Why China’s new spying law has foreign firms scratching their heads, scrambling like a ‘scared monkey’
- Corporate insiders reflect on the ramifications and fallout from a series of raids on American consultancies operating in China
- As Beijing keeps talking about opening its doors ‘wider and wider’ to lure investors, a ‘lack of clarity creates confusion and fear’
After three years of missing out on frequent trips to meet clients and colleagues in China, a senior partner in charge of the market for a New York-based consultancy firm was thrilled when the country reopened its borders in January.
Thanks to the rising tensions between Beijing and Washington, his agency’s business has been thriving – many companies caught in the geopolitical crossfire have been seeking services and advice from the firm.
And with coronavirus travel restrictions lifted, the consultant anticipated that his first post-pandemic trip to China would be in April or May.
Looks like China is only trying to kill the chicken to scare the monkey … I am a scared monkey
Ultimately, the consultant cancelled his trip and arranged instead for his China team’s leader to come to the United States.
Declining to be identified because of the sensitivity of the matter, he said his firm has been very careful with compliance in China. However, as an American passport holder, he is still worried, given the state of affairs between the two countries.
“I am not 100 per cent sure if I will be safe in China, because the line defining legit information and intelligence has moved, and we are trying to find out where the new line is,” he said.
“As of now, it indeed looks like China is only trying to kill the chicken to scare the monkey. Yes, they have succeeded. I am a scared monkey.”
02:28
Beijing raids offices of consulting firm Capvision in widening crackdown over national security
Amid a sputtering post-pandemic economic recovery and simmering tensions with the West, Beijing has been trying to lure more foreign investors and companies to China while reassuring them that the country is open for business.
While acknowledging that countries have legitimate rights to safeguard national security, foreign business communities say the lack of clarity and transparency in the recent actions taken by Chinese authorities, along with the ambiguity of the red lines noted in the new law, have significantly increased business risks and uncertainties.
“Lack of clarity creates confusion and fear,” said Michael Hart, president of the American Chamber of Commerce in China. “The foreign business community does feel that there are mixed signals, because there have been these crackdowns, and it’s not completely clear to us why.”
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Information collection and due diligence are normal parts of doing business, especially for market entry and mergers and acquisitions, and there is a lack of clarity on what specifically these consultancies have done to put themselves in the cross hairs, Hart added.
“Now there is a question [as to whether] the information we collect is no longer allowed, especially the kind of information that in any other market would be normal – like economic data, is that now considered a state secret,” he asked. “Has the playing field changed?”
Compared with scarce information released about the other two raids, Chinese state broadcaster CCTV offered up more details on the probe into Capvision, a research firm that helps clients network with experts, and which has headquarters in New York and Shanghai.
CCTV said the firm was accused of helping to leak information related to military technology to foreigners, as some Chinese experts – including employees of state-owned enterprises – had revealed the sensitive information during interviews with clients, including some with close ties to foreign governments, militaries and intelligence services.
Chinese Communist Party newspaper warns foreign firms after Capvision raids
A Shanghai-based employee of a multinational consulting firm, which was previously Capvision’s client but cut ties with it following the CCTV report in May, told the Post that Chinese experts did talk about non-public information during such calls, and they tended to have weaker compliance awareness compared with American experts.
“When we call some American experts, they are usually very compliant. They will say, ‘I’m not able to discuss financials about this company specifically, but I can talk about the general market situation,’” the employee said on condition of anonymity due to the sensitive nature of the issue. “But many Chinese experts have never received training like this. They would think, ‘The clients have paid me, so I should answer whatever they ask.’”
To further ensure national security against the backdrop of increasingly tense China-US relations, Beijing passed the revised anti-espionage law in April, expanding the scope of what is viewed as spying while granting extensive investigative power to national security agencies.
In terms of articles considered to be related to espionage activities, the changes add “intelligence and other documents, data, materials and items related to national security and interests” beyond the existing “state secrets”.
The new anti-espionage law has significant implications for multinational companies operating in China
Foreign enterprises may face unexpected risks in scenarios including collecting business intelligence, data sharing in cross-border collaborative projects and hiring former state-owned enterprises employees or government personnel, according to Todd Liao, a partner at law firm Morgan Lewis in Shanghai.
