China’s amended Counterespionage Law is creating an unpredictable risk environment for US companies

China’s amended Counterespionage Law comes into effect on 1 July. It expands the definition of “espionage” but fails to define what constitutes a “national security threat”. Some recent closures of US companies operating in China and detentions of foreign executives are “spooking” the US and foreign business community.

On 26 April, China’s top legislative body, the Standing Committee of the National People’s Congress, approved an amendment to the country's Counterespionage Law (CEL), which has created significant risk assessment concerns for US and foreign companies operating in China. It comes into effect on 1 July 2023.

The amendment broadened the definition of espionage and added the following as acts of espionage: “cyberattacks, intrusions, interference, control and destruction of the information infrastructure of the government, national security-related units, and other key information infrastructure by spy organizations and their agents.”

The amended law also allows authorities to inspect facilities and electronic equipment of organizations, as well as the digital devices of individuals suspected of spying. However, the new law does not define what constitutes a threat to China's national security or interests.

Despite Beijing’s attempt to welcome new foreign investment to the country, this new law, which is relatively vague in its interpretation of espionage, is likely to undermine investor confidence in China. It also increases the level of risk for businesses already operating in China as growing tensions between Beijing and the West are creating an evolving and unpredictable risk environment for US companies in the China market.

In March, Chinese authorities closed the Beijing office of US due diligence company, Mintz Group, detaining five local staff. A few days later, Chinese regulators for cybersecurity said that they were investigating US chip maker Micron Technology over “national security concerns”.  

In the same month, a Japanese citizen and executive at Japanese pharma company, Astellas Pharma, was detained in Beijing on spurious allegations of “engaging in espionage activities”. The man has not been named, but local media described the man as a veteran expat in China who had worked there for two decades.

In April, Chinese police questioned staff at US Consulting firm Bain & Company at their office in Shanghai, and on 15 April, China’s National Security Education Day, the Chinese government issued a circular to urge the nation to increase awareness of foreign espionage activities. Chinese state TV paraded several Chinese convicted of spying for foreign powers. Espionage trials in China are conducted secretly to protect national security.

US analysts are describing this as a warning to US firms, amid the rising tensions, and note that the foreign business community in China is currently “spooked”.  Over the years, Chinese authority has applied the broad definition of counterespionage and national security against both Chinese and foreign nationals in China.

On 23 April, the U.S. Chamber of Commerce released the following statement regarding China’s new Counterespionage Law: “We are closely monitoring the heightened official scrutiny of U.S. professional services and due diligence firms in China. The services these firms provide are fundamental to establishing investor confidence in any market, including China.”

It added: “The U.S. Chamber of Commerce welcomes the recent statements of senior Chinese officials regarding their commitment to greater openness and desire to attract more foreign investment. However, foreign investment will not feel welcomed in an environment where risk can’t be properly assessed, and legal uncertainties are on the rise.”

Pamir assesses that the lack of clarity around what can be considered relevant to national security and the possibility of arbitrary enforcement could pose legal risks or at the very least uncertainty to persons or entities doing business or even scholarly research in China.

Further, the expanded Counterespionage Law seeks to legitimize anti-foreign actions and is an explicit blow to foreign business activities and investor confidence in China. The new law codifies what have long been arbitrary public security, police and other investigative practices and will place China-based company employees, both US and Chinese citizens, at risk of harassment, coercion, and detention.

To read Pamir’s full risk assessment of the situation, including recommendations for US companies operating in China, please get in touch with our team. Or, to find out more about our risk assessment and strategic advisory services that are dedicated to guiding US companies operating in China, get in touch today.