May 17, 2023
IntelBrief: China’s Crackdown on Multinational Corporations a Worrying Trend for Private Sector
Bottom Line Up Front
- Since March, offices of several foreign consulting and due diligence firms operating in the People’s Republic of China (PRC) have been raided under the auspices of national security, signaling an extremely worrisome trend for private sector entities, including multinational corporations, operating in China.
- Under the banner of “national security,” elevated to new heights under the leadership of the Chinese Communist Party (CCP) and President Xi Jinping, Beijing has tightened its grip on the activity of foreign firms in China as the economy takes a back seat to security, marking a fundamental sea change.
- High-profile detention cases of foreign nationals in recent years, which the United States and other countries have deemed politically motivated, increase the concerns that Xi’s national security apparatus will apply the “Law of Rule” instead of the “Rule of Law” in the country.
- The recently reported raids on foreign consulting and due diligence firms in-country, coupled with the expanded counter-espionage law, have prompted U.S. and European officials and commerce interest groups to speak out and plan for the future.
Since March, offices of several foreign consulting and due diligence firms operating in the People’s Republic of China (PRC) have been raided under the auspices of national security. The PRC security services have visited U.S.-based companies like Mintz Group, Bain & Company, and Capvision, where they questioned workers, launched investigations, and detained local employees on the grounds of sharing state secrets with overseas entities. PRC authorities and state-owned media have alleged that unspecified Western countries utilize consultancy firms and think tanks to collect sensitive information and intelligence about China’s critical industries and institutions, including the military. The targeting of foreign consulting and due diligence firms comes at a critical time, as the PRC is accelerating efforts to open up its economy and attract foreign investments following almost three years of stringent COVID-19 lockdowns. At the same time, such efforts are juxtaposed with PRC leader Xi Jinping’s focus on “comprehensive national security” as a principal priority, which was first introduced in 2014 and then clearly delineated as the key priority for the Chinese Communist Party (CCP) during the 20th Party Congress last October.
Xi has made “comprehensive national security” the key priority for the CCP and China. The national security outlook of Xi is not novel to his reign but builds on the legacies and priorities of previous CCP leaders, from Mao Zedong to modern times. During Xi’s time in power, however, national security has expanded to encompass 16 different areas, the power of national security making and enforcement has been consolidated, and national security has seemingly eclipsed other key priorities, like economic development. In 2014, the term “comprehensive national security” was officially introduced and Xi established the China National Security Commission (CNSC), of which he was appointed the leader. Since then, national security has come to encompass every pillar of Chinese society that Xi and the CCP deem essential to safeguarding the country’s internal development and external security interests. In Xi’s report to the 20th Party Congress in October 2022, the term “security” was mentioned 91 times compared to 55 mentions in the 19th Party Congress report in 2017. The 20th party Congress report was also the first time “security” eclipsed “economy” in the number of mentions—illustrating that national security, not economic development, will be the principal goal to safeguard Xi’s hold on power.
As a result of Xi’s centralization and institutionalization of national security, a myriad of laws have been passed with the objective of safeguarding the PRC’s national security and the CCP’s hold on power. Several of these laws, including the Counter-Terrorism Law (2015) and the Anti-Foreign Sanctions Law (2021), allow the CCP to target entities beyond its borders—a break from the long-standing CCP foreign policy principle of “non-interference” and adherence to sovereignty. Most recently, the CCP expanded and updated the country’s counter-espionage law, which will take effect on July 1st. The primary change to the law is the expansion of what it covers, from state secrets and intelligence to any “documents, data, materials or items related to national security and interests.” As with several other PRC laws, the ambiguity and parameters of what will constitute national security have raised concerns for foreign companies and individuals operating in the PRC that day-to-day activities could now be deemed a national security offense. High-profile detention cases of foreign nationals in recent years, which the United States and other countries have deemed politically motivated, increase the concerns that Xi’s national security apparatus will apply the “Law of Rule” instead of the “Rule of Law” in the country. In March, a Japanese business executive was detained on espionage charges. On May 15, a U.S. citizen who also holds Hong Kong permanent residency was sentenced to life in prison on espionage charges.
Activities in the past months have illustrated what an increased emphasis on “comprehensive national security” in practice will mean for foreign entities and nationals. The recently reported raids on foreign consulting and due diligence firms in-country, coupled with the expanded counter-espionage law, have prompted U.S. and European officials and commerce interest groups to speak out and plan for the future. The EU ambassador to China, Jorge Toledo Albinana, said, “The latest news on crackdowns on consultancies is not good news.” On April 28, the U.S. Chamber of Commerce released a statement noting that the expanded counter-espionage law and recent activity targeting foreign firms “dramatically increases the uncertainties and risks of doing business in the People's Republic.” In addition, since March, the PRC has moved to limit access to public data sources, with some reports pointing to the CCP’s concerns about how foreign entities, including U.S. think tanks, utilize that data. It is evident that Xi will continue to weaponize threats to national security, no matter how unfounded, to institutionalize and broaden the implementation of “comprehensive national security” as a governance tool. So-called great power competition between the United States and the PRC will likely only aid the expansion of such policies, widening the rift between Washington and Beijing and further complicating an already complex relationship.