First off, let us stipulate –
- It is vitally important for a nation to ensure security during the G20. National leaders will be present, en mass. With terrorism threats salient everywhere, China wants to show off its prowess as a new member of the elite club. In Hangzhou, terrorists and protesters, ils ne passeront pas!
- At the same time, China shows the major democracies, all of which are G20 members, and the world, that there are ways to ensure stability and harmony. No Seattle 1999 here! Chinese soft power in action.
The question for the G20 members, all of whom are seeing a Potemkin village Hangzhou, is what cost for stability.
One expects some concessions in time and convenience for a meeting of world leaders. But perhaps the concessions go too far.
There are “checkpoint Charlie” locations everywhere going into the downtown districts. All vehicles must stop to be checked, registered, and if desired, searched. The checkpoints are at major arterial streets going toward downtown, generally 30 to 45 minutes driving time from Xihu, West Lake, the focal point of all directions in downtown Hangzhou.
On the way to the train station this morning, it only took me 5 minutes to get through checkpoint, at 5 am. I left an hour early, anticipating longer delay.
But I had to get out of the car, go into the special police station built just for this purpose (construction started more than a year ago, and I wondered what this was for; now I know) and have police check my papers. Took about 4 minutes. But now imagine this checkpoint, with only two checking lanes, and every car has to stop for at least a minute, to have someone write down license plate number, check the hukou registration of the driver, and check the driver’s license against records. Put this system on Lake Shore Drive in Chicago, or the Holland Tunnel in New York, 24 hours a day for two weeks. Imagine the back ups at rush hour – could you imagine sitting in the line for an hour and a half? two hours? That is what people have to do here. And, like the movie, No Way Out – there is no other way to get most places of business in Hangzhou, or the train station, or the airport, without going through one of these checkpoint Charlies.
This checkpoint, and others at the train stations and airport, even at some school entrances, look like an occupying army has swept down. More police than you can imagine, at any one location – two policemen every twenty yards, for two hundred yards or so, standing both sides of the access ramp, driving up to the train station dropoff; plenty more policemen in the drop off zone, some with heavy body armor and weapons. Inside the train station, a police lookout station, built just for the G20, with an armed guard surveying the train station masses. Special luggage search lines, not only to get into the train station, but also to get out of the station. Ticket and passport inspection, not only to get into the train station, but also to get out of the station.
I posted before that there were very few taxis available on the streets in Hangzhou. That is because most Hangzhou taxis have been allocated to the train stations and airport, and wherever the G20 people are staying. It has never been easier to get a taxi at the train station in Hangzhou. No line of people waiting. Dozens of taxis in line waiting for customers.
There are luggage checks on the buses and on the subways. I cannot verify that myself – only reports, and in this environment, no reason to doubt.
Factories are closed in the districts of the city. All construction has ceased in Hangzhou. This applies only to the districts, not the outlying counties, where I think I saw some construction going on from the train. But that means no one is working on construction projects at all for miles from downtown.
There are absolutely no trucks on the streets at all – not last night at 8:30, not this morning at 5 am, not this afternoon at 1:30. That means no deliveries of any kind. I will say it again – no trucks at all. Our main grocery store seems supplied, as of Saturday morning. There is meat in the display cases, although I think less than usual. I am going to bet that the stores will be running out starting today, and the G20 meetings are all next week.
Thousands of businesses are closed. From my looking, it is not clear what determines whether a business is open or not. It feels a bit like after a tornado – only rumors, no information –
“Is the bank open?”
– “No, but maybe the branch across town.”
“is the mobile phone store open?”
– “No, all closed. But I heard they might be open next weekend.”
For tens, perhaps hundreds, of thousands of people, it is a two week forced vacation, but no place to go. Locals are barred from many of the places they might want to go, like restaurants near Xihu, the big lake. A permit is required to go anywhere close to downtown.
The Hangzhou government has encouraged residents to leave Hangzhou, to visit nearby places a few hours drive or train ride – “go anywhere, just go.”
Even the streets outside downtown have a desolate feeling, like a highly selective neutron bomb went off. Buildings are all there, but maybe 5% of the normal population walking around. At 1:30 in the afternoon, driving back from the train station, the traffic on Tianmushan Road, a big 8 or 10 lane road (somewhat akin to Chicago’s Lake Shore Drive in local prestige) was less in volume than it would be at 1:30 in the morning. No trucks at all. Only a few buses. Almost no one riding a bicycle, or a motorbike.
