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Image: H&M

Year-old statements from H&M and Nike about working conditions in China’s Xinjiang region have prompted backlash against the retail giants amid a larger “government call to stop foreign brands from tainting China’s name,” Reuters reported on Thursday. Amid enduring concerns about forced labor in Xinjiang, which is home to detention camps where ethnic Uighurs and other Muslim minorities are reportedly forced to “learn Chinese and memorize propaganda songs” and to work as part of a sweeping “re-education” campaign, the Swedish fast fashion giant and the American sportswear behemoth both expressed “deep concern” over such alleged use of forced labor by manufacturers in the region last year. H&M went further and published a since-deleted statement on its website alerting consumers that it had stopped sourcing from Xinjiang, which is responsible for about 20 percent of the global cotton supply.

Fast forward a year, and H&M and Nike, among other brands, such as Burberry, Zara and adidas, have found themselves on the receiving end of budding boycotts in China. Chinese officials have spoken out against the widely-publicized claims of forced labor, and brands’ attempts to distance themselves from it, with such attempts undoubtedly serving as an effort to save face among consumers in the West. “The accusation of ‘forced labor’ in Xinjiang is entirely a lie concocted by certain anti-China forces,” China’s Foreign Ministry spokeswoman Hua Chunying said on Thursday. “The purpose is to discredit China’s image, undermine Xinjiang’s security and stability and impede China’s development.” State media outlets have simultaneously “launched campaigns defending Xinjiang-sourced cotton and criticizing the brands” that have spoken out against it, according to the BBC

In addition to official statements and national media reports, H&M and co. are facing addition ramifications. They are losing their Chinese ambassadors, an incredibly important marketing lifeline for non-native brands to connect with coveted Chinese consumers. Vice journalist Viola Zhou wrote on Thursday that “companies are now under pressure to choose between buying Xinjiang cotton and getting boycotted in China.” And embattled companies’ celebrity endorsers are feeling the same pressure. Zhou pointed to “a wave of celebrity statements” on Thursday “announcing their breakup with brands including Nike, Calvin Klein, Converse, [and] Tommy Hilfiger,” among others. On Friday, Reuters reported that “award-winning Chinese actress Zhou Dongyu terminated her contract with Burberry as the brand’s ambassador” on the basis that “Burberry has not ‘clearly and publicly stated its stance on cotton from Xinjiang,’ her agency revealed.”

Chinese consumers are also adding their voices to the mix – particularly on social media – in connection with what AFP China and Mongolia correspondent Laurie Chen calls a “manufactured social media boycott,” which neatly “coincides with” the sanctions that China has imposed upon the European Union this week, as well as with the “two lawsuits [filed] by Xinjiang companies against the BBC and [German scholar] Adrian Zenz – precisely over [reports of] forced labor” in Xinjiang. (“The U.S., United Kingdom, Canada and the European Union imposed sanctions on China over alleged human rights abuses this week,” per Aljazeera, thereby, “prompting Beijing to retaliate with sanctions of its own.”)

“This increasingly looks like consumer decoupling writ large,” Chen stated on Twitter on Thursday, calling the campaign against H&M and co. “an amped-up version of the 2019 NBA spat,” which saw Chinese television block the basketball league’s opening games after Houston Rockets general manager Daryl Morey tweeted his support of the Hong Kong protests. The message that is being sent in both cases, according to Chen? “International brands must stay silent on (or even actively support) China’s policies in Xinjiang, Hong Kong, etc. to be allowed future access to the Chinese market.”

Still yet, the fallout goes further. H&M, for one, has been “wiped off China’s leading e-commerce, ride-hailing, daily-deals and map applications” in the wake of the recently-recirculated statements, the Wall Street Journal stated. At the same time, “Searches for H&M’s name on platforms operated by China’s largest e-commerce companies – Alibaba Group Holding Ltd., Pinduoduo Inc. and JD.com Inc. – yielded no results [as of Wednesday,] and multiple Chinese Android app stores appeared to have removed one of H&M’s shopping apps.” And according to SCMP, “Internet giant Tencent Holdings has removed two Burberry-designed ‘skins,’ outfits worn by video game characters, from its popular title Honour of Kings on the grounds that the British fashion house refuses to buy cotton produced in the Xinjiang region.”

