Chinese authorities have conducted an investigation into consulting firm Capvision Partners, state media CCTV reported on May 8. CCTV said investigations by Chinese national security agencies had found that foreign institutions have used domestic consulting firms to steal state secrets and intelligence on areas important to China.

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China wants foreign investment, but it wants it on its own terms.

But Beijing’s terms are not clear for now – and that has raised concerns and second-guessing in the global business community.

Last Monday, state broadcaster CCTV Pointed out a consulting firm for does not follow National Security Laws of China.

Shanghai-based Capvision Partners was just the latest firm to come under such scrutiny on the mainland recently. In March, American due diligence companies Mintz told Reuters police raided its Beijing office and arrested some of its Chinese staff. In April, the American management consulting company Bain & Co reportedly confirmed The police visited the office in Shanghai.

These companies provide due diligence services, which companies and investors routinely use to determine whether suppliers are complying with rules and regulations – not only in China but also in other jurisdictions. They also audit supply chains, among many other services.

At a time when China is actively encouraging foreign investment in the world’s second-largest economy, which has been deeply affected by the country’s long-standing zero-Covid policy, such an escalation of China’s concerns about data hurts sentiment and seems at odds with its open claims of openness.

“It may seem like a paradox,” said Chong Ja Ian, an associate professor at the National University of Singapore who studies Chinese foreign policy. “But this is consistent with what we’ve seen from China’s current leadership: they want more control over all aspects of society.”

“This is a government that built its legitimacy on performance, so they would be keen to maintain a perception of control when the country is facing more pressure from different quarters now,” he told CNBC.

… So much of what is now considered national security or state secrets is not adequately defined or classified.

In an ordinary press conference led by China’s Ministry of Foreign Affairs a week ago, Beijing seemed keen to downplay the Capvision probe as an isolated incident.

“These are normal law enforcement measures in accordance with Chinese laws aimed at promoting the healthy and well-regulated growth of the relevant sector and protecting national security and development interests,” said ministry spokesman Wang Wenbin.

“arbitrary” enforcement

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“The enforcement actions seem very arbitrary now,” Lester Ross, a foreign lawyer in China, told CNBC. “Having multiple companies now involved in this crackdown and the restriction of financial information to foreigners, it appears that Chinese security departments are onto something bigger.”

“A big issue about Chinese law generally is the need for greater precision in delineating what is permitted and what is not: so much of what is now considered national security or state secrets is not sufficiently defined or classified,” it added Ross.

Leaked state secrets?

The allegations against Capvision included claims that the consultancy was among those used by foreign institutions with “complex backgrounds” as a pretext to steal state secrets and intelligence in key sectors while circumventing the law. Chinese authorities alleged that Capvision accepted more than 2,000 remittances from hundreds of foreign companies totaling $70 million between 2017 and 2020, according to a CNBC translation.

State-owned CCTV claimed that Capvision tapped into a large “network of experts” of around 300,000 people in fields ranging from domestic policy research, national defense and military technology to banking, finance and medicine.

The CCTV program also allegedly featured one of Capvision’s experts who was convicted of revealing information about the number of unnamed military aircraft in the inventory of a certain institution or company, according to a CNBC translation.

A construction official stands outside Capvision’s office in Beijing on May 10, 2023. China said on May 9 that a raid by authorities on US consultancy Capvision’s office in the country was aimed at protecting its “national security and development interests”.

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In a sign that last week’s state media report has sparked plenty of business reassessments, the state-owned Securities Times reported last Thursday that Chinese regulators have instructed mainland Chinese brokerage firms to strengthen compliance with sensitive information, expert invitations and interviews.

The American and European chambers of commerce in China also expressed concern.

The latest investigations “risk increasing uncertainty at a time when European companies are looking for clear signs that China’s business environment is becoming more reliable and predictable,” the European Chamber of Commerce in China said in a statement. “The European Chamber respects the rule of law and expects it to be followed in these cases.”

Last Wednesday, Capvision pledged to “actively address” claims by Chinese authorities about the company’s neglect of its national security responsibilities, after forming a three-person internal “compliance committee” headed by its chief executive Xu Rujie.

“We are deeply aware that we have failed to fully fulfill national security responsibilities in our past business activities and there are major hidden dangers and loopholes that have led to serious danger to the country’s national security,” the Shanghai-based company said in a statement , according to a CNBC translation.

Without more detail on what is allowed, it could make it more difficult for potential investors to do their due diligence before committing to business, especially given the nature of doing business in China.

“In a state-run economy like China’s, many local Chinese companies would have connections with the government at various levels,” says NUS’s Chong. “So some commercial data would inevitably have political and national security implications.”

“I’m not sure if the Chinese government is interested in being more precise about what that means,” the professor added. “After all, ambiguity and obscurity is a tool often used by authoritarian governments to maintain and enhance their control.”