SUBSCRIBER+EXCLUSIVE REPORTING - China tightened its already sweeping state secrets law this week in a move that extends its clampdown on information and has sparked new fears among foreigners doing business in China.
China’s top legislative body adopted amendments to the country’s Law on Guarding State Secrets to include a new category of “work secrets,” broadening the scope of data and information sharing that will be considered a national security risk. According to the state-run Xinhua News Agency, China’s ruling Communist Party determined the law needed updating because of “new problems and challenges” posed by advances in science and technology.
The new measures, which were signed by President Xi Jinping and will take effect May 1, follow a series of steps Xi has taken to cement the state’s grip on flows of information. Analysts called it the latest example of Xi’s “comprehensive national security” concept, which has included tougher laws and demands for the entire population to be vigilant against perceived internal and external threats.
But the changes are also likely to damage another core goal for Xi - the return of foreign business and investment.
“This latest expansion in what is considered ‘secret’ is another major step in a years-long effort under Xi Jinping to restrict access to information,” Bates Gill, who heads the Center for China Analysis at the Asia Society, told The Cipher Brief. He added that “the new law will only further dampen the business climate in China, for Chinese and foreign companies alike.”
China’s 1988 State Secrets law was last amended in 2010, when the country imposed requirements on internet and telecommunications companies to cooperate with state security investigations. Last year, the government passed a separate information security law and broadened the definition of espionage to include a vague reference to the sharing of “documents, data, materials and objects.”
Zhao Leji, the chairman of the legislative body that passed this week’s revisions, said they would “provide a stronger legal guarantee for protecting secrets and safeguarding national security and interests under the new situation,” Xinhua reported.
Foreigners considering investing or doing business in China were left wondering what that “new situation” will look like.
"Doors wide open" - and a growing wall
When Xi came to the U.S. last year for the Asia-Pacific Economic Cooperation (APEC) summit in San Francisco, he made a series of pledges to the American business community. After more than three years of COVID lockdowns, Xi told a group of business leaders that China was committed to creating “a world-class business environment…with our doors wide open.” He promised “heart-warming” measures that would make it easier for foreign business people to operate in China.
Just last month, China’s State Council said that building investor confidence and attracting foreign investment remained key goals for the nation in 2024.
The latest revisions to the security law cast fresh doubt on those pledges, particularly given that they followed a spate of crackdowns on foreign firms in China. In the last year alone, China has launched raids and legal reviews of foreign companies and has detained foreign executives. In the most high-profile cases, Chinese police raided several management consultancies in China, including Mintz Group and Bain & Co.
“I think there's been a contradiction in the messaging from the government here in China to the rest of the world,” U.S. Ambassador to China Nicholas Burns said in an interview with CBS’s 60 Minutes last week. “On the one hand, they say, ‘We're open for business. We want American and Japanese businesses here.’ But on the other hand, they've raided six or seven American businesses since last March...They've gone into American companies and shut them down and made accusations we believe are very much unwarranted.”
Ambassador Burns made those comments before the latest restrictions were announced.
The Asia Society’s Gill cast the crackdowns on information sharing against the backdrop of an increasingly tense U.S-China relationship.
“The need to further restrict information flows in China arises in large part from the Party's growing concern with a deteriorating international environment and in particular, the growing rivalry with the United States,” Gill said. “Gaining every advantage possible—including by protecting information—is seen as critical in this competition.”
What’s a “work secret”?
One phrase in the revised law has drawn particular attention - and heightened anxiety - in the business community: “work secrets.”
According to text released by Xinhua, the term refers to information that isn’t an official state secret, but “will cause certain adverse effects if leaked.”
More broadly, Xinhua said, the revisions would "strengthen the systematization, comprehensiveness and synergy" of laws concerning national security and state secrets. Xinhua quoted an unnamed official from the State Secrets Bureau saying the amendments would "strengthen" the management of confidential data.
"This revision...has clearly written the Party's management of secrecy into the law," the official said, adding that businesses should "cooperate with relevant departments in investigating and handling cases suspected of leaking state secrets".
None of this lessened the concerns of business leaders and analysts, who greeted the news with a flurry of warnings.
"For foreign businesses, it's the lack of clarity that will remain an unquantified risk to doing business in China," Jeremy Daum, a senior fellow at Yale Law School's Paul Tsai China Center, told CNBC.
“China's increasing focus on national security has raised uncertainty for business," Jens Eskelund, president of the European Union Chamber of Commerce in Beijing, said in a statement. "The scope of issues deemed ‘sensitive’ seems to be constantly expanding.”
“The law is vague and the definition of state secret so broad that it could include anything that the party-state decides it should,” Diana Choyleva, chief economist at Enodo Economics, told the New York Times. She said many companies will be left in a state of “paralysis” while they wait to see how China implements the new measures.
Gill and others noted that given the recent harassment and threats against foreigners, those considering bringing business to China will worry about arbitrary determinations of what exactly constitutes a “work secret.”
“In the near term, expanding the realm of restricted information to ‘work secrets’ is especially problematic for businesses,” Gill said. “The restrictive data-sharing laws already in place in China have had significant consequences for foreign businesses, forcing most to construct firewalls between China-based servers and company servers outside China, for fear of their China operations running afoul of the new laws constraining transfers of sensitive data.”
Why now?
China announced these changes at a moment when it faces economic headwinds on many fronts. Export growth has slowed, youth unemployment and income inequality have spiked, and figures released this week showed that manufacturing activity had dropped for a fifth consecutive month. Most relevant to the newly expanded security laws, foreign direct investment has fallen to its lowest level in three decades.
The problems are intertwined; as China’s growth rate dips - the 2024 figure is projected at 4.6 percent, healthy for most nations but almost anemic by China’s standards - outsiders see less upside to taking the growing risks of doing business there.
"If China intends to shore up foreign investor confidence, then the law's implementing regulations need to clearly define and limit the scope of this term (‘work secrets’)," the EU’s Eskelund said.
Even before this week’s changes, American companies had reported a steep drop in their confidence in doing business in China. Surveys of U.S. companies have shown record lows in optimism about their business outlook in China. In other words, this is a moment when Xi needs those “heart-warming,” “open-door” measures to bring business back to his country.
Some clarity may come after May 1, when the revised law is to take effect and Xinhua says implementation rules for “work secrets” will be released, along with more detail as to the practical implications for businesses.
For the moment, no one’s really sure what those will be.
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