China, with its large pool of technical resources, numerous incentives for foreign investors and its smart city schemes, has established a booming outsourcing industry, second only to India. However, recent government regulations and policies have led many foreign companies to reconsider their presence in China. Is it time for multi-national companies to say goodbye and head back home?

Ironically, it seems that the country has two faces. On one hand, China promotes innovation and investment by relaxing visa norms for foreign workers, but on the other, it is tightening its control over the same foreign ventures that bring in such investments. In early 2014, Beijing started severe antitrust campaigns against American companies – primary targets being Microsoft and IBM. The government even went as far as banning the installation of Windows 8 in its Central Government offices. In January 2015, it was Amazon, Apple and Facebook’s turn to welcome the various internet regulators to their Chinese headquarters for visit. The motive for these sudden acts became clear after the Chinese state media accused Google, Apple, Yahoo, Cisco Systems, Microsoft, Facebook and other U.S. tech giants of monitoring and stealing the country’s secrets and being a threat to cyber security of China and its internet users.

It is widely speculated that the ‘Snowden Leak,’ wherein former CIA employee Edward Snowden released confidential documents in WikiLeaks about the possibility of NSA infiltrating major American companies, prompted these moves. (Not so) Coincidentally, months after the incident and over the course of two years, China blocked Gmail, accused unnamed MNCs on tax evasion, and proposed a vaguely worded internet security law restricting access to internet lest there is a threat to public safety.

The highlight of 2015 was the introduction of the ‘National Security’ law, which addresses a broad range of security concerns, including China’s economy, cyber security, geographic expansions, etc. The scope and conditions of the law however, were very vague. Terms such as “secure and controllable internet and information systems” triggered panic driven interpretation across technological companies. Notably, this law also formed the centerpiece of other bills, which were passed in early 2016. One such draft on “anti-terrorism” asserted on monitoring of information through surveillance and made it obligatory for firms to hand over sensitive data, including encryption codes to the government. The bill also insisted on storing user data on local servers within the country. The draft, nevertheless, was widely opposed by the White House and as a result of mounting pressure not only from US, but also from Canada, Germany, Japan and the E.U, a slightly modified bill was passed. As per the amended bill, though foreign IT companies need not share the encryption code or store data within the country, they are still liable to assist local police and other security forces by providing decryption of information as well as technical support in case of need.

The consequences of these selective practices can already be seen in the country’s business conditions. As per the 2016 Business Climate Survey conducted by the American Chamber of Commerce, which captured responses from 496 foreign companies, 77% of respondents felt “less welcome” in the country, 25% planned to relocate to different country and 16% claimed that they would not reinvest in China due to severe market access barriers. In early 2015, Yahoo shut down its Chinese operations, eliminating close to 300 jobs. During the same period, Microsoft’s Nokia shifted to Vietnam, eliciting doubts that luster of foreign investment era in the country is over. Additionally, the increased regulations coincide with a decrease in economic growth. China’s YoY GDP growth rate for Q4 2015 was at 6.8%, the weakest since Q1 2009. Foreign exchange reserves headed to a three year low while currency rates dropped. Despite bank rate cuts and introduction of investor friendly policies, impending slowdown in economy looks unavoidable.

So what does this mean for your business if you’re operating in China? It is at the interest of the organizations operating in the country to liaison with the government if required, not directly, but through a local consultant or legal expert. Continuous monitoring and keeping abreast of the developments of policies would help organizations to be prepared for any sudden procedural changes. Any contracts with either the Chinese government or local vendors should be carefully assessed for clauses with respect to resolution of disputes as well as governing law. Further, periodic review and update of compliance policies and constant communication to employees about the importance of adherence of compliance procedures would assist organizations in obtaining a favorable position with the Chinese government.

It should be noted that risks such as volatile regulatory policies are very subtle in nature and it is indeed difficult to spot those, unless a thorough risk monitoring system is in place. Alerts from Supply WisdomSM help businesses not only to monitor risks but also to identify opportunities and provides solutions for effective management of the same.