The story so far: Late in May this year, the Cyberspace Administration of China announced that the U.S. chip giant Micron, which had been under investigation by the Cybersecurity Review Office, failed to obtain a security clearance, and that its products posed a threat to national security. Consequently, business operators tied to critical information infrastructure were advised not to procure Micron products. This is the latest incident in a series of crackdowns by the Chinese government against American consultancies and domestic firms dealing with overseas clients.
What are the other instances?
Two weeks before the Micron announcement, the Chinese authorities had raided the offices of Capvision, a Shanghai-based consultancy firm that connects lakhs of China-based experts with backgrounds in defence, military, finance, high tech, trade, energy, and medicine among others, to mostly overseas clients. Capvision was charged by Chinese security authorities with using economic inducements to steal state secrets and facilitating the transfer of sensitive information sourced from its experts, to its foreign clients. In the process, the company was found guilty of violating several laws relating to national security.
Before that, in April this year, the offices of American consultancy firm Bain and Co. were raided and its employees in China questioned. While no employee was detained, the authorities seized computers and phones from its offices. In March too, Chinese authorities raided another American firm called Mintz, and detained some of its employees, forcing the firm to shut its two offices in Beijing. Meanwhile, the Chinese government has been stalling several mergers and acquisition applications involving foreign entities, which has, in turn, led to mounting operational costs for foreign businesses.
Why is the Chinese government cracking down on such firms?
In October 2022, the U.S. tightened export controls which would make it harder for China to obtain and manufacture advanced computing chips and supercomputers. Therefore, at the outset, the actions by Chinese authorities appear motivated by vengeance against the U.S.-led efforts to constrain China’s tech advancement, as has been widely reported in the Western media. By heckling American firms and restricting their access to the vast Chinese market, Beijing seeks to capitalise on the divergence that exists between the U.S. administration and the American business community over the former’s China policy. Observers felt vindicated when Nvidia’s founder and CEO, Jensen Huang, expressed his reservations over U.S.’s export control measures against China. He feared a fallout on Nvidia’s revenues as China contributes to around 11% of its global earnings. In his statement to the Financial Times, Jensen even called China more valuable than Taiwan, owing to its irreplaceability as a large market.
The crackdown on consultancy and due diligence firms is likely to have ripple effects across all overseas businesses operating in China. Businesses rely on consultancy firms to navigate the regulatory environment which may prove to be challenging, especially in a country like China where regulatory unpredictability and uncertainty have been a norm in the last few years.
However, the above perspective amounts to a limited understanding of the motives of the Chinese authorities. There is a domestic component to these decisions that is different from the one that has largely been featured by mainstream media.
Why has security come to the forefront in Chinese politics?
Beijing has justified each of the above-discussed actions using national security concerns. However rhetorical as it may sound, the reality is that threat to security has become a ubiquitous concern in all aspects of governance in China.
Under President Xi Jinping, Chinese discourse on national security has repeatedly underlined that the idea of ‘development’ cannot be isolated from that of ‘security’. On numerous occasions, including at the 20th Party Congress last year and the Two Sessions (the annual plenary sessions of the National People’s Congress and of the Chinese People’s Political Consultative Conference) this year, Mr. Xi emphasised the need to balance development with security. At the recently concluded meeting of the Central National Security Commission (CNSC), Mr. Xi said, “it is necessary to ensure the new development pattern with the new security pattern, actively shape a favourable external security environment for China in order to better safeguard its opening up and push for a deep integration of development and security.” It is fairly evident that Mr. Xi wants the developmental agenda to be qualified by security.
China’s incessant attempt to securitise its development has meant that non-traditional security issues have acquired greater significance in its developmental narrative. And among all the non-traditional security issues, cybersecurity and data/information security seem to concern Chinese authorities the most. This is apparent in their recent attempts to strengthen cybersecurity and counter-espionage laws.
The recently amended Counter-Espionage Law that will come into effect from July 1, 2023, aims to treat all “documents, data, materials, and items relating to national security and interests,” at par with state secrets, thus, broadening the scope of espionage. It also expands the definition of espionage to include cyberattacks against state organs or critical information infrastructure. The revised law also empowers authorities to seize data, electronic equipment, information on personal property, and even ban border crossing. Following up on the above amendments, China also unveiled in late May its position paper on Global Digital Governance that calls upon States to “respect the sovereignty, jurisdiction and governance of data of other States,” and to “not obtain data located in other States through companies or individuals without other States’ permission.” A combined reading of these documents with the Comprehensive National Security concept, first floated in 2014, suggests that the concept of national security has permeated each and every aspect of governance and developmental strategy during Mr. Xi’s reign.
The recent crackdowns are thus reflective of this approach to ‘developmental’ security. The existing view within the Chinese administration is that several foreign businesses operating in China are indulging in espionage. The suspicion is that due diligence firms and consultancies are leveraging their vast networks to extract sensitive data under the garb of free exchange of information. The authorities also suspect the installation of backdoors by U.S. tech companies at the behest of their government.
What next?
China now, finds itself in an odd spot where development and security are applying diametrically opposing forces, thereby creating a regulatory dilemma. While development requires “reform and opening up,” and creating a business-friendly environment as the Party says, the need to balance development with security warrants enforcing restrictive measures which impinge upon free economic activity. The victims of the recent crackdowns not only have the U.S.-China competition to blame but also China’s evolving national security discourse. The fact that Chinese authorities clarified that their actions against Micron are an isolated case and all foreign businesses are welcome so long as they comply with domestic regulations, supports this idea. Nevertheless, the blurring of lines between development and security are likely to hurt foreign business sentiment in the long run.
However, from India’s perspective, one cannot help but notice the outright contradiction that China’s discourse presents when it comes to its relationship with New Delhi. While Beijing insists on the need to hyphenate development with security, it calls on India to keep the border issue (security) at its proper place and not let it derail the overall relationship (economics and development) with China.
Amit Kumar is a Research Analyst with the Indo-Pacific Studies Programme at the Takshashila Institution
