Has it become impossible for foreigners to do business in China? | world news

Just judging by the steady stream of western executives across the Pacific, China is picking up where it left off before the covid-19 outbreak. Elon Musk of electric car maker Tesla has met with officials in Beijing over the past few weeks, his first trip to China in more than three years. Meanwhile, Jamie Dimon of JPMorgan, the largest US bank, hosted a conference in Shanghai that brought together more than 2,500 clients from around the world. Over the past three months, hundreds of business leaders have taken similar trips. President Xi Jinping’s top officials have been greeting them with the catchphrase, after the pandemic hiatus, “Business back to normal in China“

Once the executives settled in, however, many found the place less welcoming. In April, the government tightened its already strict anti-espionage laws, with the Wall Street Journal reporting that China’s spy chief is tasked with combating security threats posed by U.S. companies. Officials have cited vaguely worded data-related laws introduced during the pandemic that have confused many foreign businesses, American or otherwise. Sharing something as innocent as an email signature with recipients abroad, considered personal information under some interpretations of Chinese data laws, could get you in trouble.

The space of foreign companies in China has been restricted by their own governments, led by the us, affecting Chinese companies amid geopolitical tensions; more than 9,000 Chinese companies have been hit by Western sanctions, according to data provider Wirescreen. Now, Mr. Xi is further reducing the leeway for companies. Worse, even a careful move in the remaining space could spell disaster.

A series of sensational cases sent chills down the spines of foreign executives. In March, five local employees of U.S. due diligence firm Mintz Group were arrested for violating laws related to data security. A month later, authorities opened an investigation into Bain & Company, a Boston-based consulting firm, citing apparent similar violations.

In May, state television aired footage of police raiding the offices of Capvision, a multinational research firm. At the JPMorgan meeting, where cocktail conversation was whispered about the case of a Chinese banker well-known in foreign business circles, news emerged that night that his detention would be extended for another three months for reasons unknown. Mintz said it “always operates transparently, ethically and in compliance with applicable laws and regulations”. Bain said it was “cooperating as appropriate with Chinese authorities”. Capvision has vowed to firmly abide by China’s national security rules.

It is not clear why the authorities are targeting the advisers; rumors are swirling that it is linked to their surveillance in Xinjiang, where the U.S. accuses China of using forced laborand China’s semiconductor industry, which hopes to seize advanced chips. Due to uncertainty and pressure from domestic governments, some foreigners say they are pulling out. On June 6, Sequoia Capital, the backbone of the venture capital industry in Silicon Valley, decided to part ways with its Chinese branch, which will become an independent company. On June 10, the British “Financial Times” reported that Microsoft will move dozens of top artificial intelligence researchers from China to Vancouver, partly to prevent them from being poached by China’s large technology rivals, but also because of fears of being Harassment by Chinese authorities.The boss of a Swiss asset manager whispered: “I don’t think [China] Honestly, it’s worth investing in. Many foreigners agree. Still, for most of them, China remains a trophy that cannot be relinquished. Those who stay put must therefore learn to live with two aggressive superpowers rather than one.

The travails of Mintz, Bain and Capvision have touched a nerve in foreign boardrooms because they target investigators, consultants, lawyers and other advisors whose expertise outsiders rely on to gain a foothold in distant lands. Customers often engage such intermediaries to understand who they are doing business with, identify any hidden risks and facilitate transactions.

Communist authorities have long been skeptical of such work and have created rules on data sharing and state secrecy that, if enforced, could be used to curb it. Practitioners report that enforcement has become more common this year. In places like Xinjiang and chip manufacturing, corporate investigations now appear to be banned entirely. Details of key inputs into the broader technology sector – which could be targeted by a new wave of US sanctions – appear to be increasingly being treated as state secrets. The same goes for the personal information of government-linked businessmen, who often find themselves in the sights of due diligence firms. This list of prohibited subjects is unlikely to be exhaustive. And it’s almost certainly being extended.

