Will the National Security Law Impact Foreign Investment in China?

Published on September 1, 2015

Concerning New National Security Law
China adopted its new National Security Law on July 1st 2015. It replaces the Counterespionage Law, which took effect in 1993, and seeks to put in place systems to manage laws and regulations, finance, materials, science and technology, talent, working measures, publications and education in support of the establishment and improvement of national security.
Compared to the Counterespionage Law, the New Law emphasizes economic security as the basis of national, military, cultural as well as social security, outlines safeguarding measures and includes more clauses related to important industries and sectors deemed vital to the economy, to prevent financial risks through the development of financial infrastructure and capabilities.
Moreover, the New Law stipulates China’s assets and activities in space, as well as in the deep sea and polar regions in a fine-tuned legal framework protecting national interests, announcing that China would peacefully explore and exploit these areas.
Law may affect foreign investors
Cause for concern is the fact that the New Law may give Chinese associations extensive and potential arbitrary powers over a range of foreign activities in China with an overly broad approach by using vague and open terms on top of handing an overwhelming amount of control to the State while failing to recognize the role of the market.
The present definitions of what constitutes national security is too expansive in wording and scope. Of particular concern is the introduction of the concept of “economic security”, which could be used to protect local industry to the detriment of foreign investment through industrial policies. This concern is reinforced by the provision in Article 8 of the New Law that “Maintaining national security shall be coordinated with economic and social development.” This would have an impact on competition in the Chinese market and would contradict China’s reform agenda set out by President Xi Jinping during the Third and Fourth Plenum.
Subsequently, The New Law apparently adds more restrictions on foreign organization, which could be embodied in the requirement of constructing mechanisms for national security work in intelligence collection and research, as well as supervision and accountability. Following this provision, foreign organizations may be forced to disclose detailed work and plans and funding. The provision has caused panic with regards to the possibility of foreign companies being forced out of China.
This gives rise to the worry that the lack of legal certainty brought about by the New Law will have an adverse impact on the flow of foreign wholesale promotional products investment into China, and how current investment will be protected.
In addition, the growing restrictions on the Internet and cybersecurity may harm foreign businesses. Lack of access is affecting foreign business. As demonstrated by Akamai, the biggest CDN service provider, China’s Internet speed ranks incredibly low worldwide. Given that China will strengthen the control on cybersecurity, the speed of Internet, censorship and the Great Firewall may be affected negatively. Furthermore, business data and intellectual property risks remain a problem.
In terms of financial infrastructure, the law states that China’s banking infrastructure and its financial system must be improved to keep away international risks. In combination with the requirement to strengthen the control of cybersecurity, China can demand foreign business groups, especially IT companies, release business data or even passcodes and encryption keys to the government, a marked cut-down of freedoms of overseas business activities, especially regarding Internet and key infrastructure.
Generally speaking, China’s new security law is based on China’s national conditions, follows the basic principles of international law, and draws from good experience and common practice of other countries. However, it can be considered overprotective of the Chinese industry. To safeguard the security of the country is not an excuse to reject foreign capital or protect those enterprises and domestic industries without core competitiveness while affecting normal and legal foreign organizations.
Globalization will change the economic and political pattern of the world and China’s economic status as well as national economic security. Therefore, the related regulations of the National Security Law should ease restrictions on foreign organizations and Internet commerce instead of resorting to loosely defined laws designed for absolute control.

Disclaimer
This article is intended solely for informational purposes and does not constitute legal advice. Although the information in this article was obtained from reliable official sources, no guarantee is made with regard to its accuracy and completeness.For more information please follow us:

http://www.linkedin.com/company/3725531?trk=prof-exp-company-name