The crackdown on foreign firms will deter global business—and undermine China’s own interests
Bosses of multinationals may have breathed a sigh of relief after the leaders of the g7 group of rich countries met in Japan last month. The talk was not of decoupling their economies from China, but of de-risking commercial ties with it. Yet any respite will have been momentary. The reality of operating in China is becoming increasingly bleak. As China takes a harsher approach to data privacy and counter-espionage, lawyers and executives say that the mood is tenser than ever. Officials have raided a number of foreign firms, invoking vaguely worded laws concerning data, intellectual property and national security. Since the spring they have searched the offices of Capvision and Bain, two consultancies; and they have detained employees from Mintz, an American due-diligence firm, and Astellas, a Japanese drugmaker. Routine lawyering is now harder. Contracts containing non-public information about state-owned firms could turn out to be breaking the law. Due-diligence firms asking questions about local tycoons could also find themselves in trouble. According to the Wall Street Journal, local branches of asset managers can no longer tell their overseas headquarters the size of their positions in local firms, or the names of their clients. Even forwarding an email signature to a recipient abroad could be judged an infringement of rules governing sensitive personal information. China used to take a lax approach to intellectual-property (IP) rules, partly because its economy needed foreign know-how. Now that it has more ip of its own to protect, it is more stringent. It has also become more guarded about data as it seeks to fend off Western sanctions. To be sure, worries about data security are not limited to China: American lawmakers are clamouring to ban TikTok, an app ultimately owned by a Chinese firm, which they fret might share data with the Communist Party. But two factors make Chinas actions especially chilling for business. One is the opacity that surrounds them. The rules are hazily wordedperhaps by design, to leave officials free to act as they choose. The authorities rarely feel compelled to explain themselves. As a result, most multinational firms worry they could be punished for breaking laws that seem arbitrary. The second is the types of companies being pursued. Professional-services advisers, including lawyers and due-diligence investigators, provide the information companies need to do deals and expand in China. If they cannot operate, their customers suffer, too. This adds up to a tax on global business. Many companies are turning to costly workarounds in order to continue to operate in China. Some are drawing up contingency plans; others are considering hiring staff to ensure compliance with the rules, and developing software to ring-fence data on Chinese operations. At most multinationals these costs will not extinguish the allure of Chinas vast market. In 2021 the 200 biggest global firms made sales of $700bn in the country. But at smaller or less successful firms, they could tip the balance between risk and reward. Others may follow Sequoia, a venture-capital firm, which on June 6th announced plans to break off its China branch. Large yard, high fence Such bluntness could be bad for China. Its approach may keep some secrets out of foreigners hands. But by driving firms away, it is also likely to do itself substantial harm. Officials say they want to attract investment and that China is open for business after years of zero-covid. Their actions belie those words. They also undermine support in the West from the last of the China dovesthe businesspeople and financiers who for years made bumper profits in China, while in turn helping fuel the countrys exporting success. They used to be advocates for a friendlier approach to China. Even today, they are less forceful advocates than they once were. As decoupling becomes a reality, they may fall silent altogether.