China's Dilemma - The Need to Limit Free Speech At Home vs The Need To Participate in Free Markets

China Plays Hardball Over Hong Kong Unrest

Beijing’s willingness to demand silence from Western businesses, despite the risks of alienating them, is a sign of its increasing fragility.

October 15, 2019

(Thanks Arch McGill)
Last weekend, the NBA unexpectedly found itself at the center of the row between Beijing and anti-government protesters in Hong Kong when Houston Rockets General Manager Daryl Morey expressed support for the protests on Twitter. After the Chinese Basketball Association announced a suspension of cooperation with the league, the NBA scrambled to distance itself from Morey’s views and defuse the situation. China was evidently unsatisfied; broadcasts of NBA games were canceled, NBA merchandise was pulled from Chinese stores, NBA ads disappeared (including one featuring the Brooklyn Nets, which are owned by vocally pro-Beijing Alibaba co-founder Joseph Tsai), and every one of the NBA’s official Chinese partners suspended ties with the league.

This week, Beijing also reportedly forced Apple to remove the Taiwanese flag emoji from iPhone keyboards in Hong Kong, as well as two apps: HKMap.live, which Hong Kong protesters used to crowdsource police movements, and Quartz, a U.S. media outlet whose Hong Kong coverage has evidently crossed a line. U.S. gaming company Blizzard Entertainment, meanwhile, suspended a professional player for expressing support for the Hong Kong protests. The hotel company Marriott, which has been under fire from Beijing for accidentally referring to Taiwan as a country, said it would fire an employee for “wrongfully liking” a tweet by a Tibetan independence group.

If China appears to be increasingly thin-skinned, it’s because the country is entering a period of profound internal political and economic stress. The risk of mass social unrest is as high as it has been at any time since 1989, making the potential rupture of regional fault lines amid these pressures China’s core geopolitical problem. Its uneasy relationship with foreign corporations illustrates the trade-offs inherent to Beijing’s approach to managing the problem. To stave off a political crisis sparked by an economic collapse, China needs the capital, jobs and technology provided by foreign firms. Yet, to stave off a political crisis, it can’t afford to see its control undermined by foreign influences – and won’t hesitate to go it alone if forced to choose.

The Costs Are Real

China’s willingness to draw a line in the sand with foreign firms reflects the country’s staggering growth in power but also its increasing fragility. It’s now home to the world’s second-largest consumer market. China has as many NBA fans, for example, as the rest of the world combined, and last year, the league reaped more than 10 percent of its revenue from China. Increasingly, Beijing is leveraging its market power for a wide range of strategic, economic and political aims. For example, in exchange for the right to sell to Chinese consumers, Beijing often pushes tech firms to share advanced technologies with local partners that it hopes will accelerate the economy’s race up the value ladder. As illustrated by moves like forcing foreign airlines to pretend Taiwanese cities aren’t in Taiwan, no political victory is too small.

Still, at times, Beijing can appear curiously tone-deaf and ham-fisted, pressuring outside institutions in ways that do considerable harm to its reputation abroad for minimal gain. Beijing could’ve just ignored Morey’s tweet, which was unlikely to have any impact on the Hong Kong protests or perceptions of them on the mainland. Twitter is censored in China, after all. Yet, Beijing did respond – even explicitly calling for curbs to free speech in the U.S. – and then kept escalating the matter. As a result, it magnified the spotlight on human rights issues in Hong Kong and Xinjiang (where, until Sunday, the NBA had a training camp), sparked a national conversation in the U.S. about Chinese coercion two days before critical U.S.-China trade talks were set to begin, and gave antagonized NBA fans in China reason to sympathize with Hongkongers. For what gain?

Even when China has clear, worthwhile reasons to take a hard line with foreign firms, moreover, such moves invariably come with costs. For one, China needs foreign investment and technology, now more than ever considering that it’s dealing with the trade and tech wars, the global slowdown, China’s structural slowdown, credit shortages, and the growing awareness in foreign business circles of the difficulty and risks of operating in China. Already, its current account has slipped into deficit, and uncertainty related to the trade war has pinched global investment. Yet, the more foreign firms and investors think that doing business with China comes with risks of stumbling unawares onto Beijing’s naughty list or provoking nationalist boycotts – and, at home, risks of bad PR and pressure from U.S. lawmakers – the more likely they are to stay away.

