China's censorship comes at too high a cost

An internet cafe in China. Photo credit: micgadget on Flickr (flickr.com/micgadget)

The Chinese government blocked the words "Egypt" in its search engines during the Tahrir Square demonstrations and domesticated its own versions of Twitter and Facebook which allow it to monitor the communications of the masses. It has also attempted to cover up unflattering accounts of abuses of power.

Its control of information regarding media content via the Internet, going head-to-head with Internet heavyweightsbloggers, Internet-critics, and even entertainment celebrities has been garnering press coverage for years.

Balancing need for Foreign Direct Investment versus need for internal security

These measures by the Chinese government demonstrate a struggle to balance the need for Foreign Direct Investment (FDI), which requires accurate information and to maintain state security, which requires strict information controls.

Around the world, nations play host to both domestic and foreign private intelligence companies, whose employees comprise one of the most multidisciplinary workplaces in the world. Their clients are state, regional, and local governments, as well as other private companies and investors. Their task is to have a twenty-four hour global pulse on everything that would affect informed policy and investment decisions and strategies.

This means having a clear understanding of the politics, culture, history, and economies of every country and region in the world, and being able to draw on that knowledge to interpret new intelligence in order to make them actionable for their clients. 

The Chinese State Administration of Industry and Commerce (SAIC) was once an easy-to-access source of information for corporate lawyers, who would be able to obtain information that would be withheld in most countries. 

The restrictions could be seen in the view that they now align China with international standards. However, because the new regulations are not being made bluntly clear and on-the-record, many intelligence companies may also be completely unaware of any illegality.

In addition, state-level directives have often had difficulty reaching the provincial and municipal nodes, which have historically withheld the dissemination of information of new laws to their publics if it would hurt private and local interests. 

Drawing a line between paranoia and due diligence

The ambiguity of China's secrecy laws and the sometimes retroactive declaration of any kind of information collection as illegal has made due diligence a risky endeavour. It has at times been done to ensure that the battles waged around information asymmetry favours resultant domestic interests where they exist.

The rapid growth of China's economy has necessitated the proliferation of investigative and due diligence service providers, and it is often because of their services that investment decisions that benefit China had been made. 

However, at any time these companies' activities could be declared illegal, as illustrated by the 2010 case of American Xue Feng, whose purchase of a database on Chinese oil companies landed him eight years in prison. One who spent enough time and effort doing their own independent research could easily have duplicated the information he purchased by collating information from various sources on the internet.

So what, then, was his crime? It was merely the collation of the information that he purchased that had apparently violated state secrecy laws, and the Chinese state would prefer that such information was as diffuse as possible.  This mirrors much of their behaviour on other information controls which have the objective of making it difficult for its critics to visualize and disseminate "the big picture" on issues that can be easily interpreted and digested by a mass audience. 

The Chinese government's actions are a reflection of its often primitive sense of protection, but they're also a stark reminder of how investors often ignore the most basic rules of due diligence.

Chinese laws and regulations do not affect the Hong Kong Special Administrative Region, and any Chinese state-linked commercial entity operating in Hong Kong is required to adhere to local laws regarding the provision of data and statistics regarding its structure, financing, and operations, just as other Hong Kong and foreign companies are treated. 

Canada and China: a comparison

The widespread availability of information can be both a benefit as well as a liability in any country. In Canada, it's accepted as a matter of social and political culture that we can unearth scandalous information and for the media circus to take its course, finally culminating in resignations, court trials, and a public debate.

In China, however, while it may result in increased risk-taking for foreign investors, information controls could also help cover-up any questionable corporate and political behavior. 

It then follows that such laws, while the Chinese state may defend as protecting the privacy of its citizens, may also be preventing the ability for civil activists from being able to create intelligence dossiers on persons or organizations of interests for whom they wish to have exposed for any scandalous behaviour.

Furthermore, the recent ousting of Chongqing Party Secretary Bo Xilai, who was rumoured to have created intelligence dossiers of other party members in order to identify faults and flaws of character should conflicts or competitions materialize, shows that such availability of information could constitute a significant threat to state authority and the appearance of state solidarity. 

It is yet to be seen what effects these restrictions may have. It is unlikely that foreigner investment will slow even despite these new restrictions. And it is possible that the restrictions would allow foreign investors to plead ignorance as a result of information controls when questioned by their own national governments and denizens about their activities in China when they choose to turn a blind eye to blatant abuses.  The way that foreign investors react to the new laws likely will dictate if, when, how, and how quickly these laws will become relaxed.

In the interim, well-established companies operating in China as well as civil society groups can rely on their personal social networks, known as guanxi, to obtain the information that they need.

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