Geopolitical Monitoring Report | January 6, 2023
US and European Companies Likely to Accelerate Disinvestment from China in 2023
The combination of Beijing’s strict “zero-COVID” policies, strict traveler entry requirements, rapidly shifting regulatory requirements, supply-chain issues, and geopolitical uncertainty were the main drivers of companies leaving China in 2022.
While China has begun ending the “zero-COVID” policy that was the root cause of many of the supply chain issues that were prevalent throughout the country last year, companies are still looking to divest from the country due to geopolitical risks and fears of how Chinese President Xi Jinping will continue to consolidate control after he has secured an unprecedented third term as the country’s president.
In addition, the enactment of strict export controls on the Chinese computer chip industry by the Biden Administration indicates that the tensions between the US and China are likely to continue growing over contentious issues such as Taiwan and the South China Sea more broadly. This is a fact that has not been lost on major Western companies doing business with or relying on supply chains in China. Dell Computer just announced that they will phase out Chinese-made chips and most Chinese-made components from all of their products by 2024 and many companies in Europe have decreased their investments in China in 2022, preferring other nations in Southeast Asia that have less geopolitical uncertainty and more favorable human rights records.
This trend has apparently not gone unnoticed in Beijing, as China appears to have adopted a more conciliatory tone towards the US and Europe at the start of 2023, amid widespread speculation that President Xi will visit the US for the upcoming Asia-Pacific Economic Leaders summit in November.
While a temporarily more agreeable China and a high profile visit may calm tensions between the US and China by staving off additional US sanctions on the country in the short-term, it is unlikely that these long term trends will be reversed. Xi will almost certainly continue to crackdown on any semblance of domestic dissent within China’s borders to avoid mass protests like the ones against strict COVID-19 quarantine measures late last year as he attempts to guide the country out of its “zero-COVID” regime.
While many in China have welcomed this move, it has led to the disillusionment of many individuals that were previously supportive of the government’s efforts to stop the virus and are losing confidence in the country’s leadership. Efforts by the Chinese government to contain domestic dissent will almost certainly result in additional human rights violations that could prompt additional sanctions from the West and result in more companies looking to end operations in China.
China’s charm offensive is not likely to stem the tide of Western companies fleeing the country for other countries with less geopolitical risk and better human rights records. Given the fact that both the Trump and Biden administrations have been incrementally increasing the pressure on Beijing since former President Trump launched his trade war on China in 2018. This means that additional Western sanctions on China are likely and companies must ensure they have proper due diligence capabilities in place that will ensure they are not engaging in business with a sanctioned individual or entity.
In addition, the growing divide within China over the end of “zero-COVID” and Xi Jinping securing a third term (which was opposed by many “zero-COVID” protestors) has the potential to make the exodus far greater. Companies and organizations operating within or reliant on supply chains with links to China should ensure that they have ample open-source intelligence monitoring capabilities that can monitor the ongoing situation.
Social media platforms – even those banned in China – should also be aware that Beijing deployed massive botnets aimed at distracting from the protests against “zero-COVID” in November 2022. These tactics are likely to be used in the event unrest occurs in China again. Finally, companies and organizations should be aware of Beijing’s vast global influence operations and ensure they or their employees do not become targets.
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