Xi's National Security Agenda: How can governments and businesses de-risk?
Introduction
Under Xi Jinping, ‘national security’ has been placed at the forefront of China’s political and legislative agenda. Understanding what constitutes “national security” within China's Counter Espionage Law and related legislation will prove crucial for individuals and companies, both local and foreign, continuing to operate in China. This paper examines the risks posed to international businesses in Xi’s new area, and makes recommendations to governments and businesses on how to “de-risk” their China operations.
Key point summary
Xi’s expansive definition of ‘national security’ is not confined to conventional concerns of terrorism, separatism, or extremism. Its definition encompasses broad ranging fields across culture, technology, data and cybersecurity, with ramifications across all aspects of the economy.
A raft of new legislation grants the Chinese government sweeping powers to override economic activity in the interests of national security. These laws give a broad remit for the Chinese government to freeze assets, seize data and conduct arrests of businesses and individuals judged to be compromising national security.
As demonstrated by the Chinese government’s recent crackdown on foreign due diligence firms, even routine business operations risk running foul of national security laws. Foreign auditing and legal firms are likely to come under increased scrutiny in coming years, leading to an increasingly challenging business environment.
Businesses and governments must work together to ‘de-risk’ their China operations. Governments should ensure that public funds are not invested in Chinese assets at risk of being caught up in sanctions and counter-sanctions in the event of a geopolitical crisis, as might occur over Taiwan. Businesses should diversify their operations and evaluate their ability to implement exit plans to limit losses in such an event.
Asset managers curating ESG funds must re-evaluate their China investments in light of the difficulties in carrying out human rights due diligence. Government regulation should seek to provide minimum standards and standardised principles around ESG funds, including transparency around due diligence procedures.