China rewrites its bargain with Western business

CHINA

New regulations governing technology, investment and supply chains reflect Beijing’s growing willingness to put national security ahead of economic growth as strategic rivalry with the West deepens.

For years, Western governments worried about China acquiring their technology.

But today, Beijing is increasingly worried about protecting its own.

Three new regulations governing outbound investment, supply chains and foreign sanctions suggest Beijing believes it possesses strategically important technologies that must now be shielded from the outside world.

The measures mark an important evolution in Xi Jinping’s long-term drive for technological self-sufficiency.

Having spent more than a decade building China’s indigenous capabilities, Beijing is now giving itself the legal powers to ensure those advances, particularly in sectors such as artificial intelligence, semiconductors and quantum computing, remain firmly under its control.

“Economic policy is becoming increasingly securitised,” says Jonah Kaplan, Sibylline’s Principal Asia-Pacific Analyst.

The clearest illustration came earlier this year.

When Meta agreed to acquire Manus, an advanced artificial intelligence platform developed by Chinese start-up Butterfly Effect after it had relocated to Singapore, Beijing intervened to unwind the transaction.

It was striking not simply because China sought to block the deal, but because it demonstrated a growing determination to prevent strategically important Chinese technologies from slipping beyond state control.

The Manus case reflects a broader change taking place across the Chinese economy.

For decades, the implicit bargain between China and foreign business was straightforward. Western companies gained access to one of the world’s fastest growing markets in return for investment, expertise and, increasingly, technology.

Critics argued the arrangement often worked disproportionately in Beijing’s favour, pointing to concerns over intellectual property, technology transfer and the close relationship between commercial innovation and the state’s strategic ambitions.

Today, that bargain is being rewritten.

Increasingly, access to China’s market comes with a different calculation: not simply what foreign companies can contribute to China’s economy, but what they can contribute to its strategic ambitions, and what they might ultimately take away.

The regulations also hint at a broader shift in the balance of technological dependence.

Asked whether China was approaching the point where Western economies might soon need Chinese technology more than China needed Western technology, Kaplan pauses before replying: “It’s getting close to that.”

China still needs foreign investment and overseas expertise in many sectors.But Beijing is becoming far more selective about where that investment is welcomed and under what conditions.

“I would probably say there are a lot of similarities between what China is doing and what the US is doing,” he says.

“Both are adopting an increasingly broad definition of national security. What is happening is part of a wider process of de-risking. Both the US and China want to reduce the leverage the other side has.”

The difference lies less in the direction of travel than in the way Beijing is implementing it.

China’s political system allows national security considerations to permeate commercial decision making in ways that remain difficult for many foreign companies to anticipate.

As a result, businesses face an operating environment that is becoming both more interventionist and less predictable.

That changing balance underpins three State Council regulations introduced this year.

Together they expand Beijing’s authority over outbound investment, strategic supply chains and compliance with foreign sanctions, giving the government greater legal flexibility to intervene in commercial decisions where national security is deemed to be at stake.

One of the most significant measures comes into force on 1 July.

New outbound investment rules will give Beijing greater powers to prevent Chinese companies transferring strategically important technologies overseas or reincorporating abroad in ways that could place valuable intellectual property beyond state control.

Artificial intelligence, semiconductors, quantum computing and telecommunications are all expected to face heightened scrutiny.

The regulations consolidate the legal grounds allowing Chinese authorities to prohibit domestic firms from complying with foreign sanctions while expanding the scope for action against foreign entities deemed to have discriminated against Chinese companies.

For multinational businesses, the implications could be be significant.

Companies that suspend commercial relationships with Chinese firms in order to comply with US or European sanctions may increasingly find themselves caught between incompatible legal regimes, facing potential regulatory consequences in China for actions required elsewhere.

Although Beijing has so far exercised such powers selectively, the report assesses that the expanded framework gives authorities considerably greater scope to retaliate should geopolitical tensions intensify.

The new framework also strengthens Beijing’s oversight of supply chains.

Authorities will be able to collect more information on strategic industries while companies operating in key sectors are encouraged to share supply chain data under state guidance.

The measures are designed to improve China’s resilience but also increase information security risks for foreign firms operating in the country.

Kaplan believes this reflects a broader trend towards a more tightly controlled business environment.

“One of the difficulties with China is that it is becoming increasingly opaque, and intentionally so,” he says.

“The amount of data coming out of China is more scarce and more unreliable.”

The same mindset extends beyond information.

Kaplan argues that Beijing increasingly views foreign companies through the lens of national security rather than as politically neutral commercial organisations.

“China often sees companies as an extension not just of government but of the Party,” he says. “It doesn’t necessarily see Western companies as neutral independent entities.”

The report also points to growing regulatory alignment between Hong Kong and mainland China, particularly over investment supervision and capital controls.

While the territory remains central to China’s ambitions as an international financial hub, Beijing’s national security priorities are increasingly shaping regulatory decisions there too.

China is not turning its back on foreign investment.

Rather, Beijing is becoming increasingly selective about where overseas capital and expertise are welcomed, particularly in sectors it considers strategically important.

“The era of pursuing economic growth at all costs has passed,” Kaplan says.

“The focus above all is to protect national security and to gear the whole economy and society for prolonged strategic competition with the US.”

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