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By Patrick Sherwen | 13:00:00 | 15 May 2008

The Beijing Olympics appeared the perfect opportunity for China to demonstrate to the world that it was a nation to be admired. However, the main effect of the publicity so far has been to add impetus to the outsiders’ view of China as authoritarian and repressive.

The issues of China’s controversial role in places such as Myanmar and Sudan, and its policy at home in Tibet and Xinjiang are not new. They were on the table before we were bombarded with striking images of the torch surrounded by a phalanx of Chinese bodyguards, pro-Tibetan banners being unfurled from the Golden Gate Bridge or violent protests in the streets of Lhasa, Tibet’s capital.

It would be overdramatic to say that investors and businesses will pull out of China en masse in response to the recent negative publicity but they will be considering their positions. Businesses that are sensitive to ethical concerns may also think harder before taking the plunge than they might have a month ago and there may also be an issue for investment funds with an ethical element to their remit.

The most vulnerable are those who are involved directly with the games, such as the sponsors, and those whose operations bring them in close contact with the Chinese government in Tibet, such as companies in the mining or construction sectors.

Omega watches, owned by the publicly traded Swatch Group, is one of 12 ‘Olympic partners’ and is a case in point. Search the internet and you will already find people arguing for a boycott of Omega’s products. This will clearly be unwelcome to the company but much more significant is that George Clooney, who advertises the company’s watches, has put public pressure on Omega to declare its position on China’s controversial foreign policy.

Omega played this with a straight bat and said it was proud to be associated with Clooney and his fight for good causes, adding however that it tries to separate the ‘noble endeavour’ of sport from politics.

The main threats from the recent events take two forms: security concerns and reputational damage.

Although less well known than the Tibetan issue, the only significant security threat in mainland China comes from the similarly afflicted Uighur militants in the Xinjiang region. Although tension seems to be building among the Tibetan groups they have no record of being terrorist in intention or capacity, despite official Chinese reports. The Chinese security presence in Tibetan areas is also very strong and there is no real risk of unrest spreading beyond them to ‘China proper’.

Consequently, claims of a security threat are more credible in relation to the Uighur separatist movement, which sees Xinjiang as being part of a wider ‘East Turkistan’ region and has a stronger tendency to violence. The most commonly cited groups within this movement are the East Turkistan Liberation Organisation and the East Turkistan Islamic Movement. The latter is on the US list of recognised terrorist organisations, although its listing was arguably at least partly a US tactic to gain Chinese support for the war in Iraq.

The degree to which these groups pose a threat though is made less clear by the unreliability of official Chinese information. For example, the Xinhua news agency reported that police in Urumqi, Xingjiang’s capital, had killed two members of a ‘terrorist group’ and arrested 15 others in January. The same source reported that in the raid, police seized explosives, firearms and propaganda material and that they uncovered evidence to suggest plans for bomb attacks on the Beijing Olympics.

This sounds alarming but no substantiating evidence or information has been supplied to back up these claims.

The main point here is that it is in terms of reputation that investors and businesses operating in China have most to lose and this problem will intensify. Investment in China will not be hindered on a large scale because the potential prize is simply too big and the number of companies involved too large. Chinese government policy is unlikely to change either, and in fact will probably become more entrenched. However, there is a growing likelihood that smaller or more sensitive players will steer clear of China to avoid courting negative publicity.