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American businesses are growing wary of China—with good reason

General View Of Beijing's Tiananmen SquareGeneral View Of Beijing's Tiananmen Square
BEIJING, CHINA - MARCH 02: Chinese paramilitary police officers patrol Tiananmen Square on March 2, 2015 in Beijing (Photo by Lintao Zhang/Getty Images)Photograph by Lintao Zhang — Getty Images

Last spring, five women in China were arrested for “picking quarrels and provoking trouble” because they planned a sticker campaign on buses and subways to call attention to groping and other forms of sexual harassment.

Lurking inside this political incident were two warning signs for foreign business—the increasing reach of Beijing’s cyber-spying (the women were caught while only in the planning stage) and the regime’s growing hostility to civil society, however benign.

As the White House prepares for President Xi Jinping’s visit later this month, U.S.-China relations are being rattled by a regime that is flexing its muscle militarily, in cyberspace, and against dissenters inside its own borders. Those may be political and security issues, but they are now bleeding into the operations of Fortune 1000 companies. In the most recent episode of our CSIS iTunes podcast “Smart Women, Smart Power,” I discussed these disturbing trends—as well as Beijing’s military buildup in the South China sea—with Bonnie Glaser, CSIS’s senior adviser for Asia, and Sophie Richardson, China director at Human Rights Watch. You can hear the full conversation, recorded at the Center for Strategic and International Studies, here.

“The American business community is very unhappy about the regulations and policies China is pursuing that favor Chinese companies and seek to give advantages to its own national champions at the expense of foreign companies,” says Glaser. Until recently, she notes, U.S. business “was the greatest supporter of closer US-China relations.” Now, a reversal of political reforms is making companies nervous.

Which brings us back to the five women—and the state of civil society in China. Since that episode, Beijing has issued a draft law to police foreign nongovernmental groups. The draft provoked sharp objections from American industries ranging from technology to agriculture. While NGOs may seem tangential to business operations, industry groups cite everything from chamber of commerce exchanges to scientific gatherings as central to the foundation of $600 billion in annual U.S.-China trade.

But under this regime, there is “extraordinary hostility to civil society,” says Richardson. The draft law “arguably poses the greatest threat to people-to-people diplomacy in decades.” President Xi, she adds, “looks at the world through the lens of national security. His perception of what constitutes a threat is unbelievably expansive.”

That includes not only a crackdown on civil society and human rights lawyers, but also an increasingly aggressive deployment of cyber-attacks. U.S. companies have long complained about Chinese cyber-theft of trade secrets. Now, though, Beijing’s desire to build its spy network is thought to be behind the hacking of data on some 20 million government employees and contractors—as well as the summer cyber-attack on United Airlines, where manifests of travelers can help Chinese intelligence agencies track U.S. officials.

Meanwhile, foreign companies are alarmed about the draft of a sweeping cyber security law that would force them to aide Chinese police surveillance. That follows new national security reforms that could be used to keep competitors out of the market. With a slowing economy and turbulence in the Chinese financial markets, Beijing’s determination to tighten the noose on everything from political dissent to foreign business operations is likely to grow, says Richardson, citing news that some 200 people—from journalists to brokers—were detained to stop “rumors” about the stock market. “That shows how nervous the government is about any narrative not in their control,” says Richardson.

Adds Glaser: “We have a leadership in China that is extremely insecure and paranoid, very, very fearful and worried about its political legitimacy.” And that’s not good—for political dissenters, or foreign investors.