On Thursday, June 10, the Chinese government passed legislation that will allow them to respond to foreign sanctions placed on China. In recent months, both the United States and the European Union have placed sanctions on Chinese officials in response to various issues, including human rights abuses in Xinjiang and Hong Kong, trade, and technology. Any individuals or bodies determined to be imposing discriminatory measures against Chinese entities or individuals can now be entered onto an “anti-sanctions” database.
This announcement has the potential to have a significant impact on foreign investment in China. Given the speed and lack of transparency with which this law was passed, many foreign businesses presently active or considering future investments in China are likely to have been alarmed by this legislation. Businesses will also be fearful of the prospect of being caught up in the ongoing sanctions war between China and the US. A reduction in investment would be problematic for China at any time but could be particularly so given the recent news about China’s demographic concerns combined with its slowing economic growth over the past year.
Another implication for foreign businesses - particularly those operating in the US and the EU - may be that they find themselves liable to a higher threshold of regulation and scrutiny from China. If a US or European company has to comply with US or EU sanctions in their dealings with an affected Chinese company, they will be at high risk of having retaliatory sanctions placed on them by the Chinese government. Such a scenario will likely have indirect effects on companies in certain industries operating on other continents such as Africa, given the substantial presence of European and US companies throughout the continent. However, as the law appears to be predominantly a response to US and EU actions, there is a lower likelihood that African companies would also be sanctioned.
Retaliation from Beijing in response to US actions should not come as a surprise. However, the law’s introduction has shown that China now has not only the economic clout but also the political will to enshrine such retaliation in legal form. The introduction of this law will further increase the sense of China’s retaliatory predictability, seeing as China’s responses to any US or EU actions will now have a concrete legal basis. In addition, it is more likely that China will wield such legal authority more freely. On the other hand, it is not yet known how broadly China might implement this legislation given that the law’s wording is ambiguous. This will create further uncertainty for companies, illustrating that an environment is increasingly being created where companies are being forced to have a unique set of standards for their business dealings with China.
Prior to this particular dispute, there had been signs of a thawing in relations between the US and China. In early June, the two sides held virtual trade talks and pledged that they would place more emphasis on promoting healthier trading practices and cooperating despite their differences. The two pledged to keep communication channels open, which is not an insignificant proposition given the tense state of relations between the two. However, this new law announced by China as well as a recent US visit to Taiwan seems to have reversed the tide.