Foreign Business in China: Safe and Secure?, The Wire China, May 21, 2023.
Companies operating in China need to work together to get better information on the government's intentions.
Back on the ground in China after zero-Covid, foreign business leaders face a challenge in their China strategy: Figuring out how much things have really changed — and what China’s leaders really want.
Chinese leaders have been clear in their words. In December Xi Jinping spoke of “the need to make sure that the first-rate foreign investment already in the country stays in the country, as well as to attract more high-quality foreign investment.” At Davos in January, Liu He reiterated “foreign investments are welcome in China, and the door to China will only open up further.” At the Boao Forum in March, new premier Li Qiang promised that “no matter how the international situation changes, China will unswervingly keep expanding our opening up”.
But the leadership’s actions threaten to speak louder than these words. Recent moves, all focused on professed Chinese security concerns rather than economic opportunity, send at best mixed messages. At worst they presage a much harsher landscape for foreign business in China.
Business depends on making decisions – all the more so in the fast-changing Chinese marketplace. Yet getting it wrong can now have profound personal consequences…
Recent weeks have seen staff arrested at U.S. due diligence company Mintz Group; a Japanese executive working for pharmaceuticals company Astellas detained; state television coverage of alleged espionage at research platform Capvision; staff questioned at American management consultants Bain & Company; an expansion in the scope of China’s Counter-Espionage Law; sanctions imposed on U.S. defense contractors Lockheed Martin and Raytheon; the blocking of Wind Info’s financial information services to certain non-China-based clients; and a probe into Micron, a U.S. memory chip company. Is this the new welcome for foreign business?
Positive news to balance the negatives is thin on the ground, mostly reflecting prior commitments. German chemicals giant BASF is moving forward with its $10 billion investment plans for a new complex in Guangdong province. Last month, German carmaker Volkswagen announced a 1 billion euro R&D and procurement center in Hefei. Provincial officials are back on the road, pitching for foreign investors, playing catch-up with those from India, Vietnam and elsewhere.
Starved of in-person contact and with tighter information control within China, corporate decision-makers latch on to new information to judge what is happening beneath the soundbites. They seize quickly on individual data points to form patterns or trends.
How then to interpret the recent flurry of activity in China? As ever, context matters. Although no amount of background knowledge can change these recent negative signs into positives, it can help lend perspective on how concerned foreign business should feel.
None of these actions is unprecedented. In 2009, Rio Tinto’s Stern Hu was found guilty of bribery and stealing ‘state secrets’ during iron ore price negotiations; he served nine years in prison. In 2010, an Aston Martin executive, caught up in a business dispute, was banned from leaving China. In 2014, Chinese state-owned enterprises were reportedly told to cut ties with U.S. consulting firms, following the U.S.’s indictment of Chinese nationals for corporate cyber-espionage, yet work continued.
And while the expansion of the Counter-Espionage Law is concerning, existing security-related legislation is already broadly-worded and potentially all-encompassing. This has caused significant concern in multinational companies for years, but business and investment has continued. What has always been – and remains – critical is how and when Chinese officials choose to interpret this ambiguity. Recent moves may suggest an increased willingness to apply a stricter interpretation – or they may not: In China, even this is unclear.
What is clear is that, under Xi Jinping’s leadership, national security has come to the fore. At the 20th Party Congress, Xi declared the people’s security as the ‘ultimate goal’. Security is now on at least an equal footing with economic development, a change from the previous primacy of growth. Introduced in 2014, Xi’s ‘comprehensive national security’ is broad, including economics, technology, society and culture alongside more traditional definitions.
While clear in concept, this is a recipe for uncertainty, second-guessing, and over-reaction when it comes to implementation. With such broad definitions, anything can be deemed a security risk. Specific actions may reflect top-down directives that security trumps a warm welcome to foreign business; or they may reflect local officials judging it safer to err on the side of caution. The difference matters when determining where the new ‘red-lines’ for business lie.
Data and information are especially in the spotlight, all the more cross-border data flows. While China has implemented extensive legislation in the field, much is still ill-defined. When uncertain, Chinese companies prefer to suspend services rather than run the risk of fines. Wind has cut off data access to certain overseas research institutes, while maintaining access for core financial institution clients.
Finally, China is not alone in its security focus. The U.S. government has imposed restrictions or bans on around 1,000 Chinese companies. The potential data security risks posed by TikTok and even Shein are a matter of political debate. In the U.S. too, there are investigations into espionage by Chinese nationals — some well-founded, some not. Jinko Solar’s U.S. operations were raided on May 8th.
The tension between security and business is not going away anytime soon. Chinese entrepreneurs too are trying to understand the new landscape. In 2021, many felt targeted by Xi’s common prosperity campaign. Now, state media advocates for the private sector and negative comments are censored.
Paradoxically, the emphasis on security bakes in greater insecurity for individuals and companies. Everyone tries to interpret what might breach a ‘red-line’ and what not. When the same words mean different things at different times, this is hard. Xi encourages unemployed youth to go to the countryside to help rural revitalization: Is this a pragmatic policy suggestion or a revival of Mao’s Cultural Revolution campaign?
Business depends on making decisions — all the more so in the fast-changing Chinese marketplace. Yet getting it wrong can now have profound personal consequences — for both expat and Chinese staff — even if worst-case outcomes remain highly unlikely. Many in Shanghai recall the overnight loss of personal control that the 2022 lockdown brought.
Does all this make China unattractive for foreign business? Or does it just mark the next stage of corporate adaptation to a changing China? Is this time different? Usually it is not — until it is.
China’s welcome will always be on China’s terms. But whether foreign business finds it warm or cold matters too.
For now, foreign business needs more granular information about what is happening and why. Those in China need to get beneath the often-simplistic headlines that those in headquarters are reading. They need to pool information and then explain the business impact of their concerns with Chinese officials at all levels in public and private.
They need then to judge the response, both in word and deed. Does this provide comfort that actions are to address specific, well-founded issues or reflect misunderstandings and transitory problems? Or rather does it reflect conscious trade-offs made by the Chinese leadership and reinforce the worries? To keep their welcome warm, Chinese officials need to respond constructively – and to demonstrate fresh success with foreign companies ready to invest and expand further.
China’s welcome will always be on China’s terms. But whether foreign business finds it warm or cold matters too.