To be clear, China will remain exceedingly attractive to most firms, particularly those selling to Chinese consumers. The conspicuous silence on the kerfuffle over Hong Kong of otherwise politically outspoken NBA stars has made that much clear. To steal from Michael Jordan: Communists buy sneakers, too. But for firms on the fence or those looking at the country purely as a manufacturing hub, China may not be worth the headaches.

China’s reputation problem carries risks in a number of other strategic and economic areas as well. The power of coercion is king in geopolitics, but hearts and minds still matter. Beijing has immense interest in winning political support for its aims abroad, or at least not antagonizing populations to the point where it creates political risks for foreign leaders of engaging with or conceding to China. In the past couple years alone, anti-China political backlashes have derailed strategically important Belt and Road Initiative projects in places like Sri Lanka and Malaysia. They’ve also undermined Beijing’s goals in regional states like the Philippines, which China needs to flip to solve its foremost strategic challenge. Perhaps most important, the growing impression in the U.S. and elsewhere in the West that China is a neo-fascist, revisionist state whose growth in power must be contained, whatever the costs, has boosted political support for Western trade and tech measures targeting China. The costs are real.

Rocketing Risk

Why, then, is Beijing apparently so unconcerned about winning hearts and minds – or at least so clumsy at it? For one, China often can’t help itself. When an organ of the Chinese state lashes out at a foreign firm, it’s often less a tactical, conscious decision than the reflexive response of an institutional culture that can’t tolerate any questioning of the party line. It’s doubtful, in other words, that Xi Jinping rushed to convene an emergency strategy meeting on whether and how to respond to a tweet by some front office guy with the Houston Rockets. The massive machinery of the Chinese state just responded in the way it’s been programmed to. This is an inherent risk to authoritarian regimes where dissent is not tolerated and nationalism is a boon – and where career incentives push officials to air on the side of being too hawkish. China, moreover, was almost fully closed off to the world just two generations ago, so the system as a whole is still relatively new to the game of massaging foreign opinion and thus prone to seemingly pointless misadventures.

Often, though, China’s moves are indeed the result of risk-reward calculations – ones that underscore China’s increasing political fragility. If it can’t live without foreign capital and technology, but also can’t live with foreign firms undermining its control at home, then it has good reason to make an example of those who flout the party line in hopes of making the consequences abundantly clear to everyone else. If, as a result of the rigid institutional culture this creates, it may be prone to overreach and self-inflicted wounds, so be it. If it makes China’s broader tensions with its neighbors or the West worse, well, none of these tensions would be resolved altogether by playing nice, anyway. Whenever Beijing wields its favorite, seemingly tone-deaf accusation that a Western government or corporation has “hurt the feelings of the Chinese people,” what it’s really saying is that it can survive isolation by nursing powerful historical grievances to rally nationalist support.

The bigger point is that the Communist Party of China is stuck with a lot of bad options. When forced to choose, it’ll almost invariably pick the one that it thinks most solidifies its control. And the more China’s long-term economic interests take a back seat to the CPC’s immediate concerns about political stability, the more risk levels will rise on a range of issues.

Consider Hong Kong. The main constraint preventing Beijing from forcefully ending the protests and taking full control of the territory is China’s dependence on Hong Kong as a gateway for both inbound and outbound investment. The territory accounted for around 64 percent of China’s inward foreign direct investment last year – and it will become all the more important as China’s internal and external economic woes mount. Beijing has a strong interest in preserving what’s left of Hong Kong’s reputation (with both foreign and Chinese firms) as a stable, business-friendly temple to capitalism. Thus, rather than rolling tanks through Tsim Sha Tsui, we expect Beijing to intervene only indirectly, helping Hong Kong police contain and grind down the protests over time.