China Watch: Pursuing Contradictory Policies On Foreign Investment

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SUMMARY: China is encouraging more foreign investment to help its economic recovery, while at the same time tightening data access and cracking down on international consulting firms to reduce transparency.  Beijing is still committed to economic growth and foreign cooperation, but Xi’s new security officials are more hardline and less mindful of economic consequences than their predecessors, suggesting that foreign businesses will face more risks and policy incoherence.

China’s leadership is committed to fostering economic growth and attracting foreign investment, as Beijing focuses on economic recovery after ending its devastating “zero-COVID” policy in December 2022.  On 28 April, Xi chaired a Chinese Communist Party (CPP) Politburo meeting on the economy, highlighting the need for more foreign investment and gradual economic reforms.  The Politburo consists of the most senior 24 CCP and government officials.

• In March, Premier Li Qiang vowed that China was committed to expanding market access and improving the business environment for foreign companies in China.  According to business leaders who have interacted with Li, he is a pro-business pragmatist and is a close ally of Xi. 
• From January to March 2023, foreign direct investment (FDI) grew by 4.9 percent year-on-year, with FDI in high-tech industries seeing an 18 percent increase.  Although many Western businesses are wary of the statist policies under Xi, China’s manufacturing prowess, well developed industrial infrastructure, and sheer market size still make China attractive for investors. 

At the same time, Beijing has tightened data access and launched a series of legal actions against international consulting and due diligence firms, causing serious concerns within the international business community.  In late April, China passed a revised anti-espionage law that broadened the definition of state secrets to include any information related to China’s national security, such as economic and financial data.

• The recent raids against the China offices of the Mintz Group, Bain, and Capvision, which serve international clients, have had a chilling effect on foreign businesses.  US Ambassador to China Nicholas Burn in early May said that foreign firms are delaying major investments in China until they can see greater consistency in messaging from Beijing regarding foreign investment.
• Beijing has also restricted foreign access to Chinese corporate and business databases.  According to a Wall Street Journal article, the government restricted database access after two US-based think tanks published reports on the collaboration between China’s military and private organizations, based on publicly available Chinese-language sources.  These analytic assessments were influential in shaping US policy decisions to restrict technology access to China. 

The crackdowns reflect the leadership’s sensitivity toward information security, as well as recent bureaucratic changes that strengthened the influence of career security officials who are more parochial and less attuned to the big picture than their predecessors.  Since last year, China has installed several new senior leaders to head the CPP’s law and order portfolio and key security ministries. 

• Chen Wenqing, director of CPP’s Central Political and Legal Affairs Commission (CPLC) , which oversees China’s law enforcement, intelligence, and judicial agencies, is a career intelligence and law enforcement officer with no prior economic experience.  Chen led the Ministry of State Security (MSS)—China’s premier intelligence agency—from 2016 until his elevation to the Politburo and CPLC in October 2022. 
• In contrast, Chen’s four predecessors since 1998 all had significant economic and non-intelligence or law enforcement experience prior to running the CPLC.  Three had governed provinces, where economic issues often took precedence.  One served as the chief of staff to the premier, who runs the economy. 
• Wang Xiaohong, deputy director of the CPLC and Minister of Public Security (MPS), is a career law enforcement official with little exposure to economic governance.  He is close to Xi, having worked for Xi when he was a provincial leader in Fujian.  Wang’s predecessors at the MPS since 1998 all had significant prior non-law enforcement experience.  The MPS is China’s leading law enforcement agency, including counterintelligence functions focused on political stability.       
• Previously, Chinese leaders preferred non-security officials with a diversity of experiences to head the CPLC and MPS to better integrate the security portfolio with broader governance issues.  Xi adhered to this tradition until his third term as Party leader, which commenced in October 2022.  This change reflects Xi’s even greater emphasis on internal stability in his third term and his increased ability to overturn prior leadership consensus after ten years of consolidating power.       

Going forward, foreign businesses can still expect senior economic officials to encourage foreign investment and support some reforms such as a gradual expansion of market access, but the risk of running afoul of strict national security laws has increased.  China’s economic team, led by Xi allies Li Qiang, Executive Vice Premier Ding Xuexiang, and Vice Premier He Lifeng, may occasionally push back against aggressive actions by the security services.  Xi’s leadership style—premised on maximizing his direct control—suggests that he may prefer a “team of rivals” approach between his security and economic officials, which makes him the final arbiter on key decisions.