WIND Information, a Chinese company employed by banks and brokers around the world to provide financial information on Chinese companies, has been told by authorities to stop providing some of its services to foreigners, ostensibly because of fears they would violate data security rules. The same is true for another data provider, Chacha. Some Chinese analysts working for foreign companies have been interviewed by the authorities and asked to present a better picture of China. Officials worried that U.S. regulatory disclosures could reveal secrets about Didi Chuxing’s global technology suppliers or the whereabouts of sensitive passengers, concerns enough to force the ride-hailing company to delist from New York last year.

Things get trickier when corporate whistleblowers try to mine information beyond what is publicly available or what companies voluntarily provide. Asking too many questions about a company that turns out to have ties to powerful officials is especially dangerous for nosy consultants. As one consultant put it, such questions “shouldn’t be asked”. Many are now rejecting requests for “enhanced” due diligence, which could leave clients in trouble.

Even the monotonous administrative and legal steps required for most business transactions, from writing emails to exchanging bank account information, become worrisome. Diana Choyleva of Enodo, a London-based research firm, noted that while historically, foreign companies were most concerned about the leakage of their intellectual property to Chinese competitors, they now worry about the flow of information from their Chinese partners to them. The boss of a global law firm said he could no longer technically communicate with his partners in China. When the Chinese company involved has state ties, as many do, any information about it could be classified as a state secret.

Foreign companies are scrambling to navigate this dangerous new environment. To avoid accidental data leaks, some are considering developing software to parse all information exchanges, including contracts and emails. They may also need to hire and train personnel to review any data flagged by computers as sensitive. Experts have compared it to the anti-money laundering system that banks and other multinationals began implementing more than a decade ago.

Many Western companies have also begun to develop “action plans” to deal with new risks. These are designed by in-house counsel or external law firms, often at the request of regional offices of multinational corporations keen to demonstrate readiness to domestic headquarters. The scope and depth of the plans make them different from those routinely drawn up by companies, said Benjamin Kostrzewa of law firm Hogan Lovells. They are based on a broad survey of rapidly changing Chinese laws, such as those on data, intellectual property and national security, and equally kaleidoscopic U.S. restrictions. Their rules are based on as much evaluation as possible of any Chinese companies and individuals involved.

The plan contemplates contingencies that include reviewing office leases, employment contracts and other legal responsibilities if a company is suddenly forced to withdraw from China. Companies are also more cautious about sending executives to China. One mining executive described how he now holds lengthy meetings with his company’s lawyers before visiting the mainland to discuss how to behave in the event of an arrest or other clashes with Chinese officials. Without such training, the compliance department would not have approved the trip to China, the executive said.

Meanwhile, joint ventures between foreign and Chinese companies have been restructuring how they process and store information to ensure compliance with China’s data laws, a consultant explained. Many joint ventures, ostensibly operating as single units, are unbundling data hosting to ensure foreign partners don’t end up holding anything that could be considered a state secret. Any Chinese intellectual property is kept on Chinese servers.

cash trapped

There are also growing concerns that funds from multinational companies could be seized or frozen in the event of a conflict between China and the West, said Mark Williams of Capital Economics, a research firm. In response, advisers say some foreign companies are setting up corporate structures to reduce their overall financial exposure in the country and its capital controls. One ruse is to set up new companies in China and use money borrowed from Chinese banks to buy assets held by foreign companies’ former Chinese subsidiaries. The original company then remits the sale proceeds overseas. If those assets are seized, the debt will be assumed by Chinese banks, not foreign multinationals or their banks abroad.

Such arrangements were made possible by a series of rule changes over the past four years that eased lending to newly formed foreign entities. While these structures are still rare, some advisers see them as a sign of deteriorating confidence. That confidence will almost certainly deteriorate further as foreign companies determined not to abandon the Chinese dream find themselves in an impossible situation. They must abide by Western sanctions while complying with China’s increasingly stringent laws and Xi Jinping’s desire to control the flow of information across borders. For the system to work, neither China nor the West has to look the other way. China has been willing to do this for economic growth in the past. no longer.

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© 2023, The Economist Limited. all rights reserved. From The Economist, published with permission.Original content available at www.economist.com