China’s new back doors into western markets

A nondescript serviced office on the 24th floor of an anonymous block in Singapore might seem a curiously low-key place to base an affiliate of a giant Chinese mining conglomerate.

But in the case of Yuxiao Fund, a Singapore-domiciled Chinese company which tried to acquire control of military-use mineral assets in Australia, it was entirely deliberate. 

Instead of pursuing its interest in Northern Minerals, an Australian rare earths company, from their headquarters in China, the owners of mining conglomerate Jinan Yuxiao Group chose to set up a low-profile Singaporean entity.

The point of a Singapore domicile was that it changed the angle of attack. A bid originating from a neutral Southeast Asian nation with a highly regarded legal system was intended to reduce suspicions in Australia over Chinese acquisitions in sensitive industries, analysts say. It is one of several strategies that Chinese corporations are using to adapt to a hostile world around them.

The new economic nationalism

With globalisation on the retreat, the FT investigates the causes and consequences of this new era of greater state intervention in the economy

Part 1: How national security has transformed economic policy
Part 2: China’s new back doors into western markets
Part 3: Is the global economy really fracturing?

Ultimately, its attempt to raise its stake in Northern Minerals was blocked by an Australian government “wary of allowing a foreign entity, especially one with strong links to the Chinese Communist party, to control a critical national resource”, according to John Coyne, analyst at the Australian Strategic Policy Institute, a think-tank based in Canberra.

But Yuxiao Fund’s use of Singapore hints at a much bigger and more complex geopolitical trend. An intensifying rivalry between China and the US-led west is driving a fragmentation in the world’s economic order. Beijing, Washington, Brussels and other capitals have imposed a range of tariffs, export controls and other measures to protect their domestic markets and stymie competitors’ technological progress. 

In response, company executives and analysts say, Chinese corporations are setting up shop in a host of relatively non-aligned third countries, hoping they can bridge the increasingly hostile gap that divides China from the west. 

The prime motivation behind shifting investment into these relatively insulated countries — which include Singapore, Vietnam, Ireland, Hungary and Mexico, among others — has been to circumvent protectionist measures imposed by western powers against China-based companies.

Chinese investment is pouring into such countries, according to figures provided exclusively to the FT by the Rhodium Group, a research provider. But as more of China’s exports are rerouted through these jurisdictions, officials in the US and Europe are growing increasingly concerned about the emergence of back doors into their markets.

“Global Chinese companies are definitely facing their most challenging time ever,” says Frank Pieke, professor at the East Asian Institute of the National University of Singapore.

“But they are also much better equipped than in the past to meet these challenges. They are larger, more sophisticated and have much more to offer to the countries that they operate in.”

China’s emergence as an economic superpower over the past four decades has been propelled to a large degree by globalisation.

Open markets and free trade underpinned China’s long export boom and helped facilitate huge transfers of capital, knowledge and technology from the west to Chinese companies. 

Many have gone on to become world leaders in their sectors: examples include BYD and CATL in electric vehicles and batteries, Huawei in telecoms and ByteDance in social media.

Faced with imported goods that are a match for their domestic incumbents in quality terms, and growing more concerned about national security issues, western powers have cooled on globalisation.

According to a recent IMF study, trade and investment between two distinct blocs — one centred on the US and the other on China — have declined by more than within those blocs, especially since the onset of the war in Ukraine.

The so-called connector countries are seeking to insert themselves between the two and are “rapidly gaining importance and serving as a bridge”, according to the IMF. Flows of trade with and investment in such countries have increased dramatically since the US, Europe and others began erecting trade barriers with China.

For Chinese companies, investing in such countries brings several advantages. One is access to large free trade areas with minimal tariffs and regulatory friction. Another is that domiciling in a new geography can allow Chinese companies to dilute or repurpose their identity, thus remaining below the trade flak flying between China and the US-led west, analysts say.

