[The Editors' Verdict] Containment of Chinese Influence Signals a Return to the Cold War Era

Kim Kyung-soo, Professor Emeritus at Sungkyunkwan University

‘Containment is also effective for China.’ This is the title of a recent op-ed by international political scientist Hal Brands published in the Wall Street Journal (WSJ). He argues that the containment theory of the late George Kennan, which greatly influenced U.S. foreign policy during the Cold War era, remains the best policy toward China.

Kennan's containment theory hypothesizes that the United States’ patient strategy of firmly restraining Soviet expansion would expose contradictions within the communist system, ultimately leading to its collapse.

Brands contends that although China is far superior to the former Soviet Union in terms of economy and technology, and is deeply integrated into the U.S.-led international order system (such as the WTO) established after the Cold War victory, making containment a challenging endeavor, it is a timeless alternative.

He emphasized that the “competition” with China declared by the Joe Biden administration is merely a geopolitical reality, and the strategic goal is to “contain” China to prevent a world dominated by dictatorship by overturning the balance of power. To this end, he stressed cooperation with countries and allies that share values.

Variable Interest Entity (VIE) is a corporate governance model created in the early 2000s by China, a WTO member, to raise capital overseas due to domestic capital shortages. Industries such as mining, steel, education, and IT, where foreign investment was legally prohibited, faced significant capital shortages at the time.

VIE is a desperate measure to circumvent this law. The profits earned by the company are transferred to a VIE owned by the company’s CEO (or management), then from the VIE to a foreign-owned enterprise (WOFE) located in China, and then again to an offshore holding company of the WOFE overseas. Chinese companies listed overseas are not actually Chinese companies (like Alibaba Group) but offshore holding companies (Alibaba Holdings) with WOFE subsidiaries.

VIE brought growth to capital-scarce China and profits to overseas investors. It is known that over the past decade, 300 Chinese companies have raised $82 billion through new listings in the U.S.

However, the informal governance structure based on private contracts has caused conflicts. One example is when Alibaba’s VIE separated the online payment company Alipay without the consent of Yahoo, which owned 43% of the shares 10 years ago. More fundamentally, the Chinese government has never recognized VIEs, so legal risks remain hidden.

Earlier this month, the media reported that the Chinese government would ban overseas listings through VIEs for data security reasons (with conditional exceptions for Hong Kong). This aligns with news that ride-sharing company Didi, which raised $4.4 billion on the New York Stock Exchange in June, is delisting and preparing to list in Hong Kong instead.

At the same time, the U.S. Securities and Exchange Commission announced it would finalize a bill to delist foreign companies that refuse to disclose their books. This bill targets China and Hong Kong, which have so far ignored U.S. regulatory demands. This marks a weakening link in the previously close economic interests between the two countries.

Economic conflicts show signs of spreading. Last week, the U.S. Secretary of Commerce announced plans to pursue strong economic agreements next year with Asia-Pacific countries and China, covering export controls, supply chain restructuring, AI, and cybersecurity standardization.

Amid strong Chinese opposition, U.S. President Joe Biden held a Democracy Summit with 110 countries, excluding China and Russia but including Taiwan. In his opening speech, he said that freedom worldwide is under threat from dictators who seek to strengthen power, expand influence, and justify oppression.

Brands asserts that containing China means returning to the Cold War era, that the idea of a single world is a vain dream, and that it is time to accept reality. A new Cold War era has arrived.

This content was produced with the assistance of AI translation services.