In a move that has captured many eyeballs, China’s National People’s Congress Standing Committee approved revisions to the ‘Counter-Espionage Law’ in April 2023. 

The new rules, combined with police raids on established US consultancies, signal a remarkable shift in the country’s approach towards foreign direct investment (FDI), engendering vital questions about its future trajectory. 

Doing business in China has always been a balancing act for foreign investors. So far, the opportunities of its vast, cost-convenient labour force, combined with the huge size of its domestic market, have outweighed the challenges of navigating its complex business environment. It’s fair to wonder if that’s still the case. 

Western multinationals have played a key role in China’s economic rise. 

In exchange for hefty profits, they have brought in leading-edge technology, management proficiency and precious market knowledge, bridging the divide between China’s domestic businesses and global markets. 

The latest developments threaten to place pressure on this mutually beneficial relationship.

The expanded anti-espionage law in China now encompasses disconcertingly vague provisions that grant state security agencies significant leeway in identifying and scrutinising potential espionage activities related to “documents, data, materials or items” associated with national security and interests. 

Additionally, the new Article 4(2) implies that not only active participation or receiving tasks from espionage organisations or their agents, but also any intention to associate with them, may be deemed espionage. 

The Chinese term used in this context, 投靠, can be interpreted as “affiliating or aligning with”, as well as “joining forces with” these entities. This ambiguity raises the possibility of imposing penalties for seemingly harmless interactions between foreign individuals.

Such extensive rules, together with the investigations into Capvision, Bain & Company and Mintz, have made the risk profile of investing in China significantly murkier. 

The peril of businesses unwittingly getting involved in espionage allegations is more than a conjectural worry. The current feeling among foreign businesses in China is one of apprehension and wariness. 

China’s increasingly hostile posture towards foreign companies may be rooted in its confidence that as its domestic firms ascend the technological hierarchy, it can afford to let go of the support from multinationals. 

This, however, neglects the ongoing significance of FDI in enabling China’s continued economic development and technological progress.

National security is a valid concern for all countries, and it is recognised as a reason for limiting foreign investments under international investment law. 

However, using national security as a disguise for economic protectionism could sabotage the credibility of national security measures and create uncertainties for foreign investors. 

In order to ease the investors’ anxieties and sustain its economic momentum, Beijing needs to rethink its stance towards FDI. 

It is critical to clarify what is considered espionage and to distinguish it from legitimate industrial intelligence. 

There is an essential need to align national security interests with investment liberalisation.

While the consequences of China’s expanded anti-espionage law are still to be fully revealed, one fact remains clear: for foreign businesses in China, the stakes have never been greater. 

Julien Chaisse is professor of law at City University of Hong Kong and president of the Asia Pacific FDI Network. Twitter: @JChaisse

This article first appeared in the June/July 2023 print edition of fDi Intelligence