China: Red restoration

Jamil Anderlini
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In the tranquil surroundings of the Diaoyutai State Guest House in Beijing two weeks ago, Chinese President Xi Jinping was almost effusive as he welcomed an all-star group of global capitalists.

"Many of you are renowned entrepreneurs and business leaders in the world today and you all have profound insight into the global economy," Mr Xi told the likes of Mike Duke, Walmart CEO, Indra Nooyi, the head of PepsiCo, Muhtar Kent, Coca-Cola chairman, David Rubenstein, Carlyle Group founder, and Maurice "Hank" Greenberg, the former AIG boss. "Your suggestions are a very important source of inspiration for the Chinese government."

These comments were intended to signal that the world's second-largest economy remains open for business. But many international businesses have picked up a different, more worrying signal during Mr Xi's tenure. Since he came to power a year ago, foreign companies have been targeted by corruption investigations, price-fixing accusations and state media-led smear campaigns.

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"The perception amongst foreign investors is that it is getting harder to do business here," says Michael Crain, Beijing director of administration for law firm Bingham McCutchen, which advises international companies doing business in China. "In most of the government investigations and media exposés this year the focus has definitely been on the behavior of foreign companies."

Mr Xi's friendly tone at the guest house was in stark contrast with the nationalist rhetoric, communist revivalist symbolism and crackdowns on all perceived challenges to Communist party rule that have characterized his tenure since he took power.

China's plenum could be 'profound:' Citi

As the most senior members of the party gather for a crucial meeting this week, global companies that rely on China for an ever-increasing share of their sales and profits will be listening closely to see which message Mr Xi chooses to send.

Chinese leaders have suggested that this meeting, known as the Third Plenary session of the 18th CPC Central Committee, will be the most significant since the 1978 gathering that transformed the country. Few expect detailed policy initiatives to be announced but it will set the tone for an administration that is expected to rule until 2023. This meeting, and the signals that come out of it, could determine how global companies fare in the world's most enticing market.

A strong dose of nationalistic, neo-Maoist rhetoric could portend tough times for foreign investors, while a continuation of the welcoming language used at the Diaoyutai meeting may signal an improvement in their fortunes.

When he was installed at the top of the party, many within the Chinese system were hopeful Mr Xi would push bold economic and political reforms, including strengthening the legal system and reducing the role of the state in the economy.

(Read more: Shanghai's free-trade zone: What's the hype about?)

But Mr Xi has instead fallen back on the tools and symbols of the past in an attempt to halt the erosion of party legitimacy.

This "restoration" of Communist imagery and tradition has been fueled by a heavy dose of nationalism and has been accompanied by a wave of government attacks on foreign businesses in selected industries.

GlaxoSmithKline, the pharmaceuticals company, recently revealed that its medicine and vaccine sales in China had fallen 61 percent in the third quarter from a year earlier, following a high-profile investigation into the company's alleged bribing of officials and doctors.

Many in the industry say GSK's alleged practices, some of which it has acknowledged, were far from unusual and that most domestic Chinese competitors are much more brazen in paying bribes.

The government has also launched industry-wide investigations into pricing of medicines and milk powder and in August levied its biggest ever penalties for pricing violations, fining six infant milk formula companies a combined $110 million.

Late last month, Japan's Meiji Holdings became the first international company to pull out of China's baby formula sector, saying it could no longer compete in a market that is expected to double in value by 2017 from its current $12.4 billion.

(Read more: Tiananmen crash may set dangerous precedent: Analysts)

The decision came after Meiji was forced to lower prices by the government investigation and after local media reported Beijing would give Rmb30 billion ($5 billion) to Chinese milk-powder makers to help them compete with foreign rivals.

The China factor

"These actions are about strengthening the legal system, purifying the market environment and protecting consumer rights but they also show how China doesn't need these foreign enterprises any more," says Bao Dike, managing editor of the PKU Business Review. "It's not just that we don't need foreign companies to provide jobs and tax revenue, it's also a fact that these foreign companies are occupying the market that belongs to [Chinese] state and private enterprises."

The group of international business leaders that lined up at the State Guest House in late October to pay homage to President Xi were all members of the advisory board of the Tsinghua University School of Economics and Management.

This extraordinary who's who of global industry shows just how important the Chinese market has become to many multinational companies and how the balance of power has shifted markedly in favor of the mandarins who control access to this market.

Conspicuously absent from the event were Tsinghua board members Andrew Witty, CEO of GSK, and Tim Cook, CEO of Apple.

Mr Cook was forced to issue a humiliating public apology and a promise to improve customer service policies in April following an intense campaign of criticism from state media.

In March, Volkswagen recalled 380,000 vehicles in China after state television said they were unsafe. In recent weeks several state media reports have targeted Samsung for its smartphone warranty policies and Starbucks for overcharging for its lattes.

(Read more: Xi confident about China's healthy economic growth)

Since KFC was the target of state media stories last December alleging food safety problems, sales at its parent Yum Brands have slumped by over 10 percent this year.

"The government is very aware of the enormous value of the Chinese market for multinationals and it is becoming more ruthless in ensuring that the money is kept in the family rather than letting outsiders grab the fat profits that are available now," says Kerry Brown, professor of Chinese politics at Sydney University. "Politically it is also a very easy populist move to beat up on foreign companies; much easier than taking on big Chinese companies and their powerful domestic backers."

In the government investigations of the pharmaceutical and milk-powder sectors, Beijing appears to have adopted a traditional strategy known as "killing the chicken to scare the monkey".

By pursuing foreign companies the authorities are sending a message to entire industries that they intend to clean things up in order to provide quality products at reasonable prices in industries about which the public is concerned.

