China’s Terms for Foreign Investment Remain Unclear

China wants foreign investment, but it wants them on its own terms. However, Beijing’s terms aren’t clear for now — and it’s raised concerns and triggered second guessing in the global business community.

Last Monday, state broadcaster CCTV singled out a consulting company for not complying with China’s national security laws. Shanghai-based Capvision Partners was just the latest company recently subjected to such investigations in the mainland.

At a time when China is actively encouraging foreign investment into the world’s second-largest economy that has been deeply hurt by the country’s long-held zero-Covid policy, such an escalation in China’s concerns about data is hurting sentiment and seems at odds with its overt claims of openness.

Chinese Law Enforcement Actions Seen as Arbitrary

“The enforcement actions seem very arbitrary now,” Lester Ross, a foreign lawyer in China. “To have multiple companies involved now in this crackdown and the restriction of financial data to foreigners, it appears that Chinese security departments are on to something larger.”

“A major question about Chinese law generally is the need for greater precision in delineating what’s permissible and what’s not: so much of what is now regarded as national security or state secrets is not sufficiently defined or classified,” Ross added.

Accusations Against Capvision

The accusations against Capvision included claims the consultancy was among those used by foreign institutions with “complex backgrounds” as a pretext to steal state secrets and intelligence in key sectors while evading the law. Chinese authorities alleged that Capvision accepted more than 2,000 remittances from hundreds of overseas companies totaling $70 million between 2017 and 2020.

The CCTV program also claimed to feature one of Capvision’s experts who was convicted of disclosing information relating to the number of unnamed military aircraft on the inventory of a particular institution or company.

Foreign Vested Interests Risk Heightening Uncertainty

The recent investigations “risk heightening uncertainty at a time when European companies are looking for clear signs that China’s business environment is becoming more reliable and predictable,” the European Chamber of Commerce in China said in a statement. “The European Chamber respects the rule of law and expects it to be followed in these cases.”

Business Due Diligence in a Transparent Business Environment

Without more details on what is permissible could make it more difficult for prospective investors to do their due diligence before committing to deals, particularly given the nature of doing business in China. “I am not sure if the Chinese government is interested in being more precise about what it means,” the professor added. “After all, ambiguity and lack of clarity is a tool commonly used by authoritarian governments to retain and enhance its control.”