Chinese firms not spared if Xi targets US brands

A visitor to the Disneyland in Shanghai. The China operations of McDonald's are controlled by state-backed conglomerate Citic and private equity firm Citic Capital Holdings, so a boycott risks collateral damage.
The China operations of McDonald's are controlled by state-backed conglomerate Citic and private equity firm Citic Capital Holdings, so a boycott risks collateral damage.PHOTO: AGENCE FRANCE-PRESSE
A visitor to the Disneyland in Shanghai. The China operations of McDonald's are controlled by state-backed conglomerate Citic and private equity firm Citic Capital Holdings, so a boycott risks collateral damage.
A visitor to the Disneyland in Shanghai.PHOTO: REUTERS

HONG KONG • As a trade war looms, one of Chinese President Xi Jinping's biggest weapons could be boycotts of American brands by his country's legion of consumers.

But Mr Xi would also be risking collateral damage: The China operations of all-American brands ranging from Coca-Cola to McDonald's to Walt Disney are co-owned by government-backed Chinese firms.

One of Coke's main China partners is state-backed Cofco; Shanghai Disneyland is part-owned by a local consortium, and the McDonald's franchisee in the country is controlled by state-backed conglomerate Citic and private equity firm Citic Capital Holdings.

"The number of big clean wins in terms of striking against the other guy - without accidentally punching your own guy in the face - is extremely small," said Mr Tom Orlik, chief economist in Beijing with Bloomberg Economics.

Even when Chinese firms do not have direct ownership links with US brands, boycotts or other non-tariff retaliation would hit the local partners of those American companies, he added.

Early shots in the trade war are set to be fired tomorrow, with the United States scheduled to impose tariffs on US$34 billion (S$46.4 billion) of Chinese exports. Beijing has said it will place levies on an equal value of US goods, a move that US President Donald Trump said would lead to additional penalties.

Consumers trying to punish Mr Trump by staying away from Disney's US$5.5 billion theme park in Shanghai would end up hurting Chinese businesses as the US firm is just a minority shareholder. State-run consortium Shanghai Shendi Group owns 57 per cent of the resort.

Boycotts by Chinese consumers appear suddenly and usually follow angry rhetoric by government-controlled publications and social media. In earlier conflicts with foreign countries, Chinese citizens boycotted high-profile global brands such as Toyota Motor and Hyundai Motor, hurting corporate profits and boosting Chinese leverage.

Imports of Chinese goods into the US totalled US$505 billion last year while China imported only US$130 billion from the US, limiting Mr Xi's ability to respond with tit-for-tat penalties. But American firms sold US$280 billion of goods and services in China last year via their local subsidiaries, said Deutsche Bank. That creates a big target.

So far, the government-controlled media has said little on how consumers should respond to a trade war with the US, although an editorial in the Global Times highlighted anti-US sentiment in Europe as well as calls by Canadians to boycott American goods because of Mr Trump's penalties on imported steel and aluminium.

Prominent consumer brands such as McDonald's and KFC have, in the past, been easy targets, with thousands of restaurants across the country. But since anti-US demonstrations in 2016 targeted them with calls for boycotts, the US owners of both fast-food giants have sold their controlling interests in their Chinese operations.

McDonald's owns only 20 per cent of its Chinese namesake, having sold the rest in July last year to Citic and other investors. Yum! Brands no longer owns the KFC and Pizza Hut businesses in China, having spun off Yum China Holdings in 2016.

Meanwhile, in April last year, Coca-Cola sold its China bottling assets to Cofco and Hong Kong-listed Swire Pacific.

Consumers trying to punish Mr Trump by staying away from Disney's US$5.5 billion theme park in Shanghai would end up hurting Chinese businesses as the US firm is just a minority shareholder. State-run consortium Shanghai Shendi Group owns 57 per cent of the resort.

So consumers looking to punish an American brand could unknowingly punish a Chinese one as well.

That may be a price that Mr Xi is willing to pay, especially since he is not the only one facing the risk of collateral damage. Mr Trump's efforts to punish China will damage US business, with its farmers losing if China finds other suppliers of commodities such as soya beans.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on July 05, 2018, with the headline 'Chinese firms not spared if Xi targets US brands'. Print Edition | Subscribe