So marked is this behaviour in Singapore that it has earned a distinct name. “Singapore-washing” describes a process through which Chinese companies set up a subsidiary or reincorporate in the city state to mitigate the geopolitical risks and scrutiny often directed at China-based entities.

Chen Zhiwu, professor at the University of Hong Kong, says he is “always impressed by human ingenuity when it comes to responding to the rise of deglobalisation forces”.

“As long as there are diverse political institutions among the nations on earth, some countries will try to offer a platform for globalised businesses to engage in cross-institutional arbitrage,” he adds.

Perhaps the best known example is Shein, the fast-fashion group currently seeking a public listing in either London or New York. It originated in 2008 in the eastern city of Nanjing and its supply chains, warehouses and inventory remain in China.

But in 2021 its enigmatic founder Sky Xu, who also goes by the names Xu Yangtian and Chris Xu, relocated himself and the company’s headquarters to Singapore. Shein, valued at $66bn in its last private funding round, now defines itself as a “Singapore-headquartered global online fashion and lifestyle retailer”, according to its website.

It will still need approval from Chinese regulatory authorities ahead of its planned overseas listing, according to multiple people familiar with the situation. Beijing’s powerful Cyberspace Administration of China is also reviewing whether there is a risk that some of Shein’s data could fall into foreign hands.

But the company’s customers, business partners and potential investors will look at Singapore and see a respected jurisdiction providing a transparent pathway towards legal redress if things go wrong, analysts say.

Singaporean identities are also sometimes used to access the market in India, skirting New Delhi’s clear antipathy towards Chinese investment. In a crackdown that started in 2020 after clashes between Chinese and Indian troops along their shared Himalayan border, India has banned more than a hundred Chinese social media, lending and other apps, citing data protection and privacy concerns. It has also launched several regulatory probes against Chinese tech companies.

But that has not stopped China’s Shunwei Capital — established by Lei Jun, the founder of smartphone maker Xiaomi — investing in Indian market automation platform WebEngage and dairy brand Country Delight in 2022. Those deals were done through SWC Global, which describes itself as the Singapore “affiliate of a leading multibillion venture capital firm based in Asia”.

Joyy, a US-listed tech business with roots in China, has also recast itself as a Singapore-based global company after establishing an entity in the city state in 2021, according to corporate filings.

“There is a track record of Singapore becoming a cover for companies with questionable ties to China and even the Chinese state,” says Ja-Ian Chong, associate professor of political science at the National University of Singapore and a non-resident scholar with Carnegie China.

China also has reservations about Singapore-washing. One senior Chinese official, who declined to be identified, says Beijing felt a sense of discomfort with the trend among certain Chinese companies to “de-Chinafy” when they set up offices overseas. “It raises questions of loyalty to China that some in Beijing find uncomfortable,” the person says.

Shein declined to comment.

Chong believes such concerns are mirrored in Singapore. “If there is an accumulation of such cases, especially companies with [Chinese Communist party] ties using Singapore’s preferential arrangements with other countries, or increasingly using their entities here to circumvent restrictions, this could end up with negative speculation and political risks for Singapore,” he says.

Jinan Yuxiao Group is a case in point. It has equity affiliations with the state-owned Chinese miner Shenghe Resources, says Mary Hui, a Hong Kong-based researcher on China’s industrial strategies and author of the a/symmetric newsletter.

As well as having stable relations with both China and the west, many of the group of third countries also tend to be members of free trade areas that guarantee access to large western markets at zero or low tariffs.

Singapore and Vietnam are both members of the Regional Comprehensive Economic Partnership (RCEP), a grouping of 15 Asia-Pacific countries that accounts for around 30 per cent of the world’s GDP. In addition, both have long-standing bilateral free trade agreements with the US.

“Setting up in Singapore has a whole range of benefits for a Chinese company,” says the vice-president of one Singapore-based Chinese technology company, who declined to be further identified.

“If we do business from China, we hit a wall of tariffs and suspicion over everything we want to do in the US market,” the executive adds. “From Singapore, there are no tariffs and the suspicion is much less.”

