China’s crackdown on foreign firms has increased uncertainty

INTERNATIONAL DESK: Multinational corporations in China are facing a dilemma in 2024: Stay, or walk away because of the growing risks of doing business there?

Beijing’s increased scrutiny of Western firms over the past year alarmed international investors at a time of growing tensions between the United States and China. ‘De-risking’ became the byword for wary enterprises.

Anna Ashton, director of the China corporate affairs program at the Eurasia Group, a global political risk consulting firm, told VOA Mandarin in a phone interview, “National security concerns tied to the changing geopolitical landscape and tensions with the United States have prompted Beijing to change some of the rules for doing business in ways that make the environment a lot less certain for foreign companies.

“That, plus the slower than expected return to normal growth after the end of the zero-COVID policies. So, this and geopolitical tensions with the U.S., a sort of sluggish Chinese economy … have been key drivers in terms of making the business environment difficult for foreign companies.”

China’s economic weakness may also be making foreign businesspeople wary. On December 14, the World Bank said in its semiannual regional forecast that it now expects China’s growth rate of 5.2% this year will slow to 4.5% in 2024, down from the 4.8% it expected in April, and 4.3% in 2025.

“The outlook is subject to considerable downside risks,” the report said.

Chinese Premier Li Qiang leaves the stage after delivering his keynote speech at the opening ceremony of the first China International Supply Chain Expo in Beijing, Nov. 28, 2023. Chinese Premier Li Qiang leaves the stage after delivering his keynote speech at the opening ceremony of the first China International Supply Chain Expo in Beijing, Nov. 28, 2023.

Liu Aihua, spokesperson for China’s National Bureau of Statistics said, “Looking to the future, the internal and external environment facing our country’s development is still complex and severe,” according to The Associated Press. “To further promote economic recovery, we need to overcome some difficulties and challenges.”

While Beijing still values foreign investment and is working to attract foreign firms, it is placing a higher priority on national security.

China’s newly revised Counter-Espionage Law went into effect on July 1. The U.S. National Counterintelligence and Security Center issued a warning to U.S. companies before the law was enacted, saying that the new law’s vague definition of espionage gave the Chinese government more access to, and control over, corporate data. What companies considered normal business activities, such as market research, could become criminal activities.

Addressing the law’s vagueness, Elisabeth Braw, a columnist at Foreign Policy and a senior associate fellow at the European Leadership Network, told VOA Mandarin in a phone interview in November that for Western businesses, China is becoming an increasingly difficult environment and unpredictability is the problem.

“Any Western company can be targeted by various government crackdowns related to the espionage legislation,” she said. “Also, whenever the Chinese government wants to retaliate against the Western government, there is a risk that it will use a Western company operating in China as a proxy target. That’s very easy, because what can the company do? It can do nothing.”

In an article Braw wrote for Foreign Policy in April, Braw said China’s difficult business environment is reflected in the fact that political risk underwriters have virtually stopped writing new policies for companies operating in China.

Companies signaled how they felt about the changing environment with their plans to move. In May, Forrester Research, which focuses on technology consulting, decided to close its China office. In June, the Gerson Lehrman Group, which had planned to expand its operations in China in 2023, began layoffs. In November 2023, U.S. asset management giant Vanguard Group and the management consulting polling firm Gallup announced they would be shutting down their operations and withdrawing from China.

Even companies highly dependent on China’s manufacturing sector such as Apple, which launched its Chinese manufacturing operations in 2001, are transferring part of their production lines to countries such as India and Vietnam.

According to data released in early November by China’s State Administration of Foreign Exchange, foreign direct investments were negative $11.8 billion in the third quarter, the first negative figure since recordkeeping began in 1998. (BN)