By Samuel Shen and Xie Yu
SHANGHAI/HONG KONG (Reuters) – Smaller advisory and due diligence firms in China believe they will benefit from things returning to normal after the shock caused by Beijing’s crackdown on companies providing information that is too sensitive is supposed to be shared with foreigners.
The crackdown that trapped Shanghai-based industry leader Capvision earlier this month, and a sweeping update to anti-espionage laws due to take effect on July 1, has sent some consultants in the country scrambling to reduce the risks.
But given the hopes pinned on China’s economic growth and liberalization, the demand from foreign companies for expert knowledge about China’s market, regulatory landscape, potential business partners and opportunities will inevitably continue to grow.
US consulting firm Frost & Sullivan estimated the expert insights market for China at $1 billion last year and estimated it would nearly double to $1.9 billion by 2025.
“Due diligence demand is huge among foreign companies,” said Lu Xiaomeng, director of geotechnology at Eurasia Group.
For example, about 600 Chinese companies are blacklisted by Washington and subject to export controls, “but tons of new Chinese companies are popping up every month offering similar products,” so US companies doing business with China demand expert knowledge to to be fully compliant, said Lu.
“WAKE UP CALL”
The state-run CCTV reported this month that the “expert network” service company Capvision had accepted projects from foreign companies to collect information, including “state secrets and intelligence” on sensitive sectors, including defense and high technology.
Smaller firms were able to fill the space left by rivals, such as Capvision, who were fighting against the Chinese authorities.
“When a whale falls, all things are born,” said a senior executive at a Shanghai consulting firm, who expected Chinese state-owned companies to review their exposure to Capvision.
However, China’s expert network market will suffer from bad publicity in the near term, as “no one wants to be associated with policing,” said Max Friberg, CEO of Inex One, a Stockholm-based marketplace that connects investors to expert networks. .
But in the long run, the industry — which has been more informal in China than in the West — will become better regulated and demand for insights that help investors and companies make better decisions is likely to pick up again, he said.
For the time being, the trade in expert information has clearly become more cautious.
“It’s unfortunate that the expert network business has come under the spotlight in such a way,” China Insights Consultancy (CIC), the country’s second-largest expert network company, said in a statement to Reuters.
“As a leading homegrown participant, CIC has always adhered to relevant laws and regulations,” said CIC, adding that it “will continue to contribute to the healthy development of the industry and to China’s economic growth.”
Industry insiders say they’ve encountered situations where some customers would push for information that could breach confidentiality, blurring the line between what’s legal and what’s not.
A risk adviser in Hong Kong said due diligence firms in China would shy away from research in sensitive areas and that the “quality of information” one could get about these sectors would be much more limited.
Friburg said the Capvision incident would make customers “think more about who they interact with and how they interact with these expert networks.”
“This is a wake-up call for everyone,” he said.
(Reporting by Samuel Shen in Shanghai and Xie Yu in Hong Kong; Additional reporting by Anton Bridge in Tokyo; Editing by Sumeet Chatterjee & Simon Cameron-Moore)
