Don’t Give the CCP Backdoor Influence over U.S. Companies

I n Big Rapids, Mich., a group of lawmakers and residents are fighting to halt the construction of a battery plant that proponents say would create thousands of local jobs.

While many objections to the $2 billion plant relate to its environmental impact, one of the opponents’ underlying concerns is that Gotion Inc., the California-based company seeking to build the plant, is owned by a Chinese firm whose bylaws require it to have an in-house Chinese Communist Party cell.

Gotion vice president Chuck Thelen ridiculed the concerns, saying his company isn’t behind a “plot . . . to spread communism.” He’s probably right. As a U.S.-registered entity, Gotion is subject to U.S., not Chinese, law and doesn’t share its parent company’s legal obligations to the CCP. But Big Rapids residents are right to be concerned about the parent company’s CCP cell. Plot or no plot, Beijing has a degree of influence over the parent company, which, under exceptional circumstances, it could use to manipulate the U.S. subsidiary and by extension the Michigan plant for commercial or geopolitical purposes.

This risk is hardly unique to Gotion or to companies headquartered in China. A growing number of U.S. businesses have party cells in their Chinese subsidiaries, and they should be every bit as concerning as the cells in Chinese firms investing in the U.S.

Chinese law requires any organization with three or more CCP members to set up a party cell. Given that the CCP has 96 million members and is disproportionately represented in elite business circles, there are likely few well-known companies operating in China to which this requirement doesn’t apply.

While this rule is mainly used to ensure CCP oversight of Chinese firms, Xi Jinping’s government has pushed, since at least 2016, more subsidiaries of foreign companies to comply. In 2018, it started requiring all companies publicly listed in China — including foreign joint ventures — to establish party cells.

Last year, China’s securities regulator ordered foreign-owned-fund managers to set up party cells. If implemented, this rule will give the CCP a backdoor into the leadership and operations of financial giants that have large amounts of capital, data, and political influence in Washington.

Indeed, multiple U.S. companies, including Citigroup, have already established party cells in their Chinese operations. Earlier this year, Ernst & Young’s Chinese affiliate made headlines when its party cell instructed all the company’s CCP members to wear their Communist Party pins to work.

Apologists for these companies point out that party cells usually don’t interfere in companies’ day-to-day operations, and cell members are, for the most part, regular employees engaged in standard work activities.

But in-house party organizations give the CCP broad access, which it could use to intervene in businesses if it ever desired to. These cells ensure that the CCP members who constitute them are more loyal to the party than they are to their employers. It is also increasingly common for companies to grant party-cell members positions on their corporate boards and in senior management. Some private companies have even amended their bylaws to require consultation with the party cell prior to making key business decisions. Given these trends, it would be naïve to expect party cells in U.S. firms to maintain a hands-off approach.

TikTok — ostensibly a U.S. domestic company — provides an illustrative example of how the CCP already uses party cells to influence corporations. While TikTok is owned by a Cayman Islands shell company, most of its strategic decisions are made in Beijing, where the CCP cell of its parent company, ByteDance, is also housed. In fact, the head of ByteDance’s CCP cell also serves as the chief censor of the company’s biggest Chinese app. The only person with the power to fire the chief censor and appoint his replacement is another CCP official on the company’s board. According to reports, party-cell members are also preferentially hired for censorship jobs for other ByteDance products.

It’s not hard to imagine similar control being exercised over Chinese subsidiaries, joint ventures of U.S. companies, or multinationals with subsidiaries in both China and the U.S. For example, Mercedes-Benz, a German company with lots of business in China and the U.S., has a party cell in its Chinese joint venture that has a full-time secretary who participates in the company’s management meetings and major decision-making.

While many U.S. firms are reluctant to take this step, they know all too well that running afoul of U.S. interests rarely results in more than a few days of negative press (just look at the many financial firms that continue to pump money into Chinese companies that focus on sensitive technologies), whereas displeasing the CCP could put their business operations in China at serious risk. Today, many U.S. firms are moving to establish party cells before being compelled to do so by Beijing.

This isn’t inevitable. Both the executive branch and Congress have options at their disposal to decrease the influence that China has, through private entities, in the U.S.

One that policy lawmakers should consider is prohibiting U.S. companies from establishing CCP cells in their Chinese entities. Such action would surely face opposition from powerful interests, but with pressure rising for Chinese subsidiaries of foreign firms to establish party cells, the window of opportunity may be closing to ban this practice before doing so causes unnecessary hardship for a large number of U.S. companies.

Today, many U.S. firms would likely welcome an excuse not to comply with this Chinese legal requirement, and most admit that, if conflicting compliance demands forced them to choose between their operations in the U.S. and China, they would choose the U.S. But they are not being forced to choose.

Michael Cunningham is a research fellow at the Heritage Foundation’s Asian Studies Center, where Bryan Burack is a senior policy adviser for China and the Indo-Pacific.