Similar considerations apply to Ireland and Hungary. Both are members of the EU, whose single market provides regulatory unity and zero tariffs across 27 member states and 450mn people. Tariffs imposed by the bloc on products imported from China do not apply if those same products are manufactured and sold inside the EU.

Ireland’s experience shows the clear commercial dividends that a country can reap from linking China and the west.

Bilateral trade with China has tripled in the past five years and there is a clear desire on both sides to increase investment, said Ireland’s then-prime minister Leo Varadkar as he welcomed his Chinese counterpart Li Qiang on a visit early this year.

Big-ticket Chinese investments in Ireland include those from ByteDance, parent of the short form video app TikTok, WuXi Biologics, a drug company, Huawei, the Chinese telecoms equipment giant, and the Bank of China, a big Chinese state-owned bank. In total around 40 Chinese companies employing 5,100 people are clients of Ireland’s investment promotion agency IDA.

IDA executives say the agency “definitely considers” TikTok to be a Chinese company. But TikTok itself is at pains to stress its non-Chinese credentials. Its spokespeople in Ireland said that the company’s international headquarters are in Singapore, while in Europe it is incorporated in the UK and Ireland and is subject to UK, Irish and EU laws, not Chinese ones.

They added that although ByteDance, which is headquartered in Beijing, remains TikTok’s parent, about 60 per cent of ByteDance is beneficially owned by global institutional investors such as the Carlyle Group, General Atlantic and Susquehanna International Group.

WuXi Biologics said it “would prefer not to participate in a story focused specifically” on its country of origin. “We believe our impact is most accurately reflected as part of the collective achievements within Ireland’s vibrant life sciences sector,” the company added.

Hungary, another key country for Chinese investment in Europe, has notably warmer relations with Beijing than many others. On a visit to Budapest earlier this year, Chinese President Xi Jinping described bilateral ties as being “as mellow and rich as Tokaji,” referring to a Hungarian dessert wine.

Hungary’s authoritarian president Viktor Orbán, the EU’s longest-serving head of government, praised China for loving peace and being an “important stabilising force” in the world.

Hungary received 44 per cent of all Chinese foreign direct investment in Europe in 2023, overtaking the ‘big three’ economies of Germany, France and the UK, according to a study by Berlin-based think-tank Merics.

Mexico is a member of the US-Mexico-Canada Agreement (USMCA), the successor to Nafta, which embraces 510mn people and accounts for another 30 per cent of the global economy.

Chinese companies have quietly gained a considerable foothold as investors in Mexico over recent decades. North America’s USMCA free trade agreement means Chinese businesses making everything from fridges and televisions to textiles in Mexico gain privileged US market access.

América Móvil, the telecoms group controlled by the billionaire Carlos Slim, relies heavily on Huawei technology. Mexican appliance and refrigerator manufacturer Mabe is 48 per cent owned by the acquisitive Chinese group Haier.

One in five cars purchased in Mexico last year was made in China, with half of those coming from Chinese manufacturers. Electric-vehicle makers such as BYD and Chery are now scouting Mexico for factory sites so they can export to the US and avoid tariffs on vehicles imported to the US from China, which rose to 100 per cent at the start of August.

However, US patience with Mexico’s role as a tariff-free staging area for Chinese companies to the US market is already running thin. The US Trade Representative, which oversees America’s trade policy and negotiations, has also scolded Mexico over a lack of transparency in its steel and aluminium imports from third countries like China. 

But some in Mexico City say China is too deeply embedded in Mexico to change course. In any case, there is only so much either country can do to limit China’s reach.

“In Washington they’ve only just realised,” says Enrique Dussel Peters, director of the Center for Chinese-Mexican Studies at UNAM, the National Autonomous University of Mexico. “They think the discussion is: ‘on Monday I don’t want to see China in Mexico’.

“That was maybe an option 20 years ago. Today it isn’t.”

Additional reporting by Kaye Wiggins in Hong Kong

Data visualisation by Keith Fray