China consultancy crackdown sends jitters across foreign business

Overseas business lobbies in China said on Tuesday they were unnerved by a sweeping crackdown on consultancy and due diligence firms that is damaging investor confidence in the world’s second-largest economy.

The European Union’s ambassador to China also raised concern about what state media described as “intensifying” law enforcement aimed at protecting national security, and a broadening of legislation that criminalizes the transfer of information and data.

The crackdowns “send a worrying signal and heighten the uncertainty felt by foreign companies operating in China,” the E.U.’s Chamber of Commerce in China said in a statement.

“The developments are not conducive to restoring business confidence and attracting foreign investment.”

Eric Zheng, president of the American Chamber of Commerce in Shanghai, also expressed worries about the crackdown, while calling on authorities to “more clearly delineate” which areas of due diligence were permissible.

“Without proper due diligence, foreign companies will be unable to invest in new projects in China,” he said.

Foreign Ministry spokesman Wang Wenbin said authorities had “brought under control” the relevant companies, while aiming to “promote and standardize the healthy development of the relevant (consulting) industry.” China says it welcomes foreign investment as long as firms abide by its laws.

The scrutiny of consultancies including Capvision Partners, which state media says is aimed at stopping the theft of state secrets including defense and technology, is the latest step in a yearslong campaign to tighten control of information.

“This ... is part of a broader trend in China’s tightening grip on sensitive information, particularly in light of the ongoing tension between China and the United States,” said Ani Chaudhuri, CEO at data security platform Dasera.

“The crackdown on consulting firms may be interpreted as a warning to foreign companies operating in China, highlighting the need for businesses to reassess their data handling practices and security measures.”

On Monday evening, state broadcaster CCTV aired a 15-minute report on Capvision, saying it had accepted projects from overseas companies to source information, including “state secrets and intelligence” on sensitive sectors including defense and advanced technology.

“Some of these enterprises have close relations with foreign governments, military and intelligence agencies,” CCTV said.

From 2017 to 2020, Capvision accepted more than 2,000 remittances amounting to $70 million from hundreds of overseas companies, CCTV added as it carried footage of Capvision’s offices and interviews with state security agents.

An expert hired by the firm was jailed for six years for “stealing, espionage and providing state secret intelligence abroad,” CCTV said.

Capvision said in a statement soon after the broadcast that it would resolutely abide by national security rules. Staff declined interview requests when reached by Reuters on Tuesday.

The CCTV report was the first clear indication of the national security scope of recent police action against several consulting firms.

In March, the Beijing office of U.S. law firm Mintz was raided and five Chinese members of staff were detained. Police visited U.S. management consultancy Bain & Co’s Shanghai office last month.

More scrutiny is expected, state media said.

“The state security organ and other authorities will intensify law enforcement against activities that endanger national security, such as illegal consulting,” the state-owned Global Times said.

Some observers said the scrutiny was retaliation for U.S. attempts to choke off Chinese access to advanced technologies, including semiconductors, that have seen a slew of sanctions imposed on Chinese firms and entities.

“It is a concrete action taken by the Chinese government to step up counteraction against U.S. technology containment,” said Shi Yinhong, a professor of international relations at Renmin University in Beijing.

There is particular concern that changes to the anti-espionage law from July 1 could ensnare more companies.

Jorge Toledo Albinana, the EU ambassador to China, expressed his concern about the beefed-up law earlier on Tuesday saying it was “not very conducive” to China’s aim of opening up to more overseas business.

The revisions will see all documents, data, materials and items “related to national security and interests” given the same protection as state secrets. The law does not define China’s national security or interests.


Related Posts