Geopolitical risk management: operating effectively in China - Part 1

By Paul Caulfield, Chief Legal Officer, Third Bridge

The prevailing narrative

As the leader in global primary investment research, we take our commitment to regulatory compliance seriously and work tirelessly to do so effectively within all of the jurisdictions in which we operate. This includes Mainland China since 2009.

Many narratives have competed this year, distilling China’s business landscape as something binary or at least “clickable” as a headline. One narrative has been driven by the People’s Republic of China’s reinvigorated approach toward its “sensitive data” and the increasingly dominant role of its National Security Bureau. 

On the heels of the NSB’s intensified scrutiny of and government actions against investigation firms, due diligence and consulting firms and their China operations, the predominant strategy by some multinational companies has involved the “containerisation” or “hiving off” of these local arms – demonstrating a new and near-total zero-risk appetite. 

Most recently, Gallup, the global polling and consulting firm, has announced that it is closing its doors in China.

Sequoia Capital announced earlier that its China operations will become an independent partnership next year. Marketed as Sequoia’s “local-first approach”, the new entity will also bear its own name, HongShan.

Dentons, the global law firm, is entirely unwinding its 2015 merger with Dengshen. The latter will become wholly independent. While a referral arrangement will exist, Dentons made it clear that to no degree will Dengshen play a part in Dentons’ P&L.

Forrester Research has also begun shutting down its Mainland China offices.

Why and for whom?

Having worked in regulated financial services, risk management and regulatory compliance for nearly two decades, I understand why and for whom this magnitude of divestment or “walling off” is appropriate. 

Using an analogous term from 2010’s global financial meltdown, global systemically important industries and institutions (GS-3Is) are finding it near impossible to chart a course with China other than at arm’s length.

From China’s perspective, these companies’ global reach and influence pose too much risk, regardless of intent, around the Chinese data they can access, as well as the knowledge they obtain from it, the potential adverse impact this and any cross-border transfer might have on China’s public and private sector interests and, most importantly, control over its narrative around, say, its economy and market conditions or intellectual property race.

Gallup, for example, “has found itself a target of authorities’ ire because its global polling has shown unfavourable attitudes toward China,” per the Financial Times.¹ https://www.ft.com/content/dff10673-f3e3-4117-8a71-cb57a9cc4ccb

These GS-3Is hold an interesting comparison to global systemically important financial institutions, or G-SIFIs, first defined nearly 14 years ago. The latter have been held to more robust capital adequacy, stress testing and risk management requirements to prevent them from again dragging down the global economy. Their uniqueness rested in their size and complexity, an oft-used description by banking supervisors and their regulated entities. 

For the GS-3Is, China’s amended Anti-Espionage Law, effective 1 July 2023, and China’s National Security Bureau’s increased scrutiny around undefined “sensitive data”, have put them into the bind they find themselves in today. 

It hasn’t been as straightforward as it was for the G-SIFIs, and, accordingly, it makes operational sense that firms such as Gallup, Dentons, Sequoia and other global companies continue this risk avoidance trend unless or until China changes its current method of enforcement and defining what is sensitive through dawn raids, employee detentions and hardware confiscations. 

 China’s amended Anti-Espionage Law

An alternative narrative

Not all foreign companies or industries fall into the GS-3I category, however. There is another narrative making an alternative approach possible, influenced by China’s economic struggles and its Ministry of Commerce. Where the harder line stance has been about protecting information as if it is a natural resource, this latter narrative has focused on working to salvage China’s economy given enormous global headwinds. This month’s China International Import Expo in Shanghai reporting an increase in attendance is one such indication. 

Thus, there are indeed companies with different levels of influence or separate value propositions that should be able to continue to operate within China. Third Bridge is one of them. 

With nearly 300 employees in our Beijing and Shanghai offices and 1,300 employees worldwide, Third Bridge sees the geopolitical tensions as a sober reminder of our responsibilities to our people and firm’s 16-year history. This includes the responsibility we have to our clients, with interests as local and global as our own.

Our global and China-based legal teams, insight from peers and collaboration with clients and Chinese advisors are enabling us to deploy a measured but cautious approach. It is possible because in addition to our interest and willingness, we are intent on ensuring an effective risk management acumen exists. That means clear processes and controls built upon a proper culture that encourages and enforces proper behaviours. 

We are taking nothing for granted. To navigate the landscape, we have approached the ongoing challenges of client servicing and risk management in China with humility and resolve. 

In part two, we will discuss some of the ways in which we are supporting our clients and peers.