Businesses in China face ambiguous national security rules

It is difficult for foreign and domestic companies operating in China to know what is or is not allowed. For the Asian country, national security takes precedence, even at the expense of foreign investment.

Operating in China is becoming more uncertain and risky for companies, even as Beijing says it is reopening after Covid brackets are asked to comply with vague national security rules.

Uncertainty in anti-espionage rules

The latest amendments to the Anti-Espionage Law, which will take effect on July 1, will expand the definition of espionage and prohibit the transfer of information related to national security outside China’s borders.

An ambiguous situation that worries Chinese and foreign companies in China is asking themselves the same question: How do we now know what is allowed or prohibited?

“Companies are scrambling to establish protocols to protect their employees. But the definitions are very vague,” an employee of a major international audit firm told AFP.

“No one knows whether or not he crossed a red line. Or where that red line is.”

Mintz Group offices closed; Five employees were arrested

A red line has been crossed by the US audit firm Mintz Group: In March, police closed its offices in Beijing and arrested five of its employees.

The following month, employees of American strategy and management consultancy Bain & Company in Shanghai said they were being investigated by authorities.

A new red flag at state broadcaster CCTV last week came from a 15-minute report on CapVision, which runs China’s largest group of network experts.

Officials there explained that the raids were conducted at several offices of the company as part of a larger campaign to restructure the consulting sector.

The events “send a worrying signal and reinforce the uncertainty felt by foreign companies in China”, the European Union’s Chamber of Commerce in Shanghai lamented to AFP.

“Recent developments are unlikely to restore confidence or attract foreign investment,” he said.

A pressure that is not new

It’s all about priorities, notes Jeremy Tom of Yale University Law School in the US.

“China believes there are legitimate threats to its national security, and countering these threats will always be prioritized above anything else,” he said.

Lester Rose, a Beijing-based lawyer, said state security agencies have long pushed for stricter scrutiny of sectors that collect large amounts of data.

What are the consequences of the Anti-Espionage Act? Since the original definition of intelligence was already so broad, “the impact of its expanded definition is not immediately apparent,” said Jeremy Tom.

This ambiguity “sometimes makes it difficult for companies to fully assess the risk”, which “inevitably” leads to a “deterrence effect” on them, he told AFP.

“Companies need to be very careful about their information collection” and their sources, Lester Rose summarizes.

According to Bloomberg, the government has also asked public companies to phase out contracts with the Big Four accounting firms (Deloitte, KPMG, EY and PwC).

This discrepancy between recent events and the government’s ambition to attract foreign capital has increased the sense of uncertainty.