China tells state-owned entities to cut links with US management consultants, say reports

Out-Law News | 28 May 2014 | 9:48 am | 3 min. read

The Chinese government has ordered state-owned enterprises to break their ties with US consulting companies amid fears that they are spying on behalf of the US government, the Financial Times has reported, citing sources close to senior Chinese leaders.

According to the newspaper, sources familiar with the matter have said that the government has told state-owned entities to cut links with companies such as McKinsey and Boston Consulting Group and proposed developing a team of Chinese information systems consultants to act in their place.

In addition, the Chinese government is telling its domestic banks to remove high-end servers made by US multinational IBM and replace them with a local brand, Reuters said, citing Bloomberg.

Beijing has also accused the US of using internet surveillance to spy on its leaders and key institutions, said the BBC. A report released by the China Internet Media Research Centre said that the US had spied on China's government officials, businesses and mobile phone users, describing the alleged behaviour as "brazen" and a "gross violation of human rights". The report was based on claims made by US whistleblower and former National Security Agency contractor Edward Snowden.

China's actions follow an announcement by the US Justice Department that it has indicted five officers of the People's Liberation Army on charges of cyber-espionage and stealing information from a number of US corporations, including US Steel, Westinghouse and Alcoa.

The top leadership has proposed setting up a team of Chinese domestic consultants who are particularly focused on information systems in order to seize back this power from the foreign companies,” said a senior policy adviser to the Chinese leadership, according to the Financial Times.

The reports are the latest development in a series of measures by Beijing relating to information technology, amid what the Chinese government has said are security concerns.

Last week, China announced that all foreign IT products and services sold in China will be subjected to a new security screening process. Any product, service or company which does not pass the test will be banned from China. Products and services used in communications, finance, energy and other industries the government considers to be linked to national security or “public interest” will be subject to the tests, officials said, according to the Financial Times.

Earlier this month Beijing banned Microsoft software Windows 8 from all desktops, laptops and tablet PCs purchased by central state entities, according to Xinhua, the state press agency. It was not clear whether other Windows products were prohibited as well, said Xinhua.

According to the Financial Times, the consultants McKinsey, BCG and Strategy& all declined to comment on reports that China has banned its state entities from dealing with US management consultants. According to the newspaper, people familiar with the companies said they all still have some Chinese state enterprises among their clients.

According to Forbes.com China has not signed the World Trade Organization (WTO) Agreement on Government Procurement, and this allows the Chinese administration to discriminate against foreign companies when it obtains goods or services.

Kening Li, of Pinsent Masons, the law firm behind Out-Law.com, pointed out that in the   General Agreement on Trade in Services which China agreed with the WTO, Beijing agreed not to limit market access to management consulting services. The commitment, which is laid out in Part A, Annex V of the agreement, states that foreign entities will have "national treatment" in relation to such services.

Li said: "I do not think the WTO would rule against China on this, because they are saying that they have a legitimate security concern, so the WTO would not find against China."

However some commentators have said that China's recent actions will raise questions in the minds of some companies as to whether the WTO agreements China has committed to, and which businesses expected to be in place while they trade in the country, can be relied on to continue.

Li said that Beijing's instruction to state-owned enterprises to cut their links with US management consultants must be seen in light of the US indictments against the five Chinese military officers.

"This is a political and publicity issue," said Li. "China is defending itself as a counter attack and companies like McKinsey and IBM are caught in the cross-fire."

Li said that cutting ties with western consultants and technology could harm Chinese enterprises.

"Some people would argue that the Chinese indigenous technology is the same as western technology, but most people would agree that it is not very good," Li said. "It will harm those users in China if they can no longer use western technology."

According to the Financial Times, Red Flag Software, a company backed by the Chinese Academy of Sciences and which was regarded as China's biggest competition to Windows systems, closed down earlier this year due to unsatisfactory financial performance.