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In China, escalating cost of business sends some companies to the exits

People walk along Nanjing East Road in Shanghai in August. A new personal data protection law is adding to the challenges foreign businesses face in operating in China. (Qilai Shen/Bloomberg News)
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A new data protection law is changing the calculus for doing business in China, with foreign and domestic firms scrambling to comply, and some companies including LinkedIn and Yahoo choosing to leave.

China’s personal information protection law, implemented this month, is the latest factor adding to a challenging political environment for businesses operating in the country and altering the cost-benefit analysis. While the untapped business potential of 1.4 billion consumers was once an irresistible draw, this is increasingly changing.

James Zimmerman, a Beijing-based American lawyer, said that the China market had become “less and less palatable for Western companies” because of “reputational risks of operating in an environment with extreme content censorship, and tighter regulatory conditions.”

The trade war brought politics into U.S.-China business to a much greater degree, with Beijing and Washington wielding tariffs and consumer product boycotts in their power struggle. Domestically, Beijing has launched a populist campaign against big business, effectively making the market less profitable for many companies under stricter new regulations.

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And for some Western business executives, the human rights controversies of President Xi Jinping’s era have become a bridge too far, including a crackdown on ethnic minorities in the Xinjiang region that Washington classified as genocide; silencing of Hong Kong protesters through use of force and imprisonment; and, most recently, the disappearance of tennis star Peng Shuai after she accused a former top official of sexual assault.

Women’s Tennis Association Chairman Steve Simon said last week the organization is willing to cease its China operations, potentially losing hundreds of millions of dollars, if Chinese authorities don’t properly investigate Peng’s allegations.

On Nov. 2, the same day the allegations appeared on Peng’s verified social media account, Yahoo announced it was pulling out of the China market due to “the increasingly challenging business and legal environment.” Days earlier, LinkedIn had also cited a significantly more challenging operating environment in its decision to close the Chinese version of its networking site, though it said it would keep a simple China job listing site without a social feed or the capability to share articles.

Yahoo had been downsizing its China operations for years, faced with diminishing business in the country because of censorship and competition from local players. In 2007, the company came under intense criticism in the United States for turning over emails of two Chinese political dissidents to Beijing authorities, which were used as evidence in their prosecution; they were later imprisoned. Yahoo shut down its email service in China in 2013 and closed its Beijing office in 2015.

Still, the company had hung on in the China market until now. While Yahoo didn’t go into details about its reasons for leaving China, its announcement occurred as the new data protection law came into effect Nov. 1, which industry executives said would require multinational companies to make significant and costly changes to their processing and storage of data.

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The law has broad consumer-protection measures that limit companies — Chinese and foreign — from collecting consumers’ personal information without their consent, and from storing more personal data than necessary. It also restricts the transport out of the country of Chinese nationals’ personal data, an especially onerous restriction for multinational tech companies.

“It’s created a lot of uncertainty,” said Lester Ross, policy head of the American Chamber of Commerce in China, about the new personal data law. He said AmCham has been communicating with Chinese regulators to request a period of forbearance to give U.S. companies more time to comply.

Clarisse Girot, Asia-Pacific director of the Future of Privacy Forum, said the Chinese law is largely modeled on Europe’s General Data Protection Regulation, implemented in 2018. But she said China’s version diverges from GDPR in its stipulations for China’s national sovereignty over data, instead of being purely about consumer rights.

The law also comes amid broad pressure on businesses from Xi’s “common prosperity” campaign, a populist push to narrow the country’s wealth gap. A number of China’s most powerful companies have come under regulatory crackdowns over the past year, and businesses have scrambled to make large philanthropic donations to prove they are supportive of the government effort.

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U.S. video game maker Epic Games gave up its pursuit of the China market on Nov. 15, several months after Beijing banned children from playing video games on school nights. Epic’s popular game Fortnite had been available on a trial basis in China for more than two years, but it failed to gain regulatory approval for a formal release.

The departure of some foreign tech companies means less competition for local players, but it could bring longer-term challenges. China has benefited from the presence of leading overseas high-tech companies, which has helped advance the nation’s technological know-how through joint ventures and tech transfer agreements.

Ross said that China’s strict entry restrictions during the pandemic have been yet another challenge for business, as has an energy crunch that has disrupted factory production across the country. He said he hasn’t heard of any foreign executives receiving quarantine exemptions when entering China, unlike some other Asian countries, such as South Korea, that have allowed exemptions for business trips.

Several smaller American companies that were considering entry into the China market have shelved those plans because of the country’s coronavirus restrictions, Ross said, without identifying them.

Most nonessential travel into and out of China is still prohibited, and those able to travel to the country must complete at least three weeks in quarantine. In one northern Chinese city, Shenyang, the quarantine length was extended this month to a whopping 56 days, in a strong deterrent against visitors.

Alicia Chen in Taipei, Taiwan, contributed to this report.

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