American officials are sounding alarms over recent raids against U.S. companies in China, as well as the expansion of the country’s counterespionage law.
The moves fall in line with Beijing’s heightened focus on national security but contrast sharply with recent business-friendly messaging. Following years of strict “zero-COVID” policy, several leaders – including Li Qiang, the new prime minister – have said that China seeks to attract foreign investment and expand market access. By targeting two companies involved in due diligence work – such as background checks and market consulting – while also widening the scope of data that authorities could deem related to national security, Beijing has ratcheted up the risks of operating in China.
Why We Wrote This
Investment requires trust. Even as Chinese leaders have declared the country open for business, raids against U.S. firms and sweeping data laws are discouraging the already skittish foreign business community.
The mixed signals have contributed to cautiousness among American firms here.
“On the one hand, there have been events to communicate with foreign firms and encourage investment. On the other, these company raids with no clarity have spooked the foreign business community,” writes Michael Hart, president of the American Chamber of Commerce in China (AmCham), via email. An April survey of AmCham members showed that while most respondents were optimistic about China’s economic recovery, less than a quarter planned to increase investment.
“If these companies have done something illegal, we encourage the authorities to be clear about what that is,” he adds.
China’s recent raids on American firms and the expansion of a counterespionage law are sending a chill through the foreign business community and ratcheting up the risks of operating in the country.
By targeting two U.S. companies involved in due diligence work – such as background checks and market consulting – in separate raids in March and April, while also greatly widening the scope of data that could be deemed by Chinese authorities to be related to national security, Beijing has thrown into question whether businesses and other entities can safely gather information vital to their work.
“Frankly, we’re very concerned about it,” said Nicholas Burns, the U.S. Ambassador to China, at an online event on Tuesday hosted by the Stimson Center in Washington. The amendments approved last week to China’s counterespionage law “could potentially make illegal in China the kind of mundane activities that a business would have to do.”
Why We Wrote This
Investment requires trust. Even as Chinese leaders have declared the country open for business, raids against U.S. firms and sweeping data laws are discouraging the already skittish foreign business community.
The moves place a bigger black box around critical, trust-building data at a moment when Beijing is declaring the country open for business after three years of strict “zero-COVID” policy. U.S. business representatives in China say the mixed signals coming from the government have contributed to a cautiousness among American firms here.
“On the one hand, there have been events to communicate with foreign firms and encourage investment. On the other, these company raids with no clarity have spooked the foreign business community in China,” writes Michael Hart, president of the American Chamber of Commerce in China (AmCham), in emailed responses to questions.
An April survey of AmCham members showed that while the majority of respondents were optimistic about China’s economic recovery, less than a quarter planned to increase investment. Nearly a quarter were considering relocating supply chains outside of China, mainly to better manage risk.
Company leaders visiting China for the first time in years “certainly have raised questions about recent raids, detentions, and arrests,” Mr. Hart says. “If these companies have done something illegal, we encourage the authorities to be clear about what that is. Otherwise all foreign companies may feel they are a target of a politically motivated action.”
Heightened scrutiny
American business leaders and senior U.S. officials say they are raising concerns with Beijing about the raids on the Mintz Group and Bain & Company as well as the sweeping counterespionage rules, which together are exacerbating an already challenging environment for foreign firms.
In the context of the law, which “casts a wide net” over data considered relevant to national security, the “heightened official scrutiny” of U.S. due diligence firms “dramatically increases the uncertainties and risks of doing business in the People’s Republic,” the U.S. Chamber of Commerce said in a statement. “This is a matter of serious concern for the investor community.”
Under the expanded law, Chinese authorities conducting counterespionage investigations can impose “exit bans” on Chinese and foreign suspects, blocking them from leaving the country. China’s use of such exit bans is growing, according to a report released on Tuesday by Safeguard Defenders, a human rights group based in Madrid. It cited an academic paper that found that at least 41 foreign businesspeople had been subject to exit bans by China over the past two decades. China’s use of exit bans is listed in the U.S. State Department’s March 2023 travel advisory as one reason Americans should “reconsider” travel to China.
Ambassador Burns stressed that U.S. officials are raising questions about the law with China’s government in hopes of ensuring “an environment here where American businesspeople and journalists and academics can feel safe, that if they’re operating here in China, they can do the jobs that they came here to do, and they are not subject to this kind of intimidation.”
Security roles for all
China’s prioritization of national security over economic growth, as the country faces a mounting geopolitical rivalry with the United States, is the driving force behind Beijing’s actions to assert greater control over flows of information and people, experts say.
Mark Schiefelbein/AP
China’s leader Xi Jinping stressed the need to strengthen national security – calling it the “bedrock” of the country’s development and the “ultimate goal” – at the Communist Party’s 20th National Congress last October, when he won a rare third term as head of the ruling party.
Mr. Xi called for shoring up the security of China’s food, energy, resources, and key industrial supply chains, and for bolstering the protection of the country’s infrastructure, financial system, and data, as well as cybersecurity.
“After the Party Congress, the leadership seems intent on reorienting the government priorities toward this geopolitical competition with the U.S., and the overriding economic priority is to build up the economy so it can survive and prosper and prevail in that competition,” says Andrew Batson, China research director for Gavekal Dragonomics, which covers macroeconomic and market trends in China.
“It’s a general effort to harden the economy against external shocks … based on a recognition that China is operating in what they view as a more uncertain and hostile world,” Mr. Batson says.
Indeed, China’s focus on national security has led to a steady expansion of laws – including the 2014 Counter Espionage Law, the 2015 National Security Law, the 2016 Cybersecurity Law, and the 2017 National Intelligence Law – which obligate firms and individuals to support government security efforts.
“There has been a slew of new legislation that effectively securitizes firms,” says Kellee Tsai, dean of the School of Humanities and Social Science at the Hong Kong University of Science and Technology (HKUST). “These laws explicitly ascribe national security roles to Chinese firms.”
As China’s companies play a bigger role in security, scrutiny of multinationals and foreign firms operating in China has increased as well. They are also under growing pressure to toe the political line in China, Dr. Tsai says.
“In the past five years, firms have been under increasing pressure to demonstrate political fealty, and this expectation of political correctness extends to multinationals operating in China,” says Dr. Tsai, who is also Chair Professor of Social Science at HKUST.
This contrasts sharply with China’s recent business-friendly messaging – including by Li Qiang, the new prime minister – that China seeks to attract foreign investment and will expand market access.
“That is true in a short-term, tactical sense,” says Mr. Batson. “But not in a long-term, strategic sense.”