confidence survey that companies were concerned that the requirement to have the party members involved in company management would affect business operations.

Lothar Herrmann, the chamber’s chairman in charge of North China operations, said that while it was acceptable to set up party cells in foreign firms, they should not be required to include party members in executive role.

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The German ambassador Michael Clauss told the press conference that some German companies were under pressure to revise the terms of their joint ventures with Chinese partners, to allow the party cells to have a larger voice in business operations.

He warned that such a move would lead to conflicts of interest and affect investment decisions, which might force companies to consider options such as leaving China’s markets.

Investment inflows from Germany account for more than half of the European Union’s total investment in China.

The chamber also said the uncertainties about the speed and implementation of the government’s pledges to open up markets made member companies cautious about investment decisions. A quarter of the firms surveyed highlighted legal and regulatory reasons for not increasing investment.

Clauss has previously told this newspaper that the role of the Communist Party had been strengthened at the expense of “giving the market a greater role in the economy”.

“In some cases foreign partners have been asked to renegotiate their joint venture contracts with the purpose of granting Communist Party organisations a governance and decision-making role on the management boards. This obviously causes great concern among foreign companies in China,” he said.

At the sidelines of the key Party’s Congress last month, officials from the party’s discipline agency said nearly 70 per cent of foreign-funded firms had set up party groups by the end of last year and they were welcomed by management.

The agency said the senior executives in foreign companies believed the party cells could help understanding of China’s policies and address labour disputes and offer “positive energy”.

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But a foreign business representative, speaking on condition of anonymity due to political sensitivities, said that it was acceptable to have party cells in their companies but they should not intervene in operational decision.

Foreign companies have been increasingly careful in recent years to avoid publicly criticising the Chinese government for fear of retaliation.

“These developments risk furthering weakening EU FDI engagement in China, which already saw a drop this year”, Clauss said.

The German chamber also said that more than half the companies it polled were not planning to invest in new locations.

Although their business expectations had improved, German companies in China thought slow internet speed and tight internet access control were among the top challenges for their operation.