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Decoding China’s Counter-Espionage Crackdown

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Decoding China’s Counter-Espionage Crackdown

The recent series of raids and arrests signals an expanded national security drive during Xi Jinping’s third term.

Decoding China’s Counter-Espionage Crackdown
Credit: Illustration by Catherine Putz

“We must better balance development and security,” said Xi Jinping at this year’s National People’s Congress, shortly after being reappointed as China’s president. These words reflect Xi’s preference for putting political and national security ahead of economic growth, an approach that appears to be gathering pace at the start of his third term in power.

In the weeks following Xi’s speech, Beijing has launched a broad attack on suspected espionage activities. Targets have included an executive of Japanese drugmaker Astellas, who was arrested in March on spying charges, and veteran columnist Dong Yuyu, who was indicted in April for espionage. This month, U.S. citizen and Hong Kong resident John Shing-Wan Leung was sentenced to life in prison for spying.

Meanwhile, the China offices of several U.S.-headquartered consulting firms have been raided on national security grounds. They include due diligence provider Mintz Group, which reportedly had five employees detained in March, and “expert network” consultancy Capvision, where employees were alleged to have helped leak state secrets.

Concurrent to this crackdown, Beijing has announced revisions to its counter-espionage law. From July, China will prohibit “collaborating with spy organizations and their agents,” and seek to protect any information related to “national security and interests.”

Amid today’s fraught geopolitical climate, it is unsurprising that China is rebalancing its security and economic priorities, like the United States and other governments have done. But China’s counter-espionage drive has come just as the country is trying to revive its COVID-battered economy.

Upon becoming premier, Li Qiang sought to reassure the world that China remains committed to opening up and creating a “first-class business environment.” Beijing has also said that it still supports the development and growth of the consulting industry. But such claims have rung hollow against the backdrop of raids and arrests, prompting some companies to exit the market.

What’s more, many of the charges uncovered against Capvision and others appear not to be recent cases but date back several years. So why has Beijing chosen this moment to go public with its counter-espionage concerns? And how does it square with attempts to bolster business confidence in China?

One thing to consider is that China has recently completed a major governmental transition. This has traditionally been a prime time for such clampdowns, as the incoming leadership team seeks to signal policy direction for the next term. Beijing’s public scolding of Capvision serves as a warning – not just to foreign consulting firms but also their local partners.

Another reason why China has publicized its counter-espionage drive at this time has to do with geopolitics. Over the last few months, Washington announced spying charges against numerous suspected Chinese agents, claimed that China is operating covert police stations in other countries, accused Beijing of flying a “spy balloon” over the United States, and interrogated China’s TikTok about alleged eavesdropping on U.S. citizens. This litany of espionage allegations clearly put Beijing in a position where it felt a need to reciprocate.

Yet to effectively accuse foreign firms of espionage is a significant escalation by Beijing. Chris Miller, the economic historian and author of “Chip War,” has described the charges against the Astellas executive as “dubious.” As someone who works in consulting in China, I am likewise skeptical that foreign firms or their employees would actively engage in spying, except perhaps in rare anomalies.

But Beijing’s definition of “espionage” appears to have expanded. In a report on Capvision, China’s state broadcaster suggested that sensitive areas now extend beyond traditional taboos like military industry to cover sectors like finance and healthcare. A Xinhua editorial in April similarly exhorted: “The actions of foreign spy agencies and anti-China forces are no longer limited to traditional security areas.”

The editorial gave the example of a Shenzhen-based consulting company that was punished after auditing supply chains in Xinjiang for a foreign NGO. According to Financial Times sources, the raid of Mintz Group was related to similar work in China’s sensitive northwestern region. Recall that past crackdowns on foreign journalists in China also came after they had reported on Xinjiang and other areas of extreme sensitivity.

This pattern suggests another major driver of Beijing’s counter-espionage clampdown: to limit flows of damaging information out of China. This may not be for national security per se, but an attempt to manage the global narrative on China, as the Wall Street Journal’s Lingling Wei has reported. In addition to the raids, Wei cited recent restrictions on overseas users’ access to Chinese business information databases, such as Wind and Qichacha.

Above all, China’s counter-espionage drive signals that the subordination of economic growth to national and political security will only intensify in Xi’s third term, despite the implications for the economy. His team may have taken comfort from robust first quarter activity, which prompted the IMF to raise expectations for China GDP growth this year.

But China’s economic data in April looked less rosy, with a contraction in manufacturing orders and slower exports growth. Last month also saw underwhelming domestic consumption and property investment, as well as record-breaking levels of youth unemployment. With such economic headwinds persisting, Xi’s security-economy balancing act may be easier said than done.