How foreign businesses can avoid China’s espionage trap

China’s leaders have pledged “unswerving” support for foreign investment, but authorities there are aggressively investigating consulting firms that facilitate those investments. How should the foreign business community react — and how can honest companies stay out of trouble?

The career intelligence officers reportedly leading the investigations are employing the classic Chinese tactic of “killing the chickens to scare the monkey.” They are making public examples of Bain, Capvision Partners and Mintz Group by detaining employees and closing local offices based on broad, unsubstantiated claims of espionage and threats to national security.

The Chinese refusal to define relevant offenses clearly, or to specify alleged wrongful acts, reflects the longstanding Chinese practice of issuing vague, broadly worded regulations that could have a catastrophic impact on business operations. In the absence of official clarification, businesses must guess at implications as they hope to avoid worst outcomes.

A wide variety of possible explanations have surfaced in the press in recent weeks. Some speculate that the crackdown is part of a wider effort to control publicly available information in China. Others assert that information shared through privately organized export networks sparked concern. Still others believe that Chinese authorities are determined to prevent information exchanges facilitating enforcement of foreign sanctions in China. There is even the suggestion that Maoist ideology explains the current harassment.

But nobody really knows what is behind the crackdown. And that is exactly what the Chinese leadership intends, because regulatory uncertainty intimidates the foreign business community and prevents “misbehavior.”

Companies that want to do business in China are now examining their business operations and speculating on how they can moderate behavior to avoid conflict with authorities. These attempts to self-regulate are complicated by the expanded scope of the recently amended Chinese espionage law, which now covers “documents, data, materials or items related to national security and interests.” This revision means that an espionage law that has always been subject to broad interpretation now makes almost any conceivable business activity punishable as espionage.

The only certain way to avoid official suspicion is to review the activities of Bain, Capvision and Mintz, and not to undertake similar, potentially “seditious” behavior. Fortunately, there is ample public information available about those consulting firms indicating what behavior might be at issue.

Bain is a global management consulting firm that has worked in China for more than 25 years providing corporate advice on how companies can improve sales, operations, organizations, and long-term prospects. Capvision is a research consulting firm that connects investors with subject-matter experts across a diverse range of industries and regions through interviews, surveys, industry research and business conferences. Mintz is best known for conducting background and due diligence checks to help foreign companies avoid risks such as fraud, corruption, regulatory violations and financial losses. All three companies offer insights into a wide range of Chinese industries, including consumer goods, financial services, technology and health care. 

The range of services that the investigated firms provide include strategic planning, product research, market evaluation, sales forecasting, subject-matter expert consultations, competition assessment, due diligence, sanctions compliance, and background checks of employees or partners, to name a few.

So the unrefined message China is sending to foreign investors is that they should avoid the standard business activities described above. The implicit suggestion is that there is no need to assess the market, know local business partners, or understand regulations before investing in China. Conducting research on the ground in China is inadvisable. Another open question is whether any or all of the sectors the three firms monitor and analyze on a daily basis are effectively off limits.

Fussy foreigners may object to these limitations and fret that China is becoming “uninvestible.” China is nonetheless confident that the leadership’s “unswerving” support and the irresistible Chinese market will ensure an uninterrupted flow of foreign investment into China.  

But even China’s leaders might appreciate the wisdom of the Chinese proverb cautioning “when you aim at the rat, beware of the vase.”

Jeff Moon is a China trade consultant who is a former assistant U.S. trade representative for China, State Department diplomat, and business executive in China-related roles.