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Indebta > News > China is an increasingly hostile place for foreign consultancies
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China is an increasingly hostile place for foreign consultancies

News Room
Last updated: 2023/05/23 at 11:56 PM
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For the cover of its latest position paper on doing business in the world’s second-largest economy, the British Chamber of Commerce in China this year deliberately chose red.

While the colour is auspicious in China, in the west it can signify negativity and a barrier, such as on stop signs and traffic lights.

That ambiguity is meant to capture the situation in China today. While sentiment has improved since 2022, when Beijing’s zero-Covid policy crushed the economy, mixed messages and vague rulemaking in critical areas such as data security are keeping foreign businesses on edge.

The latest shock came this week when China banned US chipmaker Micron’s products from critical information infrastructure, following a G7 meeting in Hiroshima at the weekend, in which the group accused Beijing of economic coercion and militarising the South China Sea.

The Micron ban comes on top of raids in China on foreign consultancies in recent weeks, which included the detention and disappearance of five employees from US company Mintz, and a ban on auditor Deloitte.

Uncertainty is increasing despite the Communist party starting the year with a more positive message. At the “two sessions” annual meeting of China’s parliament in March, the new premier, Li Qiang, was at pains to stress the country was open for business again.

Li said he had chatted with multinationals, including US companies. “They all told me that they were optimistic about the future” of China, he said. He followed this up with speeches and roundtables at the country’s biggest business forums, in which he assured chief executives that the worst of zero-Covid was over.

But tension with the US, which is one source of Beijing’s increasing distrust of foreign business, has continued to fester. It was exacerbated by February’s spy balloon controversy.

Both sides accuse the other of obstructing attempts at repairing communications. “We’re getting this very mixed message,” says Zou Zhibo, deputy director of the Institute of World Economics and Politics at CASS, a think-tank that is closely affiliated with the Chinese government. He says that efforts to repair relations during a November meeting between US president Joe Biden and Chinese leader Xi Jinping went sour after the US imposed export controls on high tech. “There’s no trust because we don’t know who to trust.”

For investors, the clampdown on consultancies has had a chilling effect. The authorities’ targets have ranged from ordinary blue-chip firms such as Bain and deep-dive due diligence groups such as Mintz to expert companies that keep a Rolodex of specialists that investors can call when exploring an acquisition or planning to source goods from a supplier.

The raids, for which there has been little to no explanation beyond allegations that the suspects were sharing information deemed relevant to national security, have alarmed foreign consultants operating in China.

One consultant at a European firm says that the government had always been keen to control information flows. But now it was classifying more and more data as sensitive under the “national security” label. He adds that the increasing emphasis on national security has raised the risks for consultancy staff. “I’m . . . prepared for everything if it becomes really hard businesswise,” he says. “What I’m always worried about is individual employees.”

For UK businesses, the problems include uncertainty caused by sudden regulatory changes, such as when the government cracked down on internet platforms in 2021 — and even the end to the zero-Covid policy itself, which caught businesses by surprise.

The British chamber said that while its members were less pessimistic — this year 76 per cent were more optimistic about business in China compared with a record 42 per cent who were pessimistic at the end of last year — 70 per cent said they were adopting a wait-and-see approach.

All of this is contributing to lacklustre performances in Chinese equities and weighing on the country’s economic recovery. As one consultant at a US company puts it, everyone with clients in China today is advising them regarding risk, ranging from the danger of conflict in the Taiwan Strait to how to make their data compliant with Beijing’s changing requirements.

“Boardrooms are obsessed with this. They’re not quite sure how to draw the line: ‘Maybe I need to keep a lighter footprint in China, or maybe keep less capital there, or be more nimble’,” he says.

joseph.leahy@ft.com

Read the full article here

News Room May 23, 2023 May 23, 2023
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