Stringent China: Heavier Government Scrutiny

The Chinese government is now targeting economic expansion of about 7% for 2015, as announced by Premier Li Keqiang at the annual National People’s Congress (NPC) session in March. State control over market forces is likely to continue; and as China tightens its regulatory jurisdiction over foreign businesses, multinational companies are receiving much more compliance scrutiny over areas including antitrust, anti-corruption, environmental impact, and cybersecurity.

China Regulatory

Here are a few key regulatory focus areas that multinationals should be aware of:

Antitrust
Despite efforts to further open the market to foreign capital, the Chinese government now places even stricter scrutiny on price-fixing practices. In a settlement with China’s antitrust authorities, American chip manufacturer Qualcomm was forced to pay $975 million in fines and to make several changes to its patent licensing practices for mobile phones sold in China.

Environmental Concerns
Faced with international criticism and domestic complaints regarding environmental concerns, China’s central government appears determined to strengthen efforts to limit pollution in manufacturing and corporate operations. A recently released documentary on the nation’s air pollution, “Under the Dome”, has led to heated discussions among Chinese citizens, who are increasingly concerned about aggressive industrial expansion at the expense of deteriorating air quality in China. French utility company Veolia Environment has also faced criticism in China for failing to maintain water quality.

Cybersecurity
Cybersecurity and censorship have long been controversial issues in China, leaving multinationals, especially technology companies, under heavy government control. With the world’s largest population of Internet users and the biggest smartphone market, China now places additional restrictions on multinationals entering the market. Concerns over the business environment for foreign technology firms are mounting, as regulations designed to strengthen cybersecurity in the country’s critical industries were approved at the end of 2014. These regulations include a new law affecting China’s banking sector, which requires telecommunications and Internet service providers to turn over their encryption codes to allow government surveillance.

Under tightened government control, multinationals must closely monitor relevant regulations and stay well-informed on policy direction. Companies must also work to establish a green identity and to build a strong CSR reputation in order to foster better relationships with local governments in China.

FSG encourages clients to adopt a three-pronged approach to enhancing government engagement under China’s decentralized landscape: 1) Build effective advocacy practices; 2) Align external dynamics with internal strategic planning; 3) Engage key internal stakeholders with commercial objectives.

Preparing MNCs for China’s New Normal through 2020

This blog post is the last update of a six-part FSG Insight series on China’s economic outlook in the next five to six years, and its implications for multinationals’ mid-term strategies.

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