Spotlight on: the risks of doing business in china

Business in China is inevitable for almost all global organisations.

For risk managers, that means managing operations in a nation that stretches for 3,250 miles from east to west and 3,400 miles from north to south. This vastness adds complexity to this vital supply chain hub.

Operations have become further complicated in recent years as the country has fought to recover post-COVID, while geopolitical risks linked to the US and Taiwan continue.

But for risk managers, understanding China is essential for both domestic and international success.

NEW LAW, NEW FEARS

Risk management has always been a tricky practice in China, even for domestic firms, where laws can be obscure and authorities do not need to disclose reasons for their actions.

Rachel Lim, Healix senior regional security coordinator, APAC region, says: “The broad language of China’s updated anti-espionage law gives the local authorities widespread powers to search offices, detain and investigate employees, and confiscate and destroy property.”

So what can risk managers do? “A lot of risk management practices emerge by reviewing what the Chinese courts and authorities do on a case-by-case basis,” says Lim. The developments happening in the wake of the anti-espionage laws create difficulties for firms trying to keep up with risk management best practices.”

Lou Longo, partner and international consulting practice leader of Plante Moran, says that when it comes to Chinese investments, “foreign direct investment has fallen and economic indicators are trending down. Major Chinese companies are having difficulty meeting debt obligations and calls of a real estate bubble have many inside China worried about short and mid-term market value decreases.

“Chinese consumers worked hard to buy their first apartments and, pre-COVID, wages were on the rise. The new middle class will be severely hurt if prices drop. This type of market value decrease would have a cold blanket effect on consumer demand and increase risk in financial, trade and quality matters.”

At least companies are recognising the need to manage risks. 

Maggie Sun, regional risk manager of Cummins, China, says C-level leaders are increasingly seeing the value of robust risk management in business continuity and resilience.

She adds: “The number of multinational companies’ risk managers has stabilised in recent years. More state-owned enterprises are improving their risk management capabilities not only by leveraging the expertise of insurance brokers but also finding alternative solutions from risk consulting companies.”

“The reasons for imposing these bans may be elusive, so global risk managers cannot take actions to mitigate risks or respond to such a scenario”

Lim says the most significant area requiring risk management capabilities is the uptick in the Chinese authorities detaining foreign and local employees or raiding offices under the anti-espionage law.

“There has also been an increase in the imposition of exit bans or movement surveillance on both domestic and foreign employees during an ongoing investigation.

“Most of these investigations are either finance or espionage-related, and consultancy, defence, and tech firms - including domestic firms who work with foreign firms for market research - have increasingly been targeted in recent months,” she adds.

Employees are detained and are usually not aware that a ban has been imposed until they attempt to leave China.

“The length of the exit ban may be arbitrary and it is not known when authorities will lift it. Appeal mechanisms against exit bans are obscure and the reasons for imposing these bans may be elusive, so global risk managers cannot take actions to mitigate risks or respond to such a scenario,” Lim says.

PRACTICAL STEPS FOR RISK MANAGERS

Geopolitical tension between China and Western democracies is at an all-time high, says Longo. “There’s more tariff activity and prohibitions on export of technology than ever before. Espionage charges have been levied by China at foreign businesses as well as by Western countries against Chinese nationals.” Lim says:

“We can expect China to widen their remit of surveillance from consultancy, tech and defence firms to more industries such as start-ups, universities and academia, media, trading, activist groups or any research group seeking to access data on China or Chinese nationals. We can also expect an increase in formal arrests, charges and movement surveillance or detentions.”

Lim also predicts a shutdown of foreign access into more Chinese databases.

She advises: “Ongoing Chinese court cases are not easily accessible, but risk managers may be able to follow legal proceedings by contacting local Chinese lawyers — so they have a rough estimate of what the Chinese courts will impose in cases where foreign employees are detained for espionage or finance-related charges.”

“Risk managers should also monitor changes to military appointments”

Risk managers should also monitor China’s engagement with Taiwan alongside the escalating tensions China has with its trading partners and the US.

“Risk managers should watch the significant turnover at the minister level in the government,” says Longo. “This indicates an internal struggle to follow the methods Xi Jinping is deploying to enact his rule during a difficult period.

“Risk managers should also monitor changes to military appointments - the military’s influence and budget is growing as China pushes itself further on to the world stage.”

Longo says the impact COVID had on supply chains has caused many multinational companies to reduce their reliance on China, which will increase the economic pressure for China to find new markets and develop its own internal consumer market.

Lee advises risk managers to stay close with an insurance partner and work together to better understand the risks.