Conducting geopolitical risk assessments before considering entering China is critical to protecting your firm and employees.
China under Xi Jinping has presided over a regulatory crackdown against foreign businesses that has accelerated recently, leaving foreign business executives and investors at risk. The Chinese Communist Party has expanded control over China’s business sector as the government turns increasingly authoritarian.
The fallout from the COVID-19 pandemic and heightened tensions with the West and China’s neighbors have resulted in far more stringent and aggressive actions from Beijing that target foreign companies and the private sector. Understanding the risks of this shift and how they may affect the safety and security of business operations and personnel is paramount for foreign firms operating in the country.
China has increasingly arrested foreign executives and employees and raided the premises of Western companies operating within the country. China has arbitrarily detained foreigners and Chinese citizens alike, while others have simply disappeared. Several high-profile cases, such as the disappearance of Chen Shaojie, the chief executive of the Chinese live-streaming platform DouYu, have highlighted this. Shaojie’s disappearance occurred after receiving scrutiny from China’s internet regulator. He joins a growing list of business executives to disappear in China over the last decade.
Detentions have also been linked to geopolitical events and competition between China and its biggest geopolitical competitors. For example, after spending three years in custody, two Canadian businessmen were released back to Canada in 2021. China’s detaining of Canadian nationals following the arrest of a Huawei executive in Canada based on a US-issued warrant.
Chinese authorities denied a relationship between the arrest of the Canadian businessmen in China and the arrest of the Huawei executive in Canada; however, the timing of the arrests and releases coincided with that of the Huawei executive. This is not an isolated incident, as China has been accused on numerous occasions of a practice known as hostage diplomacy, where foreign nationals and executives are detained during geopolitical spats with their host countries and used as leverage for their advantage.
In April 2023, China updated its counterespionage laws, stipulating that “all documents, data, materials, and items related to national security and interests” are under state secrets protection. The updated law does not specify what classifies as national security. China’s authoritarian system makes arbitrary seizures and arrests of foreign professionals likely, while new regulations designed to centralize state power render foreign businesses at significant risk.
In 2021, China also enacted a new data security law and the “personal information protection law,” which has bolstered uncertainty regarding data transfers, particularly of firms operating in China sharing data with entities outside the country. Like the new counterespionage laws of 2023, the legislation cites national security concerns loosely, leaving confusion around how to safely navigate data policy without receiving scrutiny from authorities.
Since early 2023, several foreign due diligence and consulting firms have been targeted by Chinese authorities under the auspices of national security concerns.
PRC security forces have raided the offices of several US companies, leading to questioning, property confiscation, and the detention of local employees. Think tanks and due diligence firms such as the Mintz Group, Bain and Company, and Capvision have been targeted due to concerns regarding the alleged sharing of sensitive data and intel about Chinese firms, the economy, and institutions it views as compromising to its national security.
International firms of this nature operating in China are at risk of increased surveillance, investigations, raids, and detentions of employees by Chinese authorities based on loosely defined and applied data security and counterespionage legislation.
Though any foreign company operating in China faces risks, certain industries should operate with extra caution:
China is losing investor confidence, and foreign direct investment is falling. Targeting of foreign executives and businesses and heightened geopolitical risk and risk associated with pandemic fallout have left the international investment community hesitant to funnel resources to China. In fact, 2023 saw a rare decline in foreign direct investment in China.
Confidence in the Chinese market has been dampened significantly by the growing number of detentions and disappearances of business executives. Travel bans and office raids have also led to concern for foreign firms operating in the country. This has led to concern from firms and investors for their employees, data, and intellectual property security, which have been frequently violated due to evolving legislation.
Supply chain volatility has risen, particularly after China’s stringent COVID-19 policies. Concerns over China’s future in the region, particularly regarding its relationship with Taiwan, pose risks to foreign businesses (particularly those from adversarial nations). Looking forward to a potential conflict with Taiwan, foreign companies must weigh the risks associated with doing business in China, given a conflict with Taiwan, and what this would mean for their operations and supply chains. Growing discontent with China’s treatment of Uyghur Muslims in Xianjiang Province and potential economic sanctions and other punishments from the international community also pose risks to supply chains and foreign nationals and companies.
Despite the recent risks highlighted above, China remains a significant economic market with a concentration of American and other international firms operating in the country. Before establishing a presence in the country, understanding the risks posed directly and indirectly to your company and executives is critical.
You should arm your leadership team with a deep understanding of the region by conducting a country risk analysis related to your proposed operational plan. Going through this exercise may even open up other opportunities or locations for your business that will allow you to minimize your risk exposure.
