Recent economic data shows that China’s post-COVID bounce wasn’t strong as expected, and that its economy is losing momentum due to weak domestic demand and a protracted real estate market slump.
To boost market confidence and attract foreign capital, Chinese President Xi Jinping chaired a meeting of Chinese Communist Party Central Comprehensively Deepening Reform Commission (CCDRC) on July 11.
He said he wanted to “proactively raise China’s opening-up to a new level” and “deepen institutional reforms” in foreign cooperation on trade, investment, finance and innovation.
On July 21, China’s state-run Global Times newspaper weighed in with an article, stating:
“Compared with the U.S., with its crackdowns, containment and protectionist approach that continues to drag down the global economy, China has been sticking to an opening-up approach with global investors while striving to maintain its own growth momentum.”
That is false.
This past spring, China launched a sweeping crackdown on consultancy and due diligence firms, damaging investor confidence. Also this year, China updated its data privacy and counter-espionage law, increasing the operational risks for many multinational companies doing business in China.
Crackdown on consultancies
China has launched a crackdown on foreign businesses that provide sensitive economic data, saying the move is aimed at safeguarding national security and economic development.
In March, Chinese officials closed the Beijing offices of the U.S. due diligence company Mintz Group and detained five of its employees. With 18 offices worldwide, Mintz Group specializes in background checking, fact gathering and internal investigations.
In April, Bain & Company, a U.S. management consultancy, said Chinese police had visited its Shanghai office and questioned the staff there. The Financial Times reported that the police seized computers and phones but did not detain any employees.
The following month, the Chinese consulting firm Capvision Partners found itself in the spotlight after Chinese Ministry of State Security officers simultaneously raided its offices in Beijing, Shanghai, Suzhou and Shenzhen. Capvision provides what it describes as “expert network” services, putting experts in various industries in contact with firms and investors.
Such incidents signal that, as one U.S. businessperson told Reuters, “Beijing wants foreign money and technology, but it won’t accept credible U.S. firms conducting due diligence on Chinese partners or the business environment.”
Asked about the raids, Chinese Foreign Ministry spokesperson Wang Wenbin said they were normal law enforcement actions conducted in accordance with Chinese laws “that aim to promote sound and well-regulated growth of relevant sector and safeguard national security and development interests.”
Eric Zheng, president of the American Chamber of Commerce in Shanghai, released a statement saying that China needs to be more transparent about law enforcement actions and more clearly delineate “the areas in which companies can or cannot conduct such due diligence.”
Data security and anti-espionage law
Two recent updates to China’s legal framework could have a significant impact on foreign businesses’ operational risks.
On June 1, China implemented a new rule on cross-border data transfer, tightening Beijing’s control over domestic data.
The Measures on the Standard Contract for the Cross-Border Transfer of Personal Information requires personal information processors sending data overseas to meet strict conditions.
As one example, the rule forbids the cross-border transfer of data by any people or entities who operate “critical infrastructure,” which is defined as "public communication and information services, energy, transport, water, finance, public services, E-government services, national defense," and "any other important network facilities or information systems that may seriously harm national security, the national economy and people’s livelihoods." (See full list of restrictions here.)
The new regulation has worried some international companies, as their day-to-day operations involve sending information from their China-based branches to overseas headquarters.
On July 1, a revision to the anti-espionage law came into effect, drastically broadening the definition of espionage activities.
Under the revised law, "relying on espionage organizations and their agents," as well as the unauthorized obtaining of "documents, data, materials, and items related to national security and interests," can constitute an act of espionage.
Craig Allen, president of the US-China Business Council, an industry group assisting American businesses operating in China, wrote in a blog that the revised law “raised legitimate concerns about conducting certain routine business activities, which now risk being considered espionage under the guise of being a threat to China’s national security.”
He added that the law is having “a chilling effect on business sentiment, and confidence in China’s market will suffer further” without a clear definition of what constitutes espionage.