Life will get even harder for foreign firms in China

In the span of a few days in September 2023, word spread that two businessmen working for global firms were not permitted to leave China. One of them, the head of a Chinese investment-banking division at Nomura, a Japanese bank, appeared to have been snagged in a corruption investigation. He had been hit with an “exit ban”, meaning he could travel within the country but could not leave. Days later news broke that a senior executive at Kroll, a due-diligence firm, was subject to similar conditions. According to the Wall Street Journal, he has been stuck in China since July.

Nearly a year into China’s reopening, after three years of isolation during the global pandemic, foreign executives are still trying to determine what the new normal is for doing business. Economic growth has petered out, making the market less appealing to global retailers. President Xi Jinping’s ideological support for Russia in its war against Ukraine has scared investors. Fund managers now demand higher returns to justify the increase in geopolitical risk; many are simply not earning enough and are allocating capital elsewhere.

Executives making their first trips to China in three years cannot help but think that things have changed for the worse. Top-tier cities such as Beijing and Shanghai feel distinctly less international than they did before the pandemic.

The pandemic years were an inward-looking period for China’s political leaders. They have emerged far more paranoid about America and other foreign rivals. This has led them to prioritise security above economic growth—and spurred the introduction of new laws and regulations that make it much harder for foreign firms to do business in the country.

New data laws, for example, mean it is unclear what information it is safe to send from a branch office in China to recipients abroad. A series of raids on foreign due-diligence firms have raised questions about whether such companies can carry out normal background inquiries on Chinese firms and executives. Access to official data sources has been limited. In a major blow to China’s image as a global business hub, Dentons, a global law firm, said in August that it would drop its partnership with a domestic Chinese law firm. Insiders say data rules, and fears over arbitrary detentions, played a part.

The government is well aware of the complaints among foreign companies. Business-minded technocrats such as Li Qiang, China’s new prime minister, are trying to ease the pain. In September the central government announced it would relax some data-transfer rules, at least for now. It has also postponed tough taxation rules for foreigners for another few years.

In 2024 multinationals will hope for a few more pro-business concessions from Beijing. But they should also not be surprised when more executives are hit with exit bans. China’s covid years reshaped the way its rulers view the outside world. They are less concerned about how they are viewed by outsiders and are unlikely to back down from their emphasis on security over growth. The new normal, it seems, is here to stay. ■

Don Weinland, China business and finance editor, The Economist, Shanghai