Executives Operating in China Face Geopolitical Risk
It is essential to evaluate geopolitical risks before considering expanding into China to protect your company and its staff.
International Companies and Their Leaders in China are Growing Concerned
China’s regulatory enforcement has been tightened since Xi Jinping became president, putting foreign investors and executives in a dangerous situation. The government has become more autocratic as the Chinese Communist Party consolidates its grip on business.
Beijing has taken more aggressive and strict measures against the international private sector and foreign companies as a result of COVID-19 and increased conflicts with Western countries and neighboring nations. Business Risk Management It is essential for foreign businesses in China to understand the potential dangers linked to this change and consider how it could affect the safety and protection of their business activities and employees.
China’s Focus On Targeting Business Executives
There has been a rise in China’s detention of foreign business leaders and staff, as well as searches of Western companies’ Chinese premises. Reports have emerged of unexplained disappearances and arbitrary arrests of both foreigners and Chinese nationals. Notable cases, like the disappearance of Chen Shaojie, the chief executive of the Chinese live-streaming platform DouYu, have brought attention to this issue. Shaojie’s disappearance occurred following scrutiny from China’s internet regulator, adding to a growing list of business executives who have vanished in China over the past decade.
These detentions have been linked to geopolitical events and competition between China and its major global rivals. In 2021, two Canadian businessmen returned to Canada after being detained for three years in China. This action came after China detained Canadian citizens in retaliation for the arrest of a Huawei executive in Canada on a US warrant.
The Chinese government has dismissed any suggestion of a correlation between the recent arrests of Canadian businessmen in China and the detention of a Huawei executive in Canada. Despite this, the proximity of these events has raised suspicions of a potential link. This kind of situation is familiar, as China has been accused of practicing hostage diplomacy by detaining foreign individuals and executives during diplomatic conflicts to gain advantages in negotiations.
The Implementation Of Stricter Legislation
In April 2023, China revised its counterespionage laws, stating that all materials related to national security and interests are protected as state secrets. However, the law does not clearly define what constitutes national security. The authoritarian government in China raises the chances of foreign professionals being seized or arrested without reason, and the introduction of new regulations that strengthen state control also presents substantial threats to foreign companies.
Moreover, China introduced new legislation in 2021, including a data security law and a personal information protection law. These regulations have increased concerns about the transfer of data, particularly for businesses in China that exchange data with parties located abroad. Similar to the 2023 counterespionage laws, these legislations vaguely reference national security concerns, leading to confusion about how to navigate data policies without attracting scrutiny from authorities.
Who Is Most Vulnerable?
Since the beginning of 2023, Chinese officials have focused on various foreign firms that conduct due diligence and consulting services, claiming national security reasons as their basis. The security personnel of the People’s Republic of China (PRC) have carried out searches on the premises of multiple American businesses, leading to questioning, confiscation of assets, and the imprisonment of domestic staff members. Think tanks and due diligence firms such as the Mintz Group, Bain and Company, and Capvision have been singled out due to suspicions of sharing sensitive data and intelligence about Chinese firms, the economy, and institutions deemed threatening to national security by the Chinese government.
International firms of this nature operating in China face heightened risks of surveillance, investigations, raids, and employee detentions by Chinese authorities, driven by loosely defined and applied data security and counterespionage legislation.
While all foreign companies operating in China encounter risks, certain industries should exercise additional caution:
- Think tanks and consulting firms
- Due diligence firms
- Data brokers and technology firms
- Social media and other cultural entities
- Companies based in countries considered geopolitical competitors of China (e.g., US, Japan, Taiwan, UK, among others)
- Businesses associated with ethnic minorities (such as Uyghurs and Tibetans)
- Companies heavily reliant on Chinese suppliers and labor for their operations
- Banking and financial services sector
The Economic Repercussions Of The Emerging Risks Associated With China
Due to the waning confidence, investors are increasingly hesitant about investing directly in China. Investors around the world are becoming more cautious about investing in China due to a number of factors. These include increased scrutiny on foreign companies, geopolitical uncertainty, and pandemic-like effects. The decline of foreign direct investments in China was a clear indication that this hesitation existed.
The increasing number of detentions and disappearances of business executives has significantly dampened confidence in the Chinese market. Travel restrictions and office raids have raised concerns among foreign firms operating in China. This has prompted worries among companies and investors regarding the security of their employees, data, and intellectual property, which have often been compromised due to evolving legislation.
China has implemented strict COVID-19 regulations that have disrupted supply chains. This further increases the uncertainty surrounding China’s position in the region. This has created potential risks for global companies, especially those from countries with strained relations with China. To prepare for potential conflicts related to Taiwan, international companies must assess the risks of conducting business in China and plan for potential consequences on their operations and supply chains.
The increasing discontent over how China is treating Uyghur Muslims in Xinjiang, along with the potential for economic sanctions and other consequences from the global community, are also threats to supply chains and foreign entities.
Information You Must Understand
Even with the risks mentioned earlier, China remains a significant economic market, attracting many American and global companies. Before venturing into the country, it is crucial to comprehend the direct and indirect risks facing your company and executives.
Equipping your leadership team with a comprehensive understanding of the region is essential. This can be achieved by conducting a country risk analysis tailored to your proposed operational plan. Such an analysis may reveal alternative opportunities or locations for your business, enabling you to mitigate risk exposure effectively.