Is doing business in China becoming impossible for foreigners?

Judging purely by the steady stream of Western executives crossing the Pacific, China is picking up where it left off before the onset of covid-19. In the past couple of weeks Elon Musk of Tesla, an electric-car maker, met officials in Beijing on his first trip to the country in more than three years. At the same time Jamie Dimon of JPMorgan Chase, America’s biggest bank, was hosting a conference in Shanghai that brought together more than 2,500 clients from around the world. Hundreds of business bigwigs have made similar trips in the past three months. President Xi Jinping’s top officials have been greeting them with the mantra that, after a pandemic hiatus, “China is back in business.”

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Once the executives settle in, though, many are finding the place a lot less welcoming. In April the government strengthened an already strict anti-espionage law and, according to the Wall Street Journal, put China’s spymaster in charge of cracking down on security threats posed by American firms. Officials invoke hazily worded data-related laws introduced during the pandemic, which perplex many foreign businesses, American or otherwise. Something as innocent as sharing an email signature, considered under some interpretations of Chinese data laws as personal information, with a recipient abroad can get you into hot water.

The space for foreign businesses in China was already being constrained by restrictions that their own governments, led by America’s, have placed on Chinese firms amid geopolitical tensions; more than 9,000 Chinese firms have been hit by Western sanctions, according to Wirescreen, a data provider. Now Mr Xi is shrinking businesses’ room for manoeuvre further. Worse, even cautious movements within the space that remains can invite disaster.

A spate of spectacular cases has sent chills down the spines of foreign executives. In March five local employees of Mintz Group, an American due-diligence firm, were arrested over what many suspect was a potential breach of laws relating to data security. A month later the authorities launched an investigation into Bain, a consultancy with headquarters in Boston, over apparently similar transgressions.

In May state television aired footage of police rummaging through the offices of Capvision, a multinational research firm. At JPMorgan’s conference, cocktail-party chatter turned, sotto voce, to the case of a Chinese banker well known in foreign business circles, whose detention would, as it emerged during the evening, be extended for three more months for unspecified reasons. Mintz said it “always operated transparently, ethically and in compliance with applicable laws and regulations”. Bain said it was “co-operating as appropriate with the Chinese authorities”. Capvision vowed to resolutely abide by China’s national-security rules.

It is unclear why the authorities took aim at the advisers; rumours are rife that it had to do with their sleuthing in Xinjiang, where America accuses China of using forced labour, and in China’s semiconductor industry, which it hopes to hobble by withholding advanced chips. In the absence of clarity, and facing pressure from governments at home, some foreigners are calling it quits. On June 6th Sequoia Capital, a stalwart of Silicon Valley’s venture-capital industry, decided to part ways with its Chinese arm, which will become a separate firm. On June 10th the Financial Times reported that Microsoft would move a few dozen top artificial-intelligence researchers from China to Vancouver, in part to avoid them being poached by Chinese big-tech rivals, but also for fear of harassment by Chinese authorities. The boss of a Swiss asset manager whispers, “I don’t think [China] is investible, honestly.” Many foreigners concur. Still, for most of them China remains too big a prize to forsake. Those that stay put must therefore learn to live with not one pushy superpower, but two.

The travails of Mintz, Bain and Capvision struck a nerve in foreign boardrooms because they targeted the investigators, consultants, lawyers and other advisers on whose expertise outsiders depend to find their feet in faraway places. Clients most commonly enlist such intermediaries in order to understand whom they are doing business with, to identify any hidden risks and to lubricate transactions.

The Communist authorities have always looked askance at such work and put in place rules on data-sharing and state secrets that, if enforced, could be used to curb it. Practitioners report that this year enforcement has become much more common. In areas like Xinjiang and chipmaking, corporate investigations now appear entirely verboten. Details on critical inputs for the broader technology sector—which could become targets of fresh American sanctions—increasingly seem to be treated as state secrets. So is personal information about state-linked businesspeople, who often find themselves in the sights of due-diligence firms. This list of forbidden subjects is unlikely to be exhaustive. And it is almost certainly lengthening.