All the while, companies are taking a financial toll beyond consumer boycotts: Zhou revealed that “Nike and adidas’ share prices dropped on Thursday.” H&M’s was also down as of market close on Thursday. 

A (Social) Credit Issue?

The sweeping backlash against these Western companies does not stop there, though. It could potentially result in another – quieter – form of punishment, by putting a marked dent in their ratings under China’s Social Credit System. A controversial program that has increasingly made headlines in recent years, the social credit system in China is a vast information gathering-and-rating of Chinese citizens in an effort to promote socially responsible behavior and crack down on everything else – whether that be littering, jay-walking, excessive spending on non-essential items, frequent gambling, or speaking out against the government on social media, among other things. 

In addition to targeting individuals, the system – which China began formally constructing in 2014 – also includes a specific business-focused initiative, the Corporate Social Credit System (“CSCS”), which a Trivium China-authored report commissioned by the U.S.-China Economic and Security Review Commission describes as a “nationwide data collection” and ranking effort. This mechanism enables the government “to penalize companies with poor compliance records [in a non-prosecutorial manner] by reducing their access to the market and subjecting them to public censure via ‘blacklists,’ while rewarding consistently-compliant companies with economic incentives and public praise via ‘redlists.’”

The CSCS “has implications for both foreign-owned and domestic companies operating in China,” according to Wiley partner Hon. Nazak Nikakhtar, who states that the system was implemented to “detect misconduct and noncompliance” among businesses in China. In order to rate companies based on their good – and their bad – behavior, the CSCS consists of a “mix of national and sector-specific policies, municipal pilot projects, and hybrid public-private sector cooperative agreements,” all of which are “loosely centered around the goal of enhancing market ‘trustworthiness,’” the November 2020 Trivium report states. 

At the same time, a January 2020 Congressional Research Service report reveals that there are currently “hundreds of official blacklists [in place] that cover everything from severe offenses, such as tax evasion and falsifying emissions data, to minor offenses like failing to file a change of address.” Companies are judged by these criteria, and their individual CSCS files are updated accordingly. (Trivium asserts that such CSCS files – which consist of eye-watering amounts of government-aggregated information and which aim to include “additional information regarding a company’s product and service quality as generated by consumers, industry associations, and other market entities” in the not-too-distant future – “have been established for most registered entities in China, including the China-registered branches and subsidiaries of U.S. firms.”).

Publicizing “false” information about the workings of Chinese companies and the Chinese government more broadly – which is what H&M, Nike, etc. are essentially being accused in connection with their statements about the human rights abuses in the Xinjiang region – would almost certainly constitute a significant offense worthy of documentation.  

“Firms placed on multiple blacklists or that commit particularly serious offenses can be added to the State Administration for Market Regulation ‘heavily distrusted entities list’ – the closest analogue to a national blacklist,” the Congressional Research Service states. Even in less extreme cases, the effects of the various individual black and red lists can have “a significant regulatory and business impact on companies operating in China,” CMS lawyers Philipp Senff and Yang Bai claim

High CSCS ratings “can trigger advantages for a company, such as the accelerated process for approvals from authorities, easier access to get loans from banks, and easier access to acquire land-use rights from the Chinese State,” they note. “Low CSCS ratings can trigger disadvantages for the company, such as the restricted issuance of governmental approvals, increased inspection rates by authorities on the company’s operation, and the prohibition to participate in procurement projects by the Chinese State.” 

Put another way, “Failing to score well, by noncompliance with the government’s policies or demands, may subject companies to a myriad of sanctions, including higher taxes or permit difficulties, or a blacklisting which could mean financial ruin,” Nikakhtar says. The impacts can be so important that European Chamber of Commerce describes this credit rating system as “potentially amounting to ‘life or death’ for companies.” 

It is unclear if the workings of the CSCS are currently at play in connection with widespread pushback against H&M, Nike, adidas, and Burberry, etc. especially in light of the removal of H&M’s footprint from a wide array of Chinese apps. However, it is undeniable, according to Senff and Bai, that the existence of the system – in and of itself – “has changed the risk landscape for companies doing business in China,” especially in instances like this one. With that in mind, they encourage “executives to develop risk management strategies” to not only “achieve regulatory and business benefits under CSCS,” but maybe more importantly, in order to mitigate potential risks that could prove to be of truly sizable proportions.