By forcing multinationals to lower prices and improve their offerings they are hoping to raise the bar for domestic competitors as well as provide concrete examples to the masses of how their lives are improving under the new administration.

The series of government investigations has been accompanied by a boisterous wave of media campaigns targeting popular global companies for alleged violations of consumer rights.

(Read more: China's manufacturing activity picks up pace)

These have often been led by the largest state media outlets, particularly state broadcaster China Central Television, and have been juiced up with inflammatory accusations of racism and disdain for Chinese consumers.

"We are actually witnessing two different things: one is the exposing of foreign companies' bribery and bad behavior in China and the other is CCTV's ridiculous populist reports that are not necessarily directly ordered by the top leaders," says Li Huafang, an independent economist and popular newspaper columnist.

"I actually think the new administration wants to strengthen regulations for both foreign and domestic businesses."

Mr Li and many other analysts believe that what appears to be a concerted and organised campaign of economic nationalism is more likely just fallout from Mr Xi's much broader domestic political agenda.

By this logic, companies such as GSK, KFC, Mead Johnson, Apple and Starbucks are collateral damage in the new president's campaign to consolidate his power, shore up Communist party legitimacy and avoid political instability.

The two sides of this campaign are Mr Xi's ruthless handling of any perceived challenges to continued one-party rule and his efforts to address the main complaints of his citizens.

In that sense, it is not contradictory for Mr Xi to personally praise global capitalists while some of their businesses are targeted under his watch. That is because those attacks are not an end in themselves but rather a side-effect of his primary goals.

(Read more: China's economic growth more like 4%: Marc Faber)

The rough treatment of some foreign businesses "stems from Mr Xi's need to establish his authority, to impose his will; this is a very common tactic among new rulers", says Wang Lixiong, a prominent political writer. "We need to wait until he has consolidated power to see what his real intentions are."

One popular interpretation of Mr Xi's conservative lurch is that he is consolidating power by adopting what is described in China as a traditionalist "leftist" approach in preparation for an eventual move to the more liberal reformist "right".

But so far there has been nothing to suggest he will eventually shift direction.

"I don't see any evidence from his background or persona or from the way that the current system is structured to suggest that Xi is moving to the left because he wants to move to the right," says François Godement, professor of political science at Sciences Po and director for strategy of the Asia Center in Paris. "We've really had all indications to the contrary and this seems more like wishful thinking."

The good news for international companies is that, for now, many of them are still being formally welcomed by Mr Xi.

As long as they can show that their investments and operations in China support or at least do not get in the way of efforts to garner support for the party and its leadership, they will probably be allowed to stay and even thrive.

But "increasingly multinational companies will in all sorts of subtle and not subtle ways be made to adapt their behavior to meet the political and economic needs of the party", Mr Brown says. "It is quite a rational response for the government in Beijing to leverage this great prize which is their domestic market."

More from the Financial Times:

China Communist Party in pivotal session
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Rehabilitating history: Xi turns to Mao to tighten the party's grip on the future

Anyone wanting to know which way the political winds are blowing in China just needs to read the propaganda signs posted all across Beijing.

As the Communist party prepares to hold the third plenary session of the 18th CPC Central Committee, those signs lay out the central themes of President Xi Jinping's term so far – conservatism, traditionalism and shoring up authoritarian one-party rule.

Along with countless billboards proclaiming Mr Xi's "Chinese Dream" slogan – or the "great rejuvenation of the Chinese nation" – several motifs from a bygone era jostle for attention.

"Study Lei Feng, devote yourself to others, upgrade your behaviour" commands a large poster in a chic Beijing neighbourhood.

This "obey morality and observe good manners reminder notice" refers to a legendary propaganda character, Lei Feng, from the early 1960s whose (probably fictional) exploits are the subject of ridicule and cynicism for many ordinary Chinese people today.

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Lei Feng was supposedly a soldier in the People's Liberation Army who secretly washed his comrades' socks at night, revered Mao Zedong and died at the age of 21. Although someone called Lei Feng probably existed, the posthumous propaganda campaigns describing his life of selfless devotion to Mao, the party and modest good deeds are almost certainly fabrications.

It might seem counterproductive to reach for a discredited and outdated symbol to shore up legitimacy. But the Lei Feng campaign is part of a wider effort by Mr Xi to rehabilitate history and explain why the party should remain in charge.

"Xi is drawing from the register of the 1950s and particularly the early 1960s when the party launched successive Leninist political movements," says François Godemont, a professor of political science at Sciences Po.

"He is trying to bring about a 'red restoration' and consolidate his grip on power."

The result is a barrage of language not heard in China for decades as Mr Xi promotes the Maoist "mass line" governance method and orders cadres to carry out "criticism and self-criticism" sessions.

In the past three decades, Chinese leaders have tried to play down the Maoist era from 1949 until 1976 to avoid subjects such as the Great Leap Forward and the Cultural Revolution.

But Mr Xi has explicitly said the Mao era should be rehabilitated.

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This is partly because much of his legitimacy derives from his pedigree as the son of Xi Zhongxun, a communist guerrilla leader who went on to be a senior official under Mao but was purged in the early 1960s.

By referring to the period before his father's fall from grace, Mr Xi is seeking to boost his own image as the son of a revolutionary founding father.

A less savoury aspect of his campaign has been the arrest of hundreds of people considered to be political "troublemakers".

"All the signs are that what Xi wants is to strengthen the system and his own position, rather than risk structural change that would reduce the power of the existing establishment," says Jonathan Fenby, director of China research at Trusted Source.