Buses are normally crowded, standing room crowded, any time of the day or night. Even with substantially fewer buses operating, they are not crowded – score one for good planning by the transportation department. Everyone gets a seat, when normally, almost everyone would be standing. Looks like bus service in the suburbs.
I don’t know how the word has gotten out to business owners, and to bike riders. But it is absolutely eerie. Most hotels are closed, except for those serving G20 participants. I drove by restaurants I have been to, and banks I have been in, and stores I went to. All shuttered.
Police, some armed, most not, are everywhere. As I mentioned before, all schools are closed, with no one allowed in or out, except for a special few. All foreign students were told to leave Hangzhou, and universities will open for classes two weeks later than usual. At my school, foreign teachers who live on campus were relocated, with all their belongings, to a different building. At one school entrance, where there would normally be hundreds of students and many cars and bicycles and motorbikes, there were ten policemen, a couple heavily armed. Some school entrances have concrete barricades in front of entrances, in addition to the locked gates.
In the last month, police went to every apartment in our residential development, checking hukou for Chinese and looking for foreigners. I was in Chicago, but they came looking for me two or three times.
On the streets, police are stopping people on bikes and people walking, checking ID. This is not near any G20 events – at least ten miles from any event.
Every bus stop – every bus stop – has a couple of volunteer assistants, standing all day in the sun, with bright red hats and vests, ostensibly to help any G20 participants who might (a) be on a bus; (b) not be accompanied by a guide: (c) want to go exploring in the neighborhoods; and (d) might somehow need instructions. The instructions are to report anything out of the ordinary to police. Every bus has an assistant, as well.
It is an occupying army of police and chengguan (chengguan are the non-uniformed unofficial police, who serve as thugs as needed). The city is in shutdown mode, except, I guess, where the G20 events are and the participants will be staying. I don’t have a permit to get near downtown, but I know the streets are clean, the taxis are plentiful, there is no traffic other than G20 traffic, no noise from construction or trucks, no emissions from factories, the hundreds of girls serving as waitstaff are well-dressed and pretty and helpful, and there is no one on the street, for miles around, to take pictures, much less hold up a sign.
But G20 promotion signs are everywhere, hung from metal posts on the sides of the major streets – “Hangzhou – A Good Host, A Better G20” In the train station, the new cars on display have a G20 logo on the sides. Buses all have a G20 promotion on their sides, as well.
Hangzhou and Zhejiang provincial government employees have the script down pretty well – “No trucks? I am enjoying driving now. It is so pleasant.” Heard that from a couple of friends.
All online searches in Hangzhou are blocked. I was going to look at Hangzhou Expat, a site that would have other information about the gross government panic we are witnessing in preparation for the G20, but that is blocked. A search for Hangzhou is blocked; also baseball and Chicago.
Selective internet blocking is a specialty here, so it is no surprise that the hundreds of journalists will have no trouble filing stories, as long as they remain within the village.
In the train station in Shanghai, I could get some internet searches. I found a little of the discussion in Hangzhou Expat. Posts ended in early August. I don’t know if Hangzhou Expat has been blocked since then, or not. You see how rumor replaces information, when rumor is all you’ve got and you can’t evaluate the source.
Local TV has foreign journalists praising the organization of the Potemkin village, announcing that based on what they have seen, the G20 will be great for Hangzhou tourism and spending. A young journalist from Africa expressed hope that China would bring investment to her country. The foreign journalists interviewed all look earnest, well-scrubbed, and well under 30.
At opening meetings of the B20, a business meeting in conjunction with the G, Xi Jinping walked out to address the foreigners come to pay tribute, Xi walking out to trumpet blasts announcing the emperor. Applause was perfunctory. No ovations.
One can learn from the history of Chinese GDP statistics, customarily announced publicly before the data could all be collected. Two days before world leaders begin arriving, I am announcing that the G20 will be a great triumph for Hangzhou and for China.
Hangzhou is pretty, and modern. Right now, not so bustling. And not so good for business, or people’s incomes. But no personal sacrifices are too great for the greater good of the state. The world can learn from China.
Next meeting should be in North Korea. Same safety, same theatrical sets, less expense.
