Anyone wondering why foreign direct investment in China keeps declining — down last year at the sharpest rate since the 2008 financial crisis, according to the Financial Times — needs to look no further than the Beijing government's invidious treatment of foreign companies trying to do business there.
It's an issue that threatens to undercut what China desperately needs to pull out of its current economic doldrums (its premier, Li Keqiang, has set next year's growth rate at 7%, the lowest target in a decade and a half): more direct investment from successful and innovative non-Chinese firms, especially American firms.
Indeed, China's growing hostility to American businesses represents a major stumbling block to further economic ties between the two countries. A survey last fall by the American Chamber of Commerce in China found that 60% of American businesses feel less welcome on the mainland, and 49% say that the Chinese government has been singling out foreign-owned firms for adverse treatment.
The battle between Chinese authorities and Google, and the Chinese allegations that Apple has been price-gouging and spying on Chinese citizens using its iPhones, are well-known — as is the fact that Apple made the charges go away by agreeing to store data from its Chinese iPhone users in China, which will allow the government to spy on them instead.
But not many are aware of the even more egregious case of OSI, a food-processing firm that spent $750 million building up its Husi Food unit over two decades to serve McDonald's and other fast-food restaurants in China.
This is no fly-by-night operation. The American-based firm set up the first food processing plant in Beijing in 1991, followed by plants in Langfang and Shanghai. In 2008, it started to provide high-quality food products to Yum Brands, whose Chinese division services 4,800 KFCs and 1,600 Pizza Huts across the country.
Then suddenly, last summer, the city's Food and Drug Administration arrested six workers in its Shanghai plant and closed the plant. A video on government-owned Dragon TV, showing workers making chicken nuggets and patties from expired meat, triggered the action.
OSI officials, however, have a very different account of what happened. They argue that the "workers" were in fact Dragon TV reporters (according to Reuters, a worker at a Shanghai employment agency actually saw an undercover reporter trying to get a job at the Husi factory).
The company further alleges that the reporters masquerading as employees even threw meat on the floor while Dragon's cameras recorded them picking it up and re-using it.
In any case, six employees were arrested and remain in jail, even though no formal charges have been brought. Another 350 employees in the Shanghai plant were laid off.
Meanwhile, OSI Group's stock took a severe hit, as did Yum Brands. So did Husi Food's reputation. Indeed, the McDonald's China division has dropped Husi as a supplier.
OSI has been working hard to get itself back into what had been one of its most important growth markets, but Shanghai authorities are determined to play hardball.
Although OSI Chairman Sheldon Lavin issued a public statement that what happened at the plant was "terribly wrong, and I am appalled," the general feeling is that OSI and Husi Food have been railroaded.
When Chinese authorities said in January that their investigation was leading them to order the destruction of "questionable products" recalled from Husi Food, OSI quickly pointed out that the recall had been entirely voluntary and that the products being destroyed never met the China Food and Drug Administration's definition of "questionable products."
In short, the OSI battle is looking like the war of intimidation that foreign firms all too often face in doing business in China these days, from charges of price gouging to food tampering.
Most give in and drop their prices or submit to the charges and pay a fine. They are aware that state-run regulatory agencies can trigger an avalanche of bad publicity that can wreck a foreign-owned business in a matter of days, as happened to Husi — and run up costs in the hundreds of millions of dollars, as happened to OSI.
China law expert Dan Harris recently testified to the U.S.-China Economic and Security Review Commission on the increasingly chilly investment climate in China. He pointed out that many U.S. firms face unfair competition by following rules concerning employment and taxes that Chinese firms routinely ignore.
In the end, however, the war on business is hurting China more than the U.S.
From 2002 to 2012, China was the country where most international business executives wanted to do direct foreign investment. In 2013, it lost top place to the United States; in 2014, confidence in China slid even further.
According to the South China Morning Post, nearly one in four American companies planning to invest $250 million or more in China have dropped or postponed plans, even though most still see the country as a future growth market and are eager to do business there.
If China intends to grow out of its enormous debt problems, it will need foreign investment. Yet by biting the hand that feeds it, in OSI's case almost literally, it's only hurting its own future.