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German firms hit by China’s internet crackdown

A soldier gestures to the photographer as he stands guard at the Tiananmen Square in Beijing
Beijing to world: Talk to the hand. Source: Reuters.

China experts marveled at Liu He’s speech at the World Economic Forum in Davos last week. The Chinese reform architect renewed President Xi Jinping’s commitment to opening up the domestic market, saying steps planned this year would exceed the international business community’s expectations.

These promises, however, ring hollow for many German companies operating in China: They’re confronted with a new cybersecurity law that, among other things, will clamp down on the use of secure virtual private networks, or VPNs, essential for secure communications.

The new law, which fully goes into effect March 31, threatens to seriously disrupt daily operations for many small- and medium-sized German companies in China by severely curtailing their access to the internet and subjecting them to aggressive state censorship. The law requires the use of government-approved software to access the internet, raising concerns that corporate secrets would no longer be safe from state surveillance.

By late March, Beijing will begin blocking overseas VPN providers. For