China Power | Economy | East Asia

Why Foreign Companies Are Re-assessing Their China Portfolio

From the National Intelligence Law to two new State Council decrees, China’s official messaging on foreign investment doesn’t match the actual developments on the ground.

China has recently gone to great lengths to ensure the world knows it is open for business. President and General Secretary of the Chinese Communist Party, Xi Jinping, has repeatedly taken it upon himself this year to deliver that message to key world leaders and corporate heads.

“Over the next five years, China will continue to promote high-quality development and expand high-standard opening-up,” Xi told Irish Prime Minister Micheal Martin in January. Xi also expressed a willingness “to step up economic and trade cooperation, seek synergy of development strategies in such areas as artificial intelligence, the digital economy, and pharmaceuticals and health, and encourage two-way investment,” according to the Chinese Foreign Ministry readout.    

Then, later that month, Xi made his pitch to the now-outgoing British Prime Minister Keir Starmer. “As China kicks off its 15th Five-Year Plan, the two sides may expand win-win cooperation in the services sector,” Xi proposed, specifically mentioning cooperation in “education, health, and finance, and… joint research and commercial application in artificial intelligence, life sciences, new energy, and low-carbon technologies for shared development and prosperity.”

And in May, on the occasion of a state visit to China by U.S. President Donald Trump, Xi met with members of a high-level business delegation who accompanied Trump.  The delegation roster reads like a who’s who of global business: Elon Musk of Tesla and SpaceX, Jensen Huang of Nvidia, Tim Cook of Apple, Larry Fink of BlackRock, Kelly Ortberg of Boeing, and many others.

Xi reportedly told the line-up of executives that China “will only open its door wider” and that “China-U.S. economic and trade ties are mutually beneficial and win-win in nature.”

At the same time, for many companies considering first-time or further investment in China, other recent events have brought into question the safety and viability of those potential investments.

China has, over the past few years, issued new laws and decrees that impact the degree to which Chinese citizens are obligated to act as informants to the government. Effectively, these laws require ordinary people to act as eyes and ears of state security, reporting suspicious and seditious behavior, as well as anything they suspect could adversely impact the national security of China.

It is inevitable that these laws would dampen the enthusiasm of foreign companies to invest in China. Any company would be reluctant to put their treasure and trust into a country that has turned its citizens – including the employees of their very own foreign-invested enterprises – into intelligence assets, under penalty of law. 

That may be the deciding factor against investing in China for the time being, especially as one goes up the value chain. The higher the value of the technology, the more it will attract attention and interference from the Chinese government. Foreign companies may increasingly find that other low-cost options are safer and more welcoming.  

This is a difficult problem for China. Historically, nothing is more important to the Chinese Communist Party (CCP) than propagating its own position as the single defining and leading force of Chinese power. Thus, the party must ensure its own health before taking into consideration the impact that has on other aspects of China’s development, including the economy.  

It is fair to say that China is in a full defensive posture at this moment in its history.  As long as that holds true, the CCP would sacrifice anything, including much-needed foreign investment, in order to preserve itself. 

China’s Complicated History With Foreign Businesses

Of course, the CCP has always exerted control over foreign investors. The difference between 40 years ago and today is not the substance of China’s control, but the methods. There may not have been a national security law in 1986, for example, but the CCP’s surveillance of, infiltration into, and varying levels of control over foreign invested enterprises were still there. 

The Canadian government made this very point in its summary of China’s National Intelligence Law. “Like much of the past state security legislation,  the law makes explicit what has long been done in practice,” the report concluded. 

The primary difference between then and now is that the activities that allowed China to infiltrate and access information and intellectual property held by foreign-invested enterprises are more sophisticated. Today, these extraction efforts rely on digital technologies, compared to just a paper trail in the 20th century.  But the motivation has remained the same.  

That also goes for new requirements to have CCP members in foreign companies in China.  Today’s CCP has codified that requirement; two to four decades ago, it was simply done. A member of the Chinese government team helping a foreign company set........

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