“This expanded authority given to national security agencies under the new anti-espionage law has significant implications for multinational companies operating in China,” he said in a May report. “These companies may face increased scrutiny and potential investigations by national security agencies, even in situations where there is no clear evidence of espionage activities.
“Furthermore, the vague criteria for identifying ‘unidentified individuals with suspected espionage activities’ may result in a higher degree of uncertainty for businesses.”
Tao Jingzhou, an international arbitrator who has practised in Beijing, Hong Kong and London, also said that determining “how to distinguish between economic espionage and normal economic intelligence gathering is definitely a delicate issue”.
And he called attention to the legality of detentions and the importance of legal representation for people accused.
“Lawyers should be allowed to participate in the investigation stage of the case, and a transparent handling of the case must be provided,” he said. “Arbitrary interpretations of the law should be strictly prohibited.”
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Jens Eskelund, president of the European Chamber of Commerce in China, said the main concern in the context of the new law is that foreign businesses don’t really know what constitutes a state secret.
“What is it we need to be careful about? There’s a lot of ambiguity. All of our companies want to comply, they want to do the right thing. But sometimes it can be difficult to understand exactly,” Eskelund said.
He said that while foreign businesses understand Beijing’s need to protect national security, their major concern is that national security is taking precedence in a lot of areas in the country, especially economic matters.
“I think this kind of concern will make companies put limitations on themselves out of an abundance of caution, and going further it will impact their willingness to invest and develop in China,” he said.
Since the 1980s, foreign investment has been playing a vital role in terms of China’s access to technology, funds and management expertise, and decades of robust economic growth have also made China one of the most favoured investment destinations for multinational companies.
China’s foreign direct investment is falling as overseas businesspeople fret
But rising labour costs, along with geopolitical tensions and supply-chain disruptions caused by the pandemic, have forced many foreign companies to reconsider their industrial-chain reliance on China.
In the first five months of this year, China’s actual utilisation of foreign direct investment (FDI) – which measures the amount of money that the country has already received when carrying out a contract with foreign companies – dropped by 5.6 per cent from a year earlier to US$84.4 billion, according to data from the Ministry of Commerce.
The ministry attributed the decline to a high base from last year, as well as recent fluctuations in the foreign exchange rate, during a press conference on Thursday.
From January to April, Chinese exports in US dollar terms from foreign manufacturers dwindled by 13.7 per cent, year on year, compared with a 2.5 per cent growth of overall exports, Chinese customs data showed.
There are foreign staff who are afraid to come to China
And China’s excessive emphasis on security and self-reliance will further accelerate the trend, foreign business groups said.
“Self-reliance means that China needs to domestically become more able to satisfy the needs for a wide range of products. How does that jive with [vows to boost FDI]? We are receiving mixed signals, and I think right now a lot of companies are sitting on the fence trying to figure out, which one is it?” Eskelund said.
For US companies, the sentiment of increasing risks and uncertainties around their operation in China seems to be stronger, as all of the targeted consultancies have been American.
“There are foreign staff who are afraid to come to China,” Hart from AmCham China said. “More importantly, we have heard from some of our member companies that they have asked their Chinese staff not to work on specific issues, because they don’t know if they’ll be sensitive.”
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To mitigate risks, especially those around data collection and cross-border transmission, more foreign businesses are considering separating out their China business units, Hart added.
“That’s a little bit concerning, because that might weaken the ties between the home office and the Chinese unit. And it might also reduce their future investment in China,” he said.
The most high-profile example has been Sequoia China, which has been rebranded into “Hongshan” as an independent entity. It was split off from parent Sequoia Capital, the Silicon Valley-based venture capital giant, earlier this month, ending a nearly two-decade financial bromance between the US and China, as it had played a vital role in marrying American money with Chinese entrepreneurs.
While bigger companies may have the resources to create separate units or value chains – one for China and one for the rest of the world – smaller firms don’t have that luxury, Eskelund said.
“For smaller companies,” he explained, “if they need to establish a separate network, they’ll say, ‘Maybe Vietnam is easier.’”
