China’s strange ‘espionage’ crackdown could cause a lot of damage

Save articles for later

Add articles to your saved list and come back to them any time.

It’s a little peculiar that, even as its trade data points to a cooling of its economy, China seems to now be doing its utmost to scare off foreign investment and chill the activity of foreign companies already operating in China.

Given its reliance on export-driven growth in an environment where global growth and global trade are slowing, it perhaps isn’t surprising that its exports, while up 8.5 per cent by comparison with last year’s severely COVID-impacted numbers, are weakening. Relative to March, they fell 6.4 per cent.

China seems to be doing its utmost to scare off foreign money. Credit: Getty

Of even greater concern to the Chinese authorities, who are trying to reorient the economy away from exports to greater domestic consumption, would be the 7.9 per cent fall in imports year-on-year and 9.7 per cent between March and April.

While China’s goal for this year of economic growth of around five per cent isn’t ambitious by its standards, it may yet have to deploy fiscal stimulus and pull other economic levers to meet that target.

One of those levers and an important element of China’s economic strategy for this year was supposed to be foreign investment.

“China will open its door wider and wider,” new premier Li Qiang told a meeting of global chief executives at the China Development Forum in March as he urged them to invest more in China.

“No matter how the international situation changes, China will unswervingly expand its opening up to the outside world,” he said, promising to give equal treatment to foreign investors and encourage trade and investment by removing government controls.

Almost at the same time that Li was laying out the welcome mat for foreign investors Chinese authorities raided the Beijing offices of a US-based global corporate analysis and due diligence firm, Mintz Group, arresting the five staff in the office.

Last month another US firm, management consultants Bain & Co, were “visited” by Chinese police and its employees were questioned and computers and phones were confiscated.

Then, on Monday this week, state media broadcast images of raids on multiple offices of yet another international advisory group, Capvision, questioning its employees and seizing its computers. Capvision has claimed that it connects more than 2000 of its clients to more than 450,000 experts with specialist expertise.

China’s economy remains fragile.Credit: Bloomberg

China has always been sensitive about the extent to which Western companies and their governments have access to corporate and government data and insights, largely because of the blurred lines in its economy between the corporate sector and the military and the extent to which the activities of the corporate sector, much of it state-owned, are shaped and directed by Beijing’s view of its national interests.

Amid the heightened tensions generated by the trade war with the US and America’s efforts to cut its access to the West’s most advanced technologies China has become even more protective of information about its companies and its military.

After initially targeting excessive leverage in its property, and causing a massive implosion in that sector, last year the authorities cracked down on China’s technology sector and wiped more than $US1 trillion ($1.5 trillion) from its value. The focus this year appears to be on the transfer of information from inside China to foreign companies and governments.

Apart from the raids on foreign consultancies, China’s data providers had already been ordered to stop providing foreigners access to detailed information on Chinese companies and China’s economy.

It’s difficult to see how Western companies could invest in China while exposing themselves to open-ended risk by investing essentially blind in an environment where there is no clarity about what’s sensitive information and what’s not.

Last month the Chinese legislature revised its Counterespionage Law, originally enacted in 2014, to restrict the transfer of information related to national security and state interests and expanded the definition of espionage to include any material related to national security and state interests – without defining what they might mean.

Presumably the information China now regards as state secrets relate to its competitive advantages or its military but the lack of definition means that foreign companies operating in China have no clear idea of where the boundaries between data that is sensitive and that which isn’t lie.

It is apparent from the authorities’ actions that even accessing and providing foreign companies or institutions open-source data published on China’s internet might be considered espionage. The raid on Capvision will also be chilling for contact between foreign companies and institutions and Chinese academics or other experts.

Foreign companies can’t invest without access to detailed information on prospective partners, competitors and the economy and market they are considering investing in.

New Premier Li Qiang insists China is open for business with foreign companies, which makes Beijing’s decisions very curious.Credit: AP

Companies investing in China, as they would in any other market, have relied on consultants and publicly-available data to gather than information and conduct the due diligence programs that are routine prerequisites in any western investment decision.

Chinese corporate registry databases have, however, been directed not to make their data available outside mainland China, Capvision’s experts will no longer be available and the consultants will make it very difficult, if not impossible, for companies to undertake their due diligence investigations.

What was supposed to be an open door has been transformed into a gateway to risk, for companies and their executives. The risk isn’t just to potential investment returns from inadequately researched transactions but the safety and freedom of individuals, given the vagueness around what constitutes espionage.

Data or contact with experts that might be routine and uncontroversial anywhere else could lead to an arrest in China.

China’s sensitivity is understandable. The nexus between its corporate and military sectors means that some commercial activity has military applications and sharing information on that activity could see valuable intelligence made available to geopolitical rivals.

There are defence-related think tanks in the US that do use, or at least have used, publicly available Chinese data to provide insights into its military’s capabilities and into the relationships between Chinese companies and the military.

Those insights could also help inform western governments when they are considering – as they have done – whether to restrict China’s access to particular technologies or whether to impose sanctions on companies or individuals.

The data hoovered by the consultancies, or even Western auditors operating within China, could be valuable to foreign intelligence agencies.

Foreign investment is, however, important to China. The Financial Times has estimated that more a third of its exports are generated by foreign companies operating in China. China also still needs access, not just to their capital but their technology and expertise.

It’s difficult to see how Western companies could invest in China while exposing themselves to open-ended risk by investing essentially blind in an environment where there is no clarity about what’s sensitive information and what’s not.

Like the crackdowns on the property and technology sectors, the crackdown on “espionage” risks substantial self-inflicted damage and a significantly increased decoupling of China’s economy from much of the rest of the world’s. That increased deglobalisation wouldn’t be good for China or the rest of the world.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.

Most Viewed in Business

From our partners

Source: Read Full Article