No Way Out from the Middle Kingdom
You remember the movie, with Kevin Kostner as the exemplary US Navy officer-special assistant to the Secretary of Defense (Gene Hackman). The plot twists around search for a purported Russian spy in the US, codenamed Yuri, who has been able to infiltrate the Navy at the highest levels. Following several plot twists, Kostner is ultimately left with no way out – he cannot be seen in public, as he will be implicated in a murder; and he does not want to return to his homeland, which he has not seen for at least twenty years. He has no safe place to go, and no way out of his predicament.
No doubt some American businesses are in a similar predicament now, with regard to their manufacturing or distribution or licensing deals in China. Conditions have been getting more difficult for foreign businesses, particularly American businesses, for years before the tirades coming from the current occupant of the White House. Seagate closed its factory in Suzhou in 2017. Panasonic ceased all manufacturing in China in 2015. And Home Depot, L’Oreal, Revlon, and Best Buy. Microsoft moved its two China plants to Vietnam in 2015.
Xi Jinping has worked hard to promote the home advantage for Chinese companies – in 2015, Starbucks was accused by the government and the Chinese media of gouging Chinese customers Starbucks China Pricing Similar charges were leveled against Apple China’s anti-Apple campaign and Yum Brands and Hewlett- Packard. In all cases, Chinese responded to the government with a large raspberry. For Starbucks and Apple, they cited the safety of the coffee and the attractiveness of the iPhone.
Those were minor skirmishes that any big company must get used to. Now companies of all sizes find themselves in the middle of a war, a trade war, conducted with spite and malice on both sides, and no clear end game. Tariffs are a tool, but the Chinese government has many other tools that can be more effective against any one company.
The tools are essentially enforcement of existing laws in a biased manner, enforcement of regulations made up on the spot, threats, and support for local businesses acting in an entirely extra-legal manner.
Differential enforcement of law and application of “special” law is a well-known tactic in the US, for persecution of blacks and other minorities. But in the US, there can be appeal to other avenues within the society – media, lawsuits, popular support, social media, engaging with legislators or regulators. These avenues are obviously restricted or non-existent for most American businesses in China – Starbucks and Apple being two that can generate widespread popular support.
But most American businesses in China are small to medium sized and without local guanxi. Those businesses trying to get factories, molds, money, and personnel out of China may be subject to a whole other level of persecution. By the way, I focus on manufacturing industries because foreign service businesses – retail, banking, finance, health care, education, real estate, insurance, media and entertainment – are highly restricted or forbidden in China. To date, foreign service businesses are not much of a factor in trade. Yes, Walmart and many chain retailers in shopping malls; but these are big companies with sufficient legal and financial wherewithal to withstand some ups and downs in the market, and American IP, personnel, and equipment are not at stake.
Dan Harris, at Harris/Bricken law firm, writes China Law Blog, by far the most useful general law blog about doing business in China. Over the years, he and co-authors have explained difficulties of doing business in China, with examples and clearly written language that provides both useful information and blatant warnings about the dark side of doing business there.
Now, Harris has reposted some of his most dire warnings, based on what he is hearing from businesses in 2018 in China and seeking to get out –
How to Leave China AND Survive September 23, 2018
The money paragraphs from this article –
Way back in 2013, in The Single Best Way To Avoid Being Taken Hostage In China, we wrote of how Chinese companies and individuals often take hostages in an effort to collect on alleged debts or to protest employee layoffs or the closing of a China facility:
As the article states, “it is not rare in China for managers to be held by workers demanding back pay or other benefits, often from their Chinese owners, though occasionally also involving foreign bosses.”
My law firm’s advice every single time to our clients who are laying off workers in China or closing a facility in China or allegedly owing money in China is to stay outside China for all negotiations. One only needs to be a regular reader of our blog to know that we took this position long ago and have never waffled:
By this point many of you are probably wondering why I am writing about debt when the issue is leaving China. My answer is very simple: once the news goes out that you will be leaving China, alleged creditors will come out of the woodwork. The tax authorities will come up with taxes that you owe. Your landlord will explain why you owe it way more than you thought you did. Your suppliers will send you bills for items they never actually gave you. Your employees will demand all sorts of severance. I am not saying these sorts of things always happen, but I am saying that they often do and you need to be prepared for it.
