China is an increasingly hostile place for foreign consulting firms

The British Chamber of Commerce in China has deliberately chosen the color red for the cover of its latest resolution on doing business in the world’s second largest economy this year.

While the color is auspicious in China, in the West it can indicate negativity and obstruction, such as on stop signs and traffic lights.

This ambiguity is intended 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 after the group accused Beijing of economic coercion and militarization of the South China Sea following the G7 summit in Hiroshima at the weekend.

Micron’s ban comes on top of a series of raids on foreign consulting firms in China in recent weeks, which have included the detention and disappearance of five employees of US firm Mintz and the banning of auditor Deloitte.

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Uncertainty is growing despite the fact that the Communist Party is starting the year with a more positive message. At the annual “two-session” session of China’s parliament in March, the new premier, Li Qiang, sought to emphasize that the country was once again open for business.

Li said he had been talking to multinational companies, including American companies. “They all told me they were optimistic about China’s future,” he said. He followed this up with speeches and roundtable discussions at the country’s biggest business forums, where he assured CEOs that the worst of zero-Covid was over.

But tensions with the United States, one source of Beijing’s growing mistrust of foreign business, have continued to rise. This was exacerbated by the spy balloon controversy in February.

Each side accuses the other of obstructing attempts to improve communications. “We’re getting this very mixed message,” says Zou Zhibo, deputy director of the Institute for World Economy and Politics at CASS, a think tank with close ties to the Chinese government. He says efforts to repair ties at a November meeting between US President Joe Biden and Chinese leader Xi Jinping fizzled after the US imposed export controls on high-tech. “There is no trust because we don’t know who to trust.”

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For investors, the crackdown on consulting companies had a chilling effect. The authorities’ targets range from run-of-the-mill blue-chip firms such as Bain and deep-due diligence firms such as Mintz to specialist firms that maintain a Rolodex of experts that investors can call upon when considering an acquisition or planning to source goods from a supplier. .

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The raids, for which little or no explanation has been given beyond claims that the suspects shared information deemed relevant to national security, alarm foreign advisers operating in China.

A consultant to a European company says the government has always been keen to control the flow of information. However, it has now classified more and more data as sensitive under the “national security” label. He adds that the increasing emphasis on national security has increased the risks for advisory staff. “I am. . . prepared for anything, if business becomes very difficult,” he says. “I always worry about individual employees.”

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Issues for UK businesses include uncertainty from sudden regulatory changes, such as when the government cracked down on internet platforms in 2021 – and even the end of the zero-covid policy itself, which took businesses by surprise.

The British chamber said that while its members were less pessimistic – 76 per cent this year were more optimistic about business in China, compared to a record 42 per cent at the end of last year – 70 per cent said they accepted the expectation. -and-see approach.

All this contributes to the weaker performance of Chinese stocks and makes it difficult for the country’s economic recovery. As one consultant for an American company puts it, today everyone who has a client in China advises them on risks, from the danger of the Taiwan Strait conflict to how to align their data with Beijing’s changing requirements.

“Boardrooms are obsessed with it. They don’t quite know how to draw the line: “Maybe I should have a smaller footprint in China, maybe I should have less capital there, or maybe I should be more nimble,” he says.

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