Heightened China Troubles Continue for Foreign Businesses
From Zhongnanhai: This week in Chinese Politics
China’s legal securitization continues
Updates to State Secrets Law expands the state’s legal reach as the CCP’s all-encompassing “national security” framework threatens foreign businesses.
The Standing Committee of the National People’s Congress (NPC)–China’s legislature–passed updates to the State Secrets Law (保守国家秘密法) in an effort to “manage and standardize” the law with recent additions to China’s expansive definition of “national security.” Legislators argued that the updates are necessary to define the scope (and to standardize who has the authority) to determine what counts as a “work secret” or “state secret” as part of General Secretary Xi Jinping’s push for “comprehensive national security.” Notably, the proposed update includes reference to “work secrets” from government and party bodies that are not considered state secrets, but that are considered potentially sensitive if leaked or made public. While details of how “work secrets” will be classified and implemented will be announced at a later date, the announcement effectively creates a new category of restricted information as potentially encompassing any state or party information.
Analysis:
The update to the State Secrets Law follows similar revisions to updates to information security and anti-espionage laws that have already done much to spook foreign investors and businesses operating in China. Xi’s expansive and purposefully vague definition of national security has led to successive clampdowns on foreign businesses, including the detention of employees, severe restrictions on independent data collection, and a worsening business and regulatory environment. The updated law also highlights how security concerns continue to dominate economic logic among CCP leaders, meaning that US businesses should be cautious about recent overtures to attract foreign investment back to China.
The update to the State Secrets Law will therefore not fundamentally change what is already a tense situation for foreign businesses in China, but it does close potential loopholes for possession of information or data that is deemed to be owned by the state or the Communist Party. Importantly, this means that foreign companies in possession of state data, even if acquired legally, may find themselves in the crosshairs of future crackdowns on data possession that may reclass information as potentially sensitive under the updated law. Extreme caution should therefore be taken when handling data and information in China and Hong Kong, although ultimately whether foreign companies are compliant with regulations will be up to the party rather than the letter of the law.
On the Hill: Developments in US China policy
McKinsey in hot water as lobbyists ditch Chinese clients
Chinese clients become toxic for US companies as politicians turn their attention towards China’s lobbying efforts. US corporations will increasingly need to make the case to Congress and the White House if they wish to continue business operations with China.
Consulting giant McKinsey is in the firing line with lawmakers after the Financial Times reported that the company engaged Chinese government clients through a series of intermediaries that promoted China’s economic, military, and tech development and forced foreign companies out of sensitive industries. China’s central government commissioned a McKinsey-led think-tank, the Urban China Initiative, to research and provide recommendations that were then included in the Chinese government’s 13th Five-Year Plan (2016-20), including the “Made in China 2025” policy that stoked tensions with the US. Speaking in his role as Chairman of the Congressional Committee on the CCP, Rep. Mike Gallagher noted that McKinsey’s “true mission is to make money” at the expense of the American people. As part of the fallout, Marco Rubio, the vice-chair of the Senate intelligence committee, and Michael McCaul, the chair of the House foreign affairs committee, both publicly criticized the company’s engagements with China, with other Republican lawmakers calling for McKinsey to be banned from future US government contracts.
Analysis:
It is increasingly clear that when it comes to US companies and China, business and politics do not mix. As US lobbying firms continue to ditch their Chinese clients out of concerns for domestic political retribution, calls for the re-establishing of people-people ties between the US and China appear increasingly at odds with political pressure in both countries to disassociate and divest. While consulting firms like McKinsey and BCG have faced questions in the past about their contracts with other autocratic governments, like Saudi Arabia, and in the case of McKinsey its extremely questionable engagements in Xinjiang, the recent ire directed towards the company appears qualitatively different given the heightened anti-China mood in DC. As global companies like Volkswagen are discovering, having business arrangements in China is becoming more liability than lucrative. For these companies, having clear answers as to why they are continuing to engage with China and under what conditions (for example, having a legally separate China-based entity) will be necessary as the US political environment continues to view any ties to China as suspicious. Importantly, US businesses will increasingly need to underscore to politicians that engagement with world markets is beneficial to both corporations and the government, and that blanket bans on engagements with certain countries or sectors will likely undermine attempts to maintain market or political sway overseas.
On a happier note, it is not all bad news in US-China relations. The San Diego Zoo announced that it will receive two new pandas from China, the first time that the US has received new pandas in over 20 years, with discussions continuing with the National Zoo in Washington DC.
