Foreign businesses in China fear they're being targeted in a 'campaign' of government crackdowns. It's probably not that simple.

Tanner Brown

Experts say U.S.-China tensions are indeed complicating corporate relations, but messier bureaucratic matters are just as important

Foreign investors and businesspeople with exposure to China are becoming increasingly unnerved. And for good reason.

In March, Chinese authorities detained an employee of Japanese drug manufacturer Astellas Pharma (4503.TO) for alleged espionage violations. The Chinese seem confident in their case. Beijing's ambassador to Japan said there was ample evidence of wrongdoing, and, despite the uproar, the Astellas employee remains detained.

That same month, Chinese authorities raided the office, and detained five Chinese employees, of U.S. corporate due-diligence company Mintz Group and shuttered its Beijing office. Weeks later a similar scene unfolded at the U.S. consulting firm Bain & Co.'s Shanghai office.

Days later, American chip manufacturer Micron Technology (MU) fell under a cybersecurity investigation that Chinese authorities said was intended to secure its supply chain for vital tech infrastructure.

Amid this, China has prevented numerous Chinese and foreign businesspeople from leaving the country, who may face a legal labyrinth in China's opaque judicial system if accused of wrongdoing.

This spate of corporate hypersupervision comes as China vastly expanded its already controversial anti-espionage law last week. The newest provisions restrict disclosing even previously public financial information to outsiders; more easily allow raids, such as those against Bain and Mintz, on overseas firms; and confer new authority to detain purported suspects and deprive them of freedom to leave of country.

From the archives (April 2023):China is not only asserting itself geopolitically but openly questioning the U.S.'s central role on the world stage

Investors and businesspeople are horrified, for the most part.

But experts say the situation is messier than it appears, and several distinct factors are involved.

"I have not seen any evidence of the institution of a 'political campaign' against foreign business," Lester Ross, chair of the policy committee at the American Chamber of Commerce in China, told MarketWatch.

"There's no evidence of any connection between the incidents that you listed," added Colin Hawes, a law professor at the University of Technology Sydney and author of "The Chinese Corporate Ecosystem."

They involve different industries and government regulators or agencies, whose decision making is surprisingly fragmented, he said.

The Bain and Mintz raids are much more likely to be part of an anti-corruption investigation, Hawes said. "Or because they stepped on the toes of some powerful Chinese official, as occurred with another due-diligence firm headed by Peter Humphrey several years ago."

The recent unfoldings feature disturbing echoes of the Humphrey case. On Friday, Humphrey himself wrote online, "The biggest risk is that you tread on the toes of someone you investigate by finding out things they don't want to be known. And if they are connected to the Communist Party, they will then leverage their contacts to get you arrested."

By contrast, the case of Japan's Astellas Pharma is almost certainly an espionage issue, Hawes said, "and not [linked to] any hot-button trade-related industries like chips or networks."

A recurrent theme from experts on China corporate law is their insistence that what may often seem like campaigns are instead representative of mere jockeying among rival government divisions or bumbling bureaucracies.

The latest series of "crackdowns" shows the conflicted nature of Chinese law and politics at this juncture, said Bing Ling, professor of Chinese law at the University of Sydney Law School. There are national-security concerns, geopolitical considerations, the legal system's growing experience with international business, and so on.

This, of course, contradicts the "China is now open for business" campaign launched early this year, spearheaded by the new premier, Li Qiang, and backed vocally by President Xi Jinping. "It is difficult as usual to forecast how the balance will shift in the future," Bing told MarketWatch.

From the archives (March 2023):China's Xi is tightening his grip on power. He's also centralizing economic and technology oversight

Not only interdepartmental infighting but personnel-level issues may be at play.

"Recent events may have to do with leadership reshuffling of the security agencies. Hopefully it will calm down after a few months," said Victor Shih, incoming director of the 21st Century China Center at the University of California, San Diego.

But all agreed on one thing: that U.S.-China tensions are a key component of Beijing's tightened corporate oversight, and the worse the former get, the tighter the latter will become.

"Much may depend on how the Sino-U.S. tensions will evolve and how they are received by the leadership," said Bing.

Others put it more gloomily.

This corporate combativeness hinges on the "extreme and rigid position on national security in both Beijing and Washington," said James Zimmermann, longtime China-based businessman and former chairman of the American Chamber of Commerce in China.

"Both sides have hollowed out any level of collaboration, and there is little room for developing even a pretense of goodwill. Someone is bound to get hurt in this tetchy environment," he told MarketWatch.

University of Technology Sydney's Hawes was even blunter. "The constant recent U.S. political attacks and draconian sanctions on China will definitely impact the way that these cases play out," he said.

Chinese authorities will no longer exercise leniency or avoid prosecuting American firms to maintain the bilateral relationship, and "behind-the-scenes diplomatic support will be less effective in resolving any charges," he said.

Things may be most contentious with the U.S., but as we've seen with the Japan case, tensions are by no means confined to Washington.

"Businesses from countries which have recently taken a harder line against Chinese military and foreign policies," said AmCham China's Ross, "are also more vulnerable."

Tanner Brown covers China for MarketWatch and Barron's.

More recent dispatches from Tanner Brown:

China is not only asserting itself geopolitically but openly questioning the U.S.'s central role on the world stage

Obstacles remain on China's path from 'zero COVID' standstill to breakneck-pace consumption

Chinese economic data paint an upbeat picture. U.S. companies operating in China are not buying it

-Tanner Brown

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05-09-23 1319ET

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