Counting on China to deliver endless growth and profits? Then you need to know about the news item last week announcing that a big international conglomerate was forced to sell one of its businesses in China.
At first blush it seems to be just another of the ups and downs of the business world. The sixth-biggest South Korean conglomerate, Lotte, said that it had decided to sell its hypermart chain in China.Lotte is mainly a retailer, with sales worth about the same as Woolworths’. A year ago it had a thriving business with 99 hypermarts in China. But today 87 have shut down, so there isn’t much of a business left to sell.
So is Lotte just a hopeless retailer? Or is there some other explanation?The Chinese authorities say that Lotte has a bad record of fire inspections, forcing the closure of one store after another. But, mysteriously, the extra rigorous fire inspections were targeted at Lotte not following a fire but after a defence event in South Korea.
The Lotte group in February offered the use of one of its golf courses to its home nation as a missile defence site. South Korea, trying to defend itself against North Korea’s illegal nuclear missile program, had decided to deploy a US system capable of shooting missiles down.
Which seems entirely reasonable, unless you’re the Chinese government. Beijing claims the system’s radar is capable of “seeing” into China and told Seoul to cancel the plan. With North Korea ramping up its nuclear tests and missile launches, South Korea refused. So Lotte’s business interests are paying the price of Beijing’s anger. Lotte estimates that its Lotte Marts business has lost about 500 billion won or some $A550 million as a result of the Chinese government’s vindictiveness.
But hold on. Is this just Lotte inventing an excuse for poor management? After all, Beijing denies any connection to the missile defence matter. It’s just coincidence that Chinese state-owned media have called for a boycott on South Korean businesses. But no. Chinese business publications have reported it as a case of direct retaliation.
“China’s continued anger over South Korea’s decision to host a US anti-missile system is hurting businesses in both Asian countries — particularly in retail, automobiles, and tourism,” reported the well-regarded Caixin business publication.
“Lotte’s China website has been down for over a month, and it has seen its stores disappear from China’s top two online marketplaces – Alibaba Group Holding Ltd.’s Tmall, and JD.com,” Caixin reporters Coco Feng and Ann Limin wrote.
South Korean President Moon Jae-in was no fan of missile defence. Photo: Sergei Bobylev
“A Shanghai-based chocolate joint venture between Lotte and US candy giant Hershey Co. was ordered to halt production last month, ostensibly for ‘safety violations’.”
And so on.The US business magazine Forbes reported a scholar at a Chinese government think tank as saying that the Chinese government had directed undeclared punishments of South Korea’s tourism industry: “Tour packages to South Korea needed to be marked ‘sold-out’ or to be deleted. Violation of any of the above regulations will be punished in accordance with the travel agency regulation — fined between 100,000 yuan to 500,000 yuan [$A19,000 to $95,000] or revocation of a business licence.”
The North Koreans are ramping up their missile program. Photo: AP
Caixin reported that “travel packages to South Korea, including tickets for tourist attractions, were removed without explanation from major Chinese travel websites such as Ctrip, Qunar, Alibaba’s Fliggy, and Tuniu”.
Nearly half of South Korea’s tourists – 47 per cent last year – came from China, so the sanctions are hurting. South Korea’s thriving car sales in China have also been hit. “The sales of Kia and its parent Hyundai Motors Co. in China fell 61 per cent from March to June,” reports The Wall Street Journal. Overall, South Korea’s share of the Chinese market has halved under the undeclared sanctions. South Korean popular culture exports to China have been punished too, with K-pop performances cancelled across China.
But does this mean that China is getting its way? Not at all. South Korea is bearing the economic cost and its government has confirmed and enlarged its deployment of the Terminal High-Altitude Area Deployment (THAAD) missile defence system. And this is from a President in Seoul who, elected only four months ago, was initially sceptical of the whole idea of THAAD.
The head of the ANU’s National Security School, Rory Medcalf, calls the whole episode “a spectacular own goal by Beijing”. Why? “China’s economic coercion is failing to achieve its aim of breaking South Korean defence links with the US, and at the same time it’s doing long-term harm to itself by deterring South Korea from long-term trade and investment with China,” says Medcalf.
The jewel in South Korea’s tourism market, the picturesque Jeju Island, has seen the number of Chinese visitors cut by a whopping 80 per cent over the last six months. The governor of Jeju province, Won Hee-ryong, is not angry but rueful: “We learned a lesson that Chinese tourists could be hugely influenced by China’s politics and a high dependence [on them] is problematic,” he told Al-Jazeera news.
The obvious lesson is not to cave in to China and abandon your country’s defence, but to diversify your relations.
“That message has been heard by Australia’s policy community in Canberra,” says Medcalf.
The rest of the country needs to understand, too, that what China gives it can take away. And not under normal rules of business but according to the policy whims of the Chinese Communist Party.
But perhaps the most bizarre aspect of this cautionary tale is that China is punishing South Korea for defending itself against North Korea, while refusing to apply any further pressure to the real source of the problem. Which is, of course, North Korea.
The US ambassador to the UN, Nikki Haley, said on the weekend that “we have pretty much exhausted all the things that we can do at the [UN] Security Council at this point.” The reason? China and Russia say they will veto any further attempts to apply sanctions to Pyongyang. So, in short, China is prepared to punish the victim of North Korea’s illegal nuclear missile program, but not the perpetrator. And this is for the fundamental reason that while South Korea is a US ally, North Korea is a Chinese ally.
This is not intended as an exercise in superpower morality – the US has long used unilateral economic sanctions as a coercive tool, too. But it is a clear illustration of why countries, including Australia, need to keep their options open and their economic risks diversified.
By Peter Hartcher
Sydney Morning Herald