Business Matters
China launches world’s first 6G satellite
Businesses need to increase investment in 6G technology or risk letting China set new global communications and technology standards.
China Mobile, the largest wireless carrier in China, launched the first 6G test satellite in February, placing it at the forefront of telecommunications technology. Co-developed with the Chinese Academy of Sciences, it is distinguished from related technology by being a low-earth orbit (LEO) satellite. This gives it the potential to send and receive information at faster rates than more distant satellites and the capacity to provide service to more remote locations of the world; it also has the potential to receive and send information into high orbit and beyond, making it a new potential lynchpin in the transfer of information between terrestrial extraterrestrial networks. The new “Star Core” infrastructure is fully autonomous and serviceable while in orbit, adding both to its technological achievements and competitive edge. China currently aims to establish 6G standards by 2025 and commercialize the technology by 2030.
Analysis:
It is important to note that what 6G technology is, precisely, remains open for debate and is changing as technology evolves. Importantly, it has been predicted to offer point-to-point encryption of data, which would necessitate moving away from the signal-relay model involving the current infrastructure of towers used for 5G. As a result, although China claims to have launched a 6G satellite, the lack of corresponding infrastructures mean the short-term implications of this claim are negligible.
In the long-term, however, the launch is an important signal of Beijing’s ambitions to become a global technology leader, and the development of 6G capabilities is part of China’s broader geopolitical and strategic objectives. In the 14th Five-Year Plan for National Informatization, for instance, 6G ranked among among the government’s top priorities. This builds on the related goal of becoming the global leader in 5G technology, which by 2021 it already accounted for 70% of the world’s 5G stations and 80% of the world’s 5G connections. Whereas 5G technology was focused on advancing the Internet of Things, 6G will provide near real-time interactions that will pave the way for developments in energy grid management, telecommunications, and defense technologies.
In response to these developments, the US and its allies announced a Joint Statement Endorsing Principles for 6G that emphasized privacy, security, and the need for international standards. The unspoken part of this statement was the very real concern that, if China is the first to develop and commercialize 6G technology, it will then have the ability to dictate the international standards and infrastructure on which it runs. This poses a significant security risk to all countries that China deems as its competitors, as they will then have the ability to control access, cache sensitive data, and limit or censor what information runs on its platforms. The knee-jerk reaction, however, to simply exclude China from 6G technology development runs its own risks, which may still end up leading to its development of a unique technology suite and creating fissures in global technology infrastructures. Moreover, as private companies increasingly embrace innovation in satellite technology, political discussions of who is included or excluded from satellite technologies are spilling into the corporate world, with Republican lawmakers demanding answers from reports that Elon Musk’s SpaceX blocked broadband internet services in Taiwan. Companies in the telecommunications industry, including those not directly involved in satellite technologies, should therefore be aware of how geopolitical divisions are shaping decisions about who and where should have connectivity.
Tech Futures
TSMC hedges against potential invasion
TSMC, Taiwan’s top semiconductor manufacturer, opened a new plant in Japan in record time as the company hedges between the US and China and tries to avoid potential future sanctions from either side.
TSMC completed the first of two planned plants in Japan in almost half the time expected for construction. With the assistance of Sony, the Japanese government, Toyota, and Denso, the plant is TSMC’s first major investment in Japan and will begin operations in the coming months, with the second plant intended to open in 2027. The Japanese government noted that its high-level support for TSMC’s investment intended to create local jobs and expertise in semiconductors as part of Japan’s pursuit of cutting-edge innovation in tech, although TSMC officials noted that the investment was also part of its strategy to expand outside of Taiwan and therefore minimize potential disruptions from a possible Chinese invasion or of foreign investors being subsequently wary of investing in Taiwan. TSMC’s announcement comes as some leading investors noted that they are selling shares in the company to minimize their exposure to one of TSMC’s major clients, Nvidia, which–despite hitting a new peak valuation–was recently embroiled in attacks from the Biden Administration about the use of its chips by China’s military.
Analysis:
TSMC’s decision to invest in Japan highlights a confluence of several geopolitical and economic factors. First, Japan is a safe investment option for Taiwan’s tech giant as it looks to diversify its business locations under threat of a potential (though currently unlikely) invasion of Taiwan by China. Second, this is one of TSMC’s major overseas investments, another being in Arizona, and highlights the Japanese government’s determination to be at the forefront of the chip manufacturing race. This determination is reflected in the US$20 billion of Japanese government investment in the manufacturing of two TSMC plants in the country. Moreover, TSMC’s increased production in Japan allows it to hedge against potential sanctions from either the US and China, with chips produced in Japan–as opposed to chips produced in the US or China–unlikely to face penalties from either side.
For TSMC, expanded investment also helps to keep ahead of competitors like Intel, which is aiming to erode TSMC’s market dominance in chip manufacturing. As tensions between the US and China continue to define discussions of chips and processors, most notably in the ongoing back-and-forth between Nvidia and the Biden Administration, TSMC’s attempt to maintain market access and prevent potential disruption is therefore helping to reshape the tech race in East Asia.
Espionage Alert
Hiring hackers
Data breach reveals China’s extensive hiring of private hacker networks to obtain sensitive government and corporate information, highlighting the severe threat of revenue losses through exposed company data and IP.
A major data breach by iSoon (also known as Anxun), a contractor to China’s Ministry of Public Security–an equivalent institution to a combined FBI and CIA–revealed the vast extent of China’s cyber espionage operations and the use of private companies to conduct these operations. The leaked documents, posted to GitHub (though since disabled), shows how, in the words of specialists, “government targeting requirements drive a competitive marketplace of independent contractor hackers-for-hire.” The leaks reveal that these hackers have compromised at least 14 governments, non-profit organizations in Hong Kong, academic institutions, and NATO. While the leak remains unverified, analysts expressed confidence that the documents are authentic.
Analysis:
These leaks confirm previous suspicions that China weaponizes cyber espionage by private sector actors against targeted governments, corporations, and individuals. As Norway’s spy agencies recently announced, Chinese espionage is widespread, innovative, and largely conducted by intermediaries like Chinese companies, organizations, think tanks, and academic institutions. The leaks indicate how iSoon, as one such intermediary, is contracted to engage in these espionage efforts, including how the Chinese government combines targeting dissenters and their followers with strictly monitoring its ethnic minorities living abroad. The extensive datasets included in iSoon’s files, including detailed flight records, social media data, and telecommunications information, indicates efforts to collect bulk identifiable information on targets. They also suggest the price tags associated with different espionage products: for $100,000, buyers could access software to run disinformation campaigns and hack accounts on X (formally Twitter); $278,000, by contrast, buys a wealth of personal information from social media platforms like Telegram and Facebook.
iSoon is most certainly far from the only contractor involved in China’s cooperation with private sector actors. While the leak emphasizes the very real threat of Chinese cyber campaigns against foreign targets, including businesses, the vulnerabilities in this data leak also underscore that while China’s espionage scope is extensive, reliance on corporate partners introduces weaknesses–including the ability to be hacked–that could be further exploited by foreign rivals.
On more thing…
Hungary is the West’s Achilles Heel
Hungary continues to demonstrate that it is a threat to the West’s collective security, compromising NATO’s decision-making ability and corporate security in the EU.
Analysis:
Hungary’s pro-Putin Prime Minister, Vikor Orban, signed a new agreement with China’s Foreign Minister, Wang Yi, that promotes mutual cooperation and permits Chinese security forces to police and arrest Chinese citizens in Hungary. This agreement effectively grants China extraterritorial legal jurisdiction over its citizens (or even those non-citizens of Chinese heritage) and is likely a model for how China will engage with foreign states moving forward, with future trade agreements increasingly likely to include guarantees of China’s jurisdiction over its citizens abroad. China signed a similar agreement with Serbia, which Xi Jinping will visit in the coming weeks, and whose president has supported issues important to China like its claim that Taiwan is a part of China. The cases of Hungary and Serbia mean that the latest agreements effectively allow China to run Chinese security outposts both within the EU and EU candidate states, in addition to its existing network of overseas “police stations,” with severe security implications for both EU and NATO security.
Hungary’s delay of Sweden’s membership application to NATO, combined with the recent signing of deals with China and Iran, and attempt to veto EU aid to Ukraine mean that Orban is playing the role of an autocratic ally to Xi and Putin within the West’s major institutions. This has led to the labeling of Hungary as a threat to the West, which is increasingly the view of the Central European state by its EU and NATO allies. This case also demonstrates the challenge faced by the US and the EU in terms of collective security against adversaries like Russia and China, with weak links like Hungary proving easy access points for Moscow and Beijing’s infiltration and effective sabotage of Western security institutions. Companies with business ties to Hungary should also be extremely cautious of further investment or expansions of operations in the country under the heightened risk of Chinese involvement in Hungarian politics and economics.
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