Xi’s China has become too risky for foreign businesses

China’s economy is losing momentum. Government officials say they want to attract more foreign investors as one way to boost economic growth, but they have a strange way of showing it.

Recent moves, such as aggressive police raids against foreign businesses and the withholding of basic economic data are akin to putting up a “Do Not Enter” sign. 

The harder the Chinese Communist Party clamps down on news, views and data that don’t fit its preferred narrative, the greater the investment risk and the harder it will be for China to tap global capital markets.

Economic data show just 0.8 percent growth in this year’s second quarter, down from 2.2 percent in the first quarter. A prolonged real estate slowdown, deflationary pressures and high youth unemployment don’t bode well for the next quarter, either.

In an effort to turn things around, the People’s Bank of China cut benchmark interest rates and injected liquidity on Tuesday. Another lever the Chinese government is reaching for is foreign investment. For decades, the sheer size of China’s market was enough to make it one of the top destinations for multinational corporations looking to expand operations.

But it’s not clear that market size alone is enough anymore. Bloomberg reports that “local officials are cold-calling foreign entrepreneurs” and that those “efforts are being met with a lukewarm reception.”

To lure foreign investors, China’s state council published a plan last month with lower tax rates for foreign firms in China, ease of obtaining visas and residence permits for employees of foreign firms, and relaxed regulations on overseas data transfers.

Time will tell how effective those sweeteners will be, but the looming question is whether it will be enough to counteract the increasing threat of your office getting raided, your employees getting detained, or worse.

International businesses know that China has broadened the scope of its counterespionage law this year. According to the National Counterintelligence and Security Center, the law expands the definition of espionage far beyond just state secrets and intelligence, “to any documents, data, materials, or items related to national security interests, without defining the terms.”

Bill Bishop, who publishes a newsletter on China that is trusted by global diplomats and policymakers, made note of a recent WeChat post from the country’s Ministry of State Security. The translation was chilling: “Counter espionage requires the mobilization of the entire society!”

Businesses also know that in March, Chinese authorities detained a senior Japanese employee of drugmaker Astellas Pharma as he was boarding a flight back to Japan. China claims he was engaged in espionage activities, which Japan denies. 

The government’s potentially all-encompassing definition of espionage, combined with these recent events, is alarming. It suggests that if you are a foreign firm in China, and Chinese authorities believe that your company has obtained information in a document or data that somehow relates to national security — however ill-defined that may be — then your firm could be subjected to one of those raids. Also, any of your employees in China, whether nationals or expats, could be questioned or even jailed.

What if your company is in the business of gathering business intelligence? Consider Capvision, “a global primary research platform connecting financial institutions, consulting firms, global enterprises.” Their Shanghai office was raided earlier this year. Their entire business model is built on providing industry expert knowledge services. That means their employees compile information about Chinese markets, companies and policies for foreign clients working in China. If one of their clients seeks market information on a sector that the CCP considers of national security importance, will its employees be at risk? 

China’s state broadcaster, CCTV, named defense, finance, energy and health as key industries. Does this mean foreign firms looking to do business in China in those sectors can no longer get market information?

China announced this week that it will no longer report youth unemployment data. What if an economic consulting firm attempts to estimate youth unemployment. Will that be considered espionage?

Uncertainty raises the risk premium so that the expected returns must be greater for the investment to occur. Greater uncertainty lowers investment from both large and small firms, but the negative impact is much greater for small firms, perhaps including those entrepreneurs whom local Chinese officials were calling. Greater uncertainty can also the reduce responsiveness of investment to demand shocks.

In other words, when China’s economy does turn around, investors may be wary of jumping back in.

Christine McDaniel is a senior research fellow with the Mercatus Center at George Mason University.