Following The Hague’s ruling on the South China Sea, Chinese netizens have called for protests and boycotts against American companies. How concerned should investors be about anti-American sentiment among Chinese consumers?
The Hague’s ruling against China over its claims and conduct in the South China Sea (SCS) has led to several nationalist protests against American businesses in China. This is not the first time international disputes have generated a backlash against US business interests in China; most famously, the NATO bombing of China’s embassy in Belgrade led to attacks on American businesses and boycotts of US brands. It is important to note what investors can learn from both recent protests and unrest in 1999 about the risks posed by nationalism to US businesses in China.
“If you don’t smash it, you’re not Chinese!”
The Arbitral Tribunal’s decision has led some Chinese nationalists to take aim at American businesses in retaliation for what they believe to be American interference the SCS dispute. Shortly after the ruling, videos emerged online of Chinese citizens destroying their iPhones. One popular video on Weibo calls on Chinese citizens to break their iPhones, claiming “if you don’t smash it, you’re not Chinese!” A small Chinese firm in Zhejiang has reportedly taken up this cause and has banned its employees from purchasing iPhones.
Protests also broke in 11 Chinese provinces against Kentucky Fried Chicken (KFC) stores: several stores in Yangzhou and Lianyungang closed temporarily in response to safety concerns. Netizens have also pushed for boycotts and protests targeting Starbucks and McDonalds.
In the ugliest manifestation of this nationalist outburst, a Chinese citizen wearing US brand clothing was attacked and beaten on a subway in Dalian.
But the extent of this outburst against American businesses has been limited. Police broke up the rowdier protests, censors have weeded out mentions of boycotts, war, and the SCS on social media and state-run media has been quick to disparage the protests. Aside from temporary closures, popular American stores like KFC and McDonald’s have remained open for business and busy with customers.
Nevertheless, some are concerned that the recent protests highlight how growing nationalism is creating serious political risks to foreign businesses in China, and that escalating tensions in the SCS will leave businesses increasingly exposed to these risks.
A History of Unrest?
After the Belgrade bombing in 1999, protesters destroyed at least four KFC stores and 12 McDonald’s restaurants. Nationalists also called for boycotts on US brands like Coca-Cola and Baskin Robbins. One American business had to empty its offices and run a security sweep of the premises after a bomb threat.
On the fourth day of protests, Chinese authorities began to restore order. The boycotts against KFC, McDonald’s, and other American brands quickly lost momentum. At the end of financial year, Tricon – the owner of KFC – reported gains in international sales and booming business in China; by the end of 2000, its sales in China had increased by 47%.
Parallels and Potential Risks
What parallels and differences are there between the contemporary incident and the 1999 protests, and what do both incidents tell us about the future risk to businesses operating in China?
First, it appears that the most salient US businesses and brands face the greatest risks during nationalist outbursts. In both cases, KFC and McDonalds were immediately targeted by anti-American sentiment, despite the fact that both stores were managed and staffed by Chinese citizens and both brands, simply because they are commonly associated with American culture.
Second, in both cases, Chinese state-run media deliberately distorted information in an attempt to cultivate strong nationalist sentiment and support for the Communist Party. In 1999, state-run media concealed the fact that Clinton had apologized to China for several days, and reported that the attack on the Chinese embassy was a deliberate attempt to humiliate China. Similarly, in the aftermath of the SCS ruling, state-run media accused Washington of manipulating the Philippines, rigging the Arbitral Tribunal, and impinging on Chinese sovereignty. In both cases, the distortion of facts in state-run media, designed to bolster nationalist support for the Communist Party, led to an outpouring of nationalist sentiment toward US businesses based on false premises.
Third, both incidents demonstrate Beijing’s commitment to stability and their desire to keep nationalist outbursts controlled and contained. In 1999, although protests turned violent, Beijing eventually aired Clinton’s apology and clamped down on the protests. The Chinese government also made a concerted effort afterward to assure American businesses that China was a safe, stable, and friendly investment environment.
Similarly, it has not taken long for Beijing to curb nationalist protests against KFC and Apple. State-run media has branded the protesters enemies of the party trying to make true patriots look bad, and has also suggested that they are simply irrational jingoists. The government has also selectively censored microblogs calling for war and boycotts. Local police, meanwhile, have been careful to break up and in some cases pre-empt protest efforts.
Ultimately, Beijing has a clear stake in maintaining political stability and a favorable environment for business – which requires keeping nationalist outbursts under control. This is good news for investors, so long as Beijing is capable of tamping down the nationalist unrest it stirs up.
The Janus-Faced Role of Social Media
An important difference between recent protests and unrest in 1999 is the role of social media. Social media can contribute to nationalist fervor by allowing like-minded netizens to come together to share information, discuss issues of common concern, and coordinate responses. In particular, the echo-chamber social media creates further cement netizen’s nationalist views. But it can also provide an outlet for netizens to express their discontent without resorting to actual physical protests.
This appears to have been the case in the aftermath of the Hague ruling. The most popular netizen reaction to the ruling seems to have been to post microblogs saying “南海仲裁 (SCS Arbitration): who cares?” and to repost a popular video featuring a compilation of young Chinese citizens repeating this slogan interspersed with clips of the PLAN firing missiles. But by and large, these keyboard warriors have stayed off the streets and appear uninterested in translating their discontent into anything more than a few keystrokes.
Key Takeaways for Investors
Overall, there are both positive and negative takeaways from these protests for investors.
The good news is that the CCP is committed to keeping China open for business and containing protests. As a result, the long-term interests of US businesses in China have not been adversely affected by nationalist outbursts, even in the extreme case of the violent 1999 protests.
The bad news is that the CCP continues to utilize state-run media to promote nationalism as a means of bolstering its own popularity. There is a very real risk that one day the CCP may find itself unable to contain the nationalist sentiments it has so carefully cultivated.
