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While China's economic development has flourished, much of it has been as a result of social restrictions and human rights violations. When examining any company working under an authoritarian leadership, it is crucial to carefully examine every aspect of a business to ensure that supply chains, governance and many other aspects are clear of ESG concerns.

Social issues: a long list of concerns difficult to navigate

EdenTree Investment Management EdenTree Investment Management Responsible Asset Manager
Edentree Insight reports

China on the world stage: What it means for responsible investors

EdenTree Investment Management


Responsible Asset Manager
24 Mar 2021

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Chapter 3

Social issues: a long list of concerns difficult to navigate

Censorship, oppression, human rights violations, working conditions, health and safety, freedom of association... The list of areas of concern for responsible investors doesn’t stop at the environment. The tight control of the Communist Party of China on the economy extends to its people. Many human rights organisations including Freedom House and Amnesty International have flagged a lack of fundamental freedoms, and a crackdown on dissent. As a result China is classified by EdenTree under our oppressive regimes screen as an ‘oppressive regime’, resulting in restrictions on investment where companies are also potentially involved in activities related to human rights violations in oppressive regimes.

Many of the countries on our oppressive regimes list are authoritarian or totalitarian, this is also the case for China and the CPC is at the heart of many of the issues. The Chinese Communist Party has a tight control over the state bureaucracy, the media, online speech, religious groups, universities, businesses, and civil society associations. Media and internet censorship is widespread and controlled by the CPC. Independent rule of law is non-existent/very limited. The CPC dominates the judicial system, with courts at all levels supervised by party political-legal committees that have influence over the appointment of judges, court operations, and verdicts and sentences. The CPC interferes and controls religious activities, including naming religious leaders and prosecuting Tibetan Buddhists, Uighur Muslims and proponents of Falun Gong.

The CPC has been in continuous power since 1949. Activists and lawyers who support a democratic transition are detained, abused, executed or mysteriously disappear. Political freedom as well as freedom of speech are not tolerated. Following amendments to China’s constitution abolishing the two-term limit for the state presidency and vice presidency, this is unlikely to change; President Xi Jinping has been given (or given himself) unlimited terms in power, effectively for life.

The disapproval of democratic thoughts and ideologies that are different from the CPC are also a key factor in many of the tensions between Beijing and some of its autonomous regions and special administrative regions. Whilst tensions with Tibet have been ongoing since the 1950s, oppression has significantly increased in the 21st century, with tighter surveillance as well as suppression of the Tibetan culture. In Xinjiang province, campaigns against “religious extremism” have led to severe human rights violations and indoctrination in so called “re-education camps”. Since Hong Kong was handed back to China in 1997, control from China has only tightened and freedom has significantly been reduced further, following the recent imposition of the National Security Law.

Whilst a lack of freedom and the presence of an authoritarian regime is a concern, as an investor this becomes especially material when companies become complicit in violations. As explained in the first part of this Insight, given China’s size and role, many companies will have some exposure to operations or suppliers in China or might be trying to sell their products and services in the Chinese market. As responsible investors we watch out for possible involvement in human rights issues.

Many well-known Western players of the digital era have a Chinese equivalent, which strictly adheres to CPC censorship rules. Companies like Alphabet, Amazon or Facebook have faced difficulties gaining access to the Chinese market for this reason.

China’s surveillance ecosystem is one of the issues that concerns us. The Skynet project is a vast network of security cameras deployed in public spaces across the country, it is the world’s largest surveillance network. According to the Chinese Ministry of Public Security, China is anticipated to have 626m CCTV cameras in use in 20201. The Great Firewall is the largest and most sophisticated online censorship operation in the world. Beijing has curbed the internet from the beginning, and online activities are closely monitored to avoid “hurting national security or the interests of the state”. VPNs - Virtual Private Networks used to circumvent the firewall - have largely been blocked since 2015. This vast surveillance and censorship ecosystem would not be possible without the cooperation and participation of businesses. Manufacturers of cameras used by the regime, telecoms operating censored networks, or online services having to comply with China’s surveillance regime should make a western investor cringe. These issues do not just appear when trying to invest in the likes of Huawei or Baidu; given the size of the Chinese market global companies sell their technology in China too. Companies ranging from Microsoft and Apple, to Cisco and Ericsson have discovered the challenges of a delicate balancing act between the ambition to operate in China and the risks of handing over sensitive user data to Beijing.

China’s role as the manufacturing centre of the world also means that investors will no doubt have exposure to supply chains in China and the country’s labour practices. Whilst labour rights such as freedom of association and health & safety in the workplace legislation exist, in practice it is not always respected or enforced. For instance, trade union representation has been allowed since the 1990s, however similar to the political sphere, there is not much choice. Whilst workers have the right to join or form a union, they are expected to join the CPC approved All-China Federation of Trade Unions (ACFTU). In practice, new unions are not tolerated and considered as political threats.

Health and safety, working conditions and forced labour also regularly feature in NGO reports on factory conditions in Chinese supply chains. China Labour Watch reported that over 200 million employees are exposed to a variety of occupational risks that impact their health, and about 12 million enterprises provide working environments that increase risks of developing occupational diseases. Electronics supply chains as well as the garment industry have both been shown to endanger employee health due to exposure to chemicals and dyes. The working conditions at supplier Foxconn have exposed many of the issues in China’s factories. In addition, China’s economic development has been powered by mass migration from rural China to the east coast where a lot of the manufacturing jobs are. As a result workers will often live on factory grounds, with poor living conditions in factory dorms2.

A new form of forced labour emerged in the last few years in Xinjiang province, and many international brands have been accused of benefiting from forced labour in re-education/labour camps managed by the CPC

Forced labour can take many forms: over the past two decades there have been reports of children being kidnapped to work in brick kilns or cotton fields and forced internships whereby university students are threatened not to be able to graduate if they refuse to take on manufacturing internships – often not related to their degrees - on electronics or automobile production lines. Despite the Ministry of Human Resources and Social Security announcing that the practice of withheld wages will be eradicated by 2020, this still prevails, and similarly the charging of recruitment fees creates significant debt preventing employees from changing jobs. A new form of forced labour emerged in the last few years in Xinjiang province, and many international brands have been accused of benefiting from forced labour in re-education/labour camps managed by the CPC. Resulting from this is there is mounting pressure on apparel retailers to ‘manage’ where their suppliers source cotton given that 20% of global supply emanates from Xinjiang and is likely to be affected by forced labour issues.

Sources

1. The Guardian, https://www.theguardian.com/cities/2019/dec/02/big-brother-is-watching-chinese-city-with-26m-cameras-is-worlds-most-heavily-surveilled

2. China Labour Watch

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