China’s launch of a nationwide “anti-spy crackdown” on consulting firms will be a major concern for global investors who were just starting to consider increasing their exposure in the world’s second-largest economy, and is likely to deter many.
On orders from the central government, officials carried out synchronized operations in cities including the financial hubs of Beijing, Shanghai, Shenzhen and Suzhou on Monday, according to a state broadcaster.
The media described the move as “intensifying” law enforcement aimed at protecting national security, and a broadening of legislation that criminalizes the transfer of information and data.
Security authorities in Suzhou raided the local offices of Capvision, a consulting firm with headquarters in New York and Shanghai. Employees were grilled, say reports, and some items were seized, according to the report, which didn’t identify whether other firms were also targeted.
Capvision said in a statement posted to its WeChat account on Monday evening that it will stick to national-security policies and take the lead to guide the sensible development of the consulting industry.
This latest government crackdown has echoes of previous ones – which also served as a deterrent to many foreign investors.
The most infamous one was targeted on China’s biggest tech companies, which began in 2020, with new regulations on financial technology, which forced Jack Ma’s Ant Group to suspend its US$37 billion initial public offering (IPO) days before its launch.
Regulators then targeted the online financial service units of 13 other tech giants, including Tencent, Baidu, JD.com, Bytedance, Meituan and Didi.
“These tech regulations were part of a broader government campaign to curb the country’s private enterprise, which had become too powerful in the eyes of the ruling Communist Party,” says CNN.
In addition, Beijing in effect issued a shock ban on the country’s $100 billion private tutoring sector in July 2021.
However, this year, things appeared to have changed somewhat. Indeed, I wrote in Asia Times in January that “after a series of radical and controversial regulatory crackdowns in recent years, which has impeded growth, the CEWC has stated that science and technology policy must ‘focus on self-reliance and self-improvement.’ This indicates that overreaching regulatory scrutiny may be less intense moving forward.”
And I championed that Beijing appeared to be encouraging foreign investment and trade by expanding market access and giving equal treatment to overseas firms, increasing the protection of intellectual property and other rights, and promoting existing and in-the-pipeline foreign-owned projects.
I suggested that China’s plans would pique global investors’ interest in 2023.
But now I am not so certain. The latest crackdown will, for sure, unnerve investors from overseas.
The crackdowns “send a worrying signal and heighten the uncertainty felt by foreign companies operating in China,” the European Union’s Chamber of Commerce in China said in a statement.
“The developments are not conducive to restoring business confidence and attracting foreign investment.”
Unfortunately, this seems likely.
All eyes from investors around the world will be watching carefully to see how this plays out. Should Beijing rein in its crackdown frenzy, I would still expect that investors will position themselves to seek out opportunities to create and build wealth by increasing exposure in their portfolios to the People’s Republic and its $17 trillion economy.