WIND Information, a Chinese firm employed by banks and brokers around the world to provide financial information on Chinese companies, has been told by the authorities to stop offering some of its services to foreigners, ostensibly lest they breach data-security rules. So has Qichacha, another data provider. A number of Chinese analysts working for foreign companies have been visited by the authorities and pressed to present a rosier picture of China. Officials’ fears that regulatory disclosures in America could divulge secrets about Didi Global’s technology suppliers or the whereabouts of sensitive passengers were potent enough to force the ride-hailing firm to delist from New York last year.

When corporate muckrakers try to dig up information beyond what is publicly available, or volunteered by firms, things get thornier still. Asking too many questions about a company that turns out to have ties to powerful officials can prove especially hazardous for a nosy adviser. As one consultant recounts, such questions just “shouldn’t be asked”. Many now turn down requests for “enhanced” due diligence, which can leave clients in the lurch.

Even humdrum administrative and legal footwork required in most business dealings, from writing emails to exchanging bank-account information, is becoming fraught. Whereas, historically, foreign firms worried most about leakage of their intellectual property to Chinese rivals, now they fret about the flow of information from their Chinese partners to them, notes Diana Choyleva of Enodo, a research firm in London. The boss of a global law firm says he can technically no longer correspond with his partners in China. When the Chinese company in question has links to the state, as many do, any of its information could be classified as a state secret.

Foreign companies are scrambling to navigate this perilous new environment. To avoid accidental data leaks, some are considering developing software to parse all exchanges of information, including contracts and emails. They will probably also need to hire and train people to review any data that is flagged by the computer as sensitive. Experts compare it to the anti-money-laundering systems which banks and other multinationals began putting in place more than a decade ago.

Many Western firms have also started drawing up “action plans” for dealing with the new risks. These are being devised by in-house counsel or outside law firms, often at the behest of multinational companies’ regional offices, which are keen to demonstrate preparedness to headquarters back home. The scope and depth of these plans make them unlike the ones that firms draw up routinely, says Benjamin Kostrzewa of Hogan Lovells, a law firm. They are based on a broad survey of fast-changing Chinese laws, such as those concerning data, intellectual property and national security, as well as of the equally protean American restrictions. Their provisions are informed by an evaluation, so far as one is possible, of any Chinese companies and individuals involved.

Contingencies that the plans consider include reviewing office leases, employment contracts and other legal responsibilities if a firm were suddenly forced to pull out of China. Companies are also more careful about sending executives to China. A mining executive describes how any visit to the mainland is now preceded by lengthy meetings with the company’s lawyers to discuss how to behave in the event of an arrest or other run-in with Chinese officialdom. Without such training, the executive says, the compliance department would not sign off on a Chinese trip.

To ensure compliance with China’s data laws, meanwhile, joint ventures between foreign and Chinese firms have been restructuring how they process and store information, explains an adviser. Many joint ventures which are ostensibly run as a single unit are divvying up data-hosting to make sure that the foreign partner does not end up holding anything that could be considered a state secret. Any Chinese intellectual property is kept on Chinese servers.

Cash trapped

Concerns are mounting, too, over the threat of multinationals’ money being seized or frozen in the event of a conflict between China and the West, says Mark Williams of Capital Economics, a research firm. In response, advisers say that some foreign firms are putting in place corporate structures that would reduce their overall financial exposure to the country and its capital controls. One ruse is to set up new companies in China that use money borrowed from Chinese banks to buy assets held by the foreign firm’s original Chinese subsidiary. That original company then remits the proceeds of the sale overseas. Should those assets be seized, the liabilities sit with Chinese banks, not with the foreign multinational or its bank abroad.

Such arrangements are possible thanks to a series of rule changes in the past four years that relaxed criteria for lending to newly formed foreign entities. Though the structures remain rare for now, some advisers see them as a sign of deteriorating confidence. This confidence is almost certain to deteriorate further, as foreign companies determined not to give up on their Chinese dream find themselves in an impossible situation. They must comply with Western sanctions and, at the same time, with China’s ever more draconian laws and Mr Xi’s desire to control cross-border flows of information. To make the system work, either China or the West must turn a blind eye. China used to be willing to do this for the sake of economic growth. No longer.

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