China passes dangerous law for foreign companies

Exactly a week ago, Chinese newspapers and the official news agency reported for the first time about this new law, which will be submitted to the NPC Standing Committee for a second reading: the Anti-Punishment Law. Nobody knows a draft. The text was published last weekend, when a law that could soon force foreign companies to choose between China or the rest of the world long ago entered into force. Most foreign companies in China are still unable to understand what just happened. How dangerous is the law for them.

“European companies in China are shocked by the lack of transparency and the speed of this process,” complains Jörg Woetke, president of the European Chamber of Commerce in Beijing. “This measure is not conducive to attracting foreign investment or reassuring companies that already feel they are being used as pawns in a political chess game.”

The new law consists of only 16 articles. On the surface, it merely depicts a series of retaliatory measures that Beijing has always taken in response to Western sanctions. At the end of March, for example, after the European Union imposed sanctions on four Chinese officials and a government bloc involved in the suppression of Uyghurs in northwest China’s Xinjiang region for the first time since 1989, the Chinese government responded immediately. An hour after the European sanctions were announced, the Foreign Ministry in Beijing published its own ban list: a number of scholars and politicians were banned from entering the People’s Republic of China, Hong Kong and Macau.

“Revenge is the second best option.”

The danger to foreign companies is mainly hidden in Article 12 of the new law, according to which individuals and institutions (including companies) must expect legal consequences if they carry out sanctions against the People’s Republic of China or Chinese organizations. As a result, this means that if a foreign company complies with US sanctions against a Chinese group, the company is threatened with legal action in China, and since China is not a constitutional country, it must be clear to whom the rulings will be in favour. made.

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“China had neither the economic strength nor the political will to take legal action against US sanctions. Now it has both,” said Wang Jiangyu, a law professor at City University of Hong Kong. “Cooperation is the best option, but the United States does not want it. So, as with this new law, revenge is the second best option.”

Chinese law is based on the so-called embargo law, introduced by the European Union in 1996 to protect European companies from US sanctions against Libya, Iran and Cuba. Unlike the European Union, China is the direct target of the sanctions and is now trying to protect itself.

Network equipment supplier Huawei can now sue “Taiwanese semiconductor manufacturer TSMC for economic losses,” explains Tian Feilong, a law professor at Beihang University in Beijing who co-authored the law. “If TSMC loses in our court, TSMC will have to decide whether to respect US sanctions or China’s anti-sanctions law, as it has significant interests in both places.”

The United States is increasingly targeting China

A very clear example: Huawei banned former US President Donald Trump by order of semiconductor renewal. Since last September, US companies are no longer allowed to deliver to Huawei, just like foreign companies that make chips with machines from the US or production processes that have been patented in the US. Therefore, TSMC, one of the world’s largest chip manufacturers, has halted deliveries. Perhaps the detention was a consequence of TSMC not being allowed to extradite to America, yes, and even worse, it was supposed to have had an impact on the company’s banking relationships, that is, if international institutions refused to do business with a company that defies US sanctions.

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It is unclear to what extent European companies are now affected by Chinese law. For example, German semiconductor manufacturer Infineon generates about 40 percent of its sales in the People’s Republic of China, but mainly in the auto sector, which remains unaffected by US sanctions.

However, the reality is that the US in particular is increasingly targeting China – over actions in Hong Kong and human rights abuses in Xinjiang, but also on issues of trade and technology. A few days ago, US President Joe Biden blacklisted 59 Chinese companies with links to defense or surveillance technology already established by his predecessor Trump, including Huawei. So US investors will no longer be allowed to trade in these companies’ securities from August 2 – the first test of the new law. Until then, the Chinese government had been very friendly: “China always welcomes and supports foreign companies to do business in China and protect their rights and interests in accordance with the law,” said a spokesperson for the Foreign Ministry in Beijing. “The door to China will continue to open wider.”

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