No way out is not too strong an image. Whatever the merits of the current US complaints about Chinese business practices – and there are plenty of valid complaints, including IP theft, preferential treatment for local companies, and subsidies for exporters – China-US IP battle – the US companies love the profits earned in China, and so are between a rock and a hard place. For some companies, mostly the consumer facing companies like Starbucks or KFC, there is growing competition, but a measure of public support. CCP members drink coffee and eat KFC ice cream, too. B to B companies are out of sight, out of mind, a perfect mental location for the excesses of law or regulation that are simply another way to cheat or extort from the foreigners.
Try this post – China Factory Scams: Their Time is Ripe By Steve Dickinson on September 9, 2018
Think about it this way – is there another major American trading partner where one need fear being kidnapped over a real or imagined payment dispute? Is there another American major trading partner for which the best trade advisories scream, danger, danger, danger?
In the movie No Way Out, we don’t know what happens to Kevin Kostner. But his Russian contact is right – “Let him go. He will be back. Where else can he go?” In the tariff war, we can’t tell right now what will happen. The US has a theoretical advantage in buying more than it is selling to China, and China will soon run out of US imports to tariff; but Mr. Xi doesn’t have to stand for reelection, and Chinese, even modern Chinese, are accustomed to conceding to power. Neither Mr. Xi nor the orange haired baboon can concede without losing substantial face. The uncertainty on all sides is palpable, and uncertainty in operations is deadly scary for manufacturing businesses. (Ask any business in England right now). The American Chamber of Commerce in China (AmCham China) says that almost half of 430 member companies surveyed expect a strong negative impact from the tariff war AmCham – more pain ahead. (note – this link is now blocked or deleted) Even though American businesses are developing strategies to move operations to Vietnam, Indonesia, Philippines, or Malaysia, it will be difficult to reproduce the infrastructure and organizational experience of having spent years in China. But at some point, companies will have to abandon the lure of profits when the cost and uncertainty become too great. China is trying to soft-pedal its formal response to the orange-haired baboon, but the indirect penalties may soon become intolerable.
High tech industries in the US face a related set of problems. In addition to traditional IP theft, Chinese companies are now innovative enough on their own to challenge world competitors, and the China market for high tech – business and consumer – is the biggest in the world. Large government subsidies and huge attractive packages for individual scientists who relocate to China are the norm. Chinese students educated in STEM fields in the US are now likely to return to China where opportunities are greater. Money alone does not drive innovation, but it is certainly a catalyst. Now American companies are feeling pressure to partner with Chinese companies on research, even as the threat of IP theft continues (even if less now than before) and loss of researcher talent continues. How to respond in this new environment, particularly one in which malice aforethought is salient? An MIT Sloan School of Management report from June of this year describes the conundrum – Changing Face of Innovation in China (limited access with sign-in). The Sloan recommendations for foreign companies in China may be all that can be done – hire more Chinese locally, learn to file patents faster in China, and “Engage in cutting-edge innovation in China when returns exceed global risks.” I’m not sure what this means, but the Sloan report described it this way –
This requires both an aggressive global innovation strategy (for example, doubling down on promising R&D projects outside China and speeding up R&D outside China) and a complementary business strategy (for example, strategically patenting, engaging in more mergers and acquisitions in China and abroad, seeking greater support from home governments, and possibly shifting away from product lines increasingly dominated by Chinese companies).
Ok.
Obviously, tariffs and different locations within China affect industries differently. For me, I expect those indirect costs – the unfair application of regulations and paperwork and extra-legal harassment as tools of trade war – to push a sizable chunk of American manufacturing out of China. Not major companies, but many smaller companies, looking at the short and medium term, will need to negotiate a way out. In the latest AmCham survey, 25% of American respondents said they had moved or are planning to move capacity out of China – and this survey was conducted a year ago. At that time, businesses cited labor costs, IP theft, and a “more challenging regulatory environment” as the reasons for relocation. Forty-five per cent reported flat or declining revenue in China, and only 64% reporting a profit, the lowest percentage in five years. Now comes the trade war. AmCham – businesses leaving China (note – this link is now blocked or deleted) Larger companies may choose to reinvest elsewhere, but they too will have to bear the brunt of both sides – tariffs on imports to the US and tariffs on imports and punishment from China. The greater the role that public stockholders play in company valuation, the more difficult it will be for American companies to find a way out. Potential loss of profits and the sunk costs of capacity will be hard for stockholders to bear. But no way out can only be a short term solution. For some firms, as for Kostner in the movie, returning home – or at least, leaving China – may be the only way out.