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Sanctions Risks for Businesses in China
Doing business in China can be incredibly lucrative, but it also comes with major risks that companies need to be aware of. One of the biggest risks is the potential for sanctions against China and how that could impact operations there. With tensions growing between China and Western countries like the US, the threat of sanctions is very real.
In this article, we’ll break down the key sanctions risks for businesses in China and how companies can mitigate them. There’s a lot to cover, so let’s dive in!
Contents
US Sanctions on China
The US has already imposed some sanctions on China in recent years, mainly related to human rights issues in Xinjiang and Hong Kong. However, if tensions continue to rise, we could see much broader US sanctions on China, similar to what they’ve done with Russia.
Potential US sanctions could target major Chinese banks, state-owned companies, certain industries like tech and defense, and even high-ranking officials. This could make it very difficult for US and multinational companies to continue operating in China.
For example, if major Chinese banks are sanctioned, it would disrupt international payments and financing. Companies may not be able to access their revenue or pay suppliers and employees in China. Sanctioned Chinese companies also wouldn’t be able to do business with US entities.
Here are a few key US sanctions risks for businesses in China:
- Banks unable to process cross-border payments
- Cut off from US technologies, equipment, and other exports
- Barred from working with sanctioned Chinese companies
- Chinese partners or customers going out of business
- Reputational risks as sanctions ramp up
While full-scale sanctions are not guaranteed, the risks are increasing. Businesses in China need to monitor sanctions developments closely and have contingency plans in place.
China’s Anti-Foreign Sanctions Law
In 2021, China passed its own Anti-Foreign Sanctions Law to counter restrictions from the US and others. This law allows China to seize assets of foreign companies that implement or assist with “discriminatory” sanctions.
The law is quite broad, so even if your company isn’t directly sanctioning China, you could get caught up in retaliation. For example, if your company stops business in China to comply with US sanctions, China could see that as “assisting” sanctions.
Key risks under China’s anti-sanctions law include:
- Asset seizures, bank account freezes
- Entry bans on company leadership
- Loss of licenses, permits and other authorizations
- Restrictions on Chinese subsidiaries
- Lawsuits and prosecutions in Chinese courts
Companies need to review the full law and subsequent regulations to understand their sanctions risk exposure. Unfortunately, the law provides the Chinese government with broad powers, creating compliance challenges.
As sanctions ramp up, multinational companies face a tough balancing act. If they comply with US sanctions, they could face retaliation from China. But if they ignore US sanctions, heavy penalties await.
This “double bind” requires businesses in China to take careful steps:
- Closely track sanctions on both sides
- Assess which business lines are most at risk
- Reduce exposure where necessary, but avoid overreaction
- Engage with both governments
- Look for safe harbors and exemptions
- Plan for contingencies like divestment
There are no easy options, but proactive planning and engagement can help avoid the worst impacts. Companies should tap legal counsel to map out risks and options.
Chinese Policies and Regulations
Beyond sanctions, businesses in China face risks from evolving Chinese laws, regulations, and policies. Some key examples include:
Data Localization and Cybersecurity Rules
China has implemented strict data localization laws that require companies to store data within China. There are also cybersecurity reviews for companies handling sensitive data.
These rules create compliance burdens and risks around data access. Violations can result in fines, loss of licenses, or even shutdowns.
Export Controls
China has complex export control rules restricting what technologies can be taken out of the country. There are licensing requirements for encrypted tech, drones, AI, semiconductors and other areas.
Falling afoul of these regulations can lead to goods being seized at the border, fines, and loss of export rights.
Foreign Investment Restrictions
Foreign investment into China is regulated through the Foreign Investment Negative List (FINL) and Market Access Negative List.
These lists ban or restrict foreign investment in certain sensitive sectors. Businesses can only invest in permitted areas.
Anti-Monopoly Law
China’s Anti-Monopoly Law gives regulators extensive powers to block mergers and acquisitions, break up monopolies, and impose fines.
In recent years, enforcement has ramped up dramatically, especially against foreign companies. Fines can be up to 10% of revenue.
Here are some additional best practices for mitigating compliance risks when doing business in China:
- Conduct thorough due diligence before investing or partnering
- Hire local staff to help navigate Chinese regulations
- Implement a strong compliance program with regular audits
- Frequently assess changes in laws and update policies
- Maintain transparent and accurate books and records
- Provide compliance training to employees, especially expat staff
- Perform careful screening of third-party partners and vendors
- Develop contingency plans for responding to investigations
- Engage reputable local counsel for support as needed
- Consider political risk insurance to mitigate sanctions impact
- Communicate regularly with regulators to build relationships
- Participate in trade groups to stay abreast of developments
- Consider keeping operations flexible and movable if needed
- Maintain operations globally to diversify risk exposure
Staying on top of the regulatory environment takes significant resources. But given the high risks, it’s a necessity for companies operating in China. Partnering with experienced advisors can help bridge knowledge gaps.
With the right compliance approach, foreign businesses can still thrive in China’s complex but lucrative market.