China’s bans on foreign consulting firms are not about cybercrime

29 August 2014 | By Andrew Lumsden (Partner)

"The drinker's heart is not in the cup"

 (Chinese proverb)

Media reports about the Chinese government ordering state-owned enterprises (SOEs) to cut ties with US consulting firms have suggested a tit-for-tat dispute between China and the US over cybercrime and national security. But is it really a case of international espionage? 

More likely, it is simply China intervening to support the growth of its local Chinese consulting sector as it looks to advance towards a sophisticated, services-based economy.

China has previously used bans on foreign services and products to grow its domestic industries with great effect. Now, it’s quite possible its using this tried and true policy lever to boost development of the home grown consulting sector and professional services more broadly.

For decades, China has been promoting the development of services and technology as part of building a robust modern economy. Premier Li Keqiang has repeatedly reinforced this policy priority in his public speeches and the State Council has made several decrees aimed at helping sectors like IT, insurance and production-related services.

From an economic development perspective, China has a clear interest in restructuring its economy to being more services-based. Services provide a natural hedge to the highs and lows of the commodity cycle and also the shifting whims of the international consumer market.

The opportunities for Australia are enormous as nearly one billion new middle class Chinese demand their share of our non-resources sectors: agriculture, high-end manufacturing and services. But we need to be cognisant of the Chinese Government’s desire to find local solutions to these problems.

Right now output from China’s service sector accounts for less than 50 per cent of national GDP, significantly lower than the 70 per cent usually seen in developed countries. However, in a recent address at the 2nd China Beijing International Fair for Trade In Services, Premier Li Keqiang declared that services already add more value to the economy than industry and that the sector employs more people than agriculture.

Any ban on state companies engaging foreign consulting firms is unlikely to be simply the result of national security concerns. Rather, these concerns provide a convenient reason for Chinese consulting firms to expand their business and gain experience and expertise in significant cross-border transactions, all essential to becoming competitive in the global market. As China’s local consulting industry grows, so too will the broader professional services sector.

In the past we have seen how IT services have reportedly benefited from a ban on the use of Microsoft’s Windows 8 operating system on government computers. While security concerns may be part of the reason for the ban, it is reported that China has been developing its own operating system. Like the ban of foreign consulting services, the ban on Windows 8 will facilitate the growth of a computer operating system indigenous to China and the development of China’s IT services sector more broadly.

The position on foreign services firms is reminiscent of China’s ban on global tech giants like Facebook, Twitter and Youtube in 2009-10, which has resulted in explosive growth of China’s own gaming and social media industry eg Tencent and WeChat. Tencent is now the world’s biggest company in terms of game-related revenue, raking in some US$5.3 billion last year. This comes after it grew by 45% last year, streaking past Microsoft’s US$4.7 billion in gaming revenue.

Given the commercial benefits of China’s new ban on foreign consultants, it is hard to believe it is all about national security. Rather, the likely scenario is the Government is using the ban to promote China’s indigenous services sector. We should expect China’s leadership to continue employing a range of policies as part of the transition to a modern economy – the face of capitalism with Chinese characteristic is complex and ever-changing. In the meantime, we will no doubt see an increasing number of Chinese domestic consultants servicing the needs of the growing Chinese market.

The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.

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Andrew Lumsden

Partner. Sydney
+61 2 9210 6385