China’s security crackdown could be a new dawn for foreign investors


Chinese authorities have investigated consulting firm Capvision Partners, state media CCTV reported on May 8. China.

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China wants foreign investment, but it wants it on its own terms.

However, Beijing’s terms are unclear at this time – and it has raised concerns and sparked doubts in the global business community.

Last Monday, the public channel CCTV distinct a consulting firm for not conforming to China’s National Security Laws.

Capvision Partners, based in Shanghai, is just the latest company recently subjected to such investigations on the mainland. In March, the American due diligence firm Mintz told Reuters police raided its Beijing office and arrested some of its Chinese staff. In April, the American management consulting firm Bain & Co would have confirmed the police visited his office in Shanghai.

These companies provide due diligence services, which companies and investors regularly use to determine whether suppliers are following rules and regulations, not only in China, but also in other jurisdictions. They also audit supply chains, among many other services.

At a time when China is actively encouraging foreign investment in the world’s second-largest economy that has been deeply affected by the country’s long-standing zero-Covid policy, such an escalation in China’s data concerns is hurting sentiment and seems in contradiction to its overt claims of openness.

“It may seem like a paradox,” said Chong Ja Ian, an associate professor at the National University of Singapore who studies Chinese foreign policy. “But that’s consistent with what we’ve seen from current Chinese leaders: they want more control over all facets of society.”

“This is a government that has built its legitimacy on performance, so it would be keen to maintain a perception of control as the country currently faces more pressure from different directions,” he told CNBC.

… Much of what is now considered national security or state secrets is not sufficiently defined or classified.

“This is a government that has built its legitimacy on performance, so it would be keen to maintain a perception of control as the country currently faces more pressure from different directions, including demands for a better access to information,” Chong added.

At a steady pace press conference led by the Chinese Ministry of Foreign Affairs a week ago, Beijing seemed to want to downplay the Capvision probe as an isolated incident.

“These are normal law enforcement actions in accordance with Chinese laws that aim to promote healthy and well-regulated growth of the relevant industry and safeguard national security and development interests,” the spokesperson said. ministry spokesman, Wang Wenbin.

“Arbitrary” application

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“The enforcement actions seem very arbitrary now,” Lester Ross, a foreign lawyer in China, told CNBC. “To have multiple companies involved now in this crackdown and the restriction of financial data to foreigners, it seems that the Chinese security services are onto something bigger.”

“A major question about Chinese law in general is the need for greater precision in delineating what is permitted and what is not: much of what is now considered national security or state secrets is not sufficiently defined or classified,” Ross added.

State secrets leaked?

The charges against Capvision included allegations that the consultancy was among those used by foreign institutions with “complex backgrounds” as a pretext to steal state secrets and intelligence in key industries while circumventing the law. Chinese authorities have alleged that Capvision accepted more than 2,000 remittances from hundreds of foreign companies totaling $70 million between 2017 and 2020, according to a CNBC translation.

State-owned CCTV said Capvision draws on a vast “network of experts” of about 300,000 people in areas ranging from domestic policy research, national defense and military technology to banking. , finance and medicine.

The CCTV program also claimed to feature one of Capvision’s experts who was found guilty of leaking information relating to the number of unnamed military aircraft in the inventory of a particular institution or company, according to a translation from CNBC.

A building official stands outside Capvision’s office in Beijing May 10, 2023. China said on May 9 that a raid by authorities on U.S. consultancy Capvision’s offices in the country was aimed at safeguarding its ‘interests of national security and development.

Greg Baker | AFP | Getty Images

In a sign that last week’s state media report sparked many reassessments in the business community, state-owned Securities Times reported Last Thursday, Chinese regulators asked mainland Chinese brokerage firms to step up compliance with sensitive information, expert invitations and interviews.

The American and European Chambers of Commerce in China have also expressed concern.

The recent surveys “risk increasing uncertainty at a time when European companies are looking for clear signs that the business environment in China is becoming more reliable and predictable,” the European Chamber of Commerce in China said in a statement. “The European Chamber respects the rule of law and expects it to be followed in these cases.”

Last Wednesday, Capvision pledged to “actively respond” to requests from Chinese authorities over the company’s neglect of its national security responsibilities, after forming an internal three-person “compliance committee” chaired by its general manager Xu Rujie.

“We are deeply aware that we have not fully complied with our national security responsibilities in our past business activities and that there are significant hidden dangers and loopholes that have led to grave danger to the national security of the country,” the Shanghai-based company said in a statement. , according to a CNBC translation.

Without further details on what is allowed, it could be more difficult for potential investors to do their due diligence before committing to transactions, especially given the nature of doing business in China.

“In a state-run economy like China’s, many local Chinese companies would have relationships with the government at different levels,” said Chong of NUS. “Thus, some trade data would inevitably have political and national security implications.”

“I don’t know if the Chinese government wants to be more specific about what that means,” the professor added. “After all, ambiguity and lack of clarity are common tools used by authoritarian governments to retain and strengthen their control.”

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