Global Courant 2023-05-09 16:47:20
For weeks, little was known about why prominent international consulting firms in China were raided by police. Employees were interrogated and even detained for doing what has long been the core of the job: collecting information about Chinese markets, companies and policies for foreign clients operating in the world’s second-largest economy.
Now the motivation behind the raids, which have also involved US firms such as the Mintz Group and Bain & Company, are beginning to emerge after state media on Monday revealed a multi-agency crackdown on the consulting industry in the name of national security.
Beijing has also taken steps to limit the availability of financial data to foreign clients and expanded an already sweeping counterintelligence law. There is growing concern in the business world that more Chinese commercial information could be swept up in the growing geopolitical rivalry with the United States that has frustrated China, particularly over its loss of access to advanced US semiconductors.
Using language that echoed the recent condemnation of the West by China’s top leader, Xi Jinping, China’s state broadcaster, CCTV, accused Western countries of stealing intelligence information in key industries, including defence, finance, energy and health, as part of its a “strategy of containment and suppression against China.”
The broadcaster, which devoted a 15-minute special report to the matter and focused on Capvision Partners, a consulting firm based in Shanghai and New York, also blamed “overseas institutions” for collaborating with domestic consulting firms to hide their foreign background. for “circumventing Chinese laws and regulations.
The campaign threatens to undermine Beijing’s efforts to persuade foreign companies to reinvest in China and revive an economy still trying to recover after large parts of it were effectively closed off to the world by severe anti-Covid -limits. New data released by the Chinese government on Tuesday shows a steep drop in imports last month, another sign that growth remains fragile.
“Whatever China gains by restricting ‘sensitive’ information is not worth the reputational costs China pays with foreign companies,” said Gerard DiPippo, a older colleague at the Center for Strategic and International Studies and a former senior US intelligence officer, who added that the raids “will have a chilling effect, especially with investors and local personnel employed by US companies.”
The crackdown shines the spotlight on a sprawling industry of due diligence and business intelligence firms that sprang up along with China’s rise to help make sense of the country’s lucrative but often opaque economy.
Eric Zheng, president of the US Chamber of Commerce in Shanghai, said in a statement that the organization was “concerned” about the raids. “Without proper due diligence, foreign companies will not be able to invest in new projects in China,” he said.
Capvision seems to have been near the center of the business intelligence industry. According to its website, Capvision offers a matchmaking service that connects a list of 450,000 “experts” in various industries with customers looking for more information. It has said its clients include most of the world’s leading consulting firms, the largest private and venture capital firms investing in China, and all of the country’s largest financial securities firms.
Agents raided several of the company’s offices in China, including in Shanghai, Beijing, Suzhou and Shenzhen, state media said, adding that the company “did not seriously fulfill its responsibilities and obligations” to prevent espionage.
Capvision did not respond to requests for comment.
On Monday night, the company said on its official account on WeChat, China’s social media and chat app, that it would “firmly implement national security development” and take a leading role in regulating the consulting industry.
In March, Mintz, which specializes in corporate investigations, said Chinese authorities raided its offices, detained five of its Chinese employees and closed the branch. Last month, Bain said security officials had visited his offices and questioned employees.
Police told Jiangsu Television, a state broadcaster, that Capvision had been in regular contact with “secret personnel” of the Chinese Communist Party and officials in fields such as defense and science. Authorities accused Capvision of hiring “highly paid” consulting experts to “illegally obtain various kinds of sensitive data,” which they said posed a “major risk and hidden danger to China’s national security.”
According to the CCTV report, the investigation led to the arrest of at least one state-owned company employee who was sentenced to six years in prison for providing “state secrets and intelligence” to Capvision’s foreign clients.
The image of the employee, nicknamed Han, was clouded in an interview with the state broadcaster and was found to be wearing a prison uniform. He said he initially refused to provide Capvision with what he described as “classified information”, but changed his mind when the company offered to double its consulting fees. The report did not say what company or industry the employee worked for.
Last month, China’s newly revised counterintelligence law expanded the definition of what constitutes espionage, reflecting Mr. Xi. The law alarmed foreign companies and governments because it stipulated that the sharing of “documents, data, materials and objects” could be considered espionage if the information “affected national security and interests”, a criterion considered too broad and potentially arbitrary.
The revisions signal Beijing’s renewed focus on restricting the flow of what it considers sensitive information to foreign investors and governments. China has foreign access restricted to the largest academic database disseminating research papers, dissertations and statistics, while there are reports that access to the country’s database of business registrations was limited for some foreign users.
China is locked in a stalemate with the United States over restrictions on microchip technology and growing unease about China’s dominance of materials and components used in electric vehicle production. The free movement of goods helped build a global supply chain that bound the United States and China as economic partners — if not geopolitical allies — but those ties are now frayed.
Founded in 2006 by former Bain consultants and Morgan Stanley investment bankers, Capvision is based in New York and Shanghai with 700 employees, according to the company’s website.
In 2021, Capvision filed for a public listing in Hong Kong, though its shares never debuted.
In an investor prospectus, the company said it was the largest provider of “expert knowledge services” in China, with a 33 percent market share and revenue five times that of its closest competitor.
In the United States, such companies were targeted in 2011 by the Securities and Exchange Commission as part of a crackdown on insider trading among hedge funds. In those cases, the companies were often used to pass on non-public information about companies’ earnings and strategies to gain a trading advantage. Such companies have largely disappeared from view in the United States.
In 2013, Kai Hong, a co-founder of Capvision, told Reuters that it took advantage of the fact that “the flow of information in China has always been quite opaque.”
News of the raids on consulting firms last month prompted the US Chamber of Commerce, Washington’s powerful business lobby, to warn of rising risks in doing business in China.
Mr. DiPippo of the Center for Strategic and International Studies said China will continue to be an important market for Western companies, but that many companies will increasingly diversify their investments in other countries due to rising risks.
“The Chinese economy cannot fully recover until private business sentiment and investment improve,” he said.
Claire Fu and Olivia Wang contributed research. Keith Bradsher contributed reporting.
