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Beijing is likely to use its legal system as a coercive tool against foreign companies and foreign nationals in the coming months.

This assessment was issued to clients of Dragonfly’s Security Intelligence & Analysis Service (SIAS) on 27 April 2023.

  • Foreign companies and foreign nationals are likely to be exposed to arbitrary enforcement of local laws in China in the coming months
  • China passed a revised Counter-Espionage law on 26 April, broadening its definition of espionage and enhancing control of information
  • Chinese security forces are likely to use a range of tools ranging from arbitrary detention, exit bans, investigations, fines and raids against targets

Clients with operations in China have recently asked us for our assessment of the arbitrary enforcement of local laws there. This follows a recent spate of high-profile detentions and raids affecting foreign nationals and firms in the country. In addition, China’s highest legislative body passed an update to its Counter-Espionage Law on 26 April, enhancing its control of information and data flows while giving the authorities greater ability to target individuals and organisations.

Gates closing

China now appears more intent than ever on prioritising state security over the country’s business environment. In our analysis, this is particularly the case in its efforts to establish greater control of data and information the Chinese authorities perceive as potentially helping foreign countries in political or military competition with China.

International media reports also point to a worsening trend of arbitrary enforcement of local laws in general. This may be to keep unwelcome foreign pressures and critical scrutiny at bay. This would fit with the pattern of recent cases of raids, detentions and investigations of high-profile technology, consulting and due-diligence firms in China. And social media posts by political commentators and recent statements by US officials appear to back this up.

Updated Counter-Espionage Law

The new law seems to further expand the already-broad concept of national security and what activities the authorities could consider espionage in China. The exact details and scope of the updated law is still unclear. But according to Chinese state media outlets, ‘anti-China hostile forces … are no longer confined to traditional security areas’. Previously, China had primarily targeted sectors such as media, NGOs and embassies. But in our assessment, the authorities will probably use the law to also focus on companies and individuals in sectors such as consulting, professional services and technology.

We assess that the new legislation means that organisations that store, handle or transfer data or information about issues that China considers sensitive are likely to be at particular risk of being targeted by authorities. According to state media outlets, Western countries, including the US, can use such information to ‘suppress and smear China’. Along with traditional security data such as on military and state secrets, sensitive data is likely to include, but is not limited to, information on:

  • Critical infrastructure
  • Industrial capacity
  • Supply chains
  • Data about government or party officials
  • Geolocation or geophysical data
  • Political risk
  • Ethnic minority issues

More hostile actions to come

Organisations that hold sensitive information are likely to be at heightened risk of arbitrary enforcement, in our assessment. This means that state agencies will probably use the new law against individuals and organisations with information Beijing perceives to be harmful to China’s interests. This is likely to materialise through various judicial and regulatory procedures, ranging from arbitrary detentions to exit bans, government investigations, revoked operating licences and fines. Over the past two months, Beijing has raided at least two foreign firms and detained a senior foreign executive on espionage charges.

Business travellers to China from organisations that hold sensitive data are also likely to be subject to increased scrutiny. The updated legislation seems to expand the ability of the authorities to target individuals or companies without any reasonable grounds. Therefore, there is a less than even chance of staff being subject to snap inspections of luggage, documents, electronic devices or exit bans. Such actions are particularly likely around sensitive locations, including military or government sites, and for foreign nationals who are current or former members of the government, military or intelligence services.

Civil and commercial legal environment

More generally, the Chinese authorities are also highly likely to continue to enforce local laws arbitrarily outside of the national security domain. This includes using arbitrary actions to resolve civil and commercial disputes and ‘compel individuals to participate in government investigations’, according to the US government’s travel advisory for China. This is also because China’s courts are largely beholden to state and private interests, with local law enforcement agencies often using the law and judicial procedures arbitrarily to achieve political or commercial objectives.

Image: Chinese paramilitary police stand guard on the Bund in the Huangpu district in Shanghai, China, on 10 April 2023. Photo by Hector Retamal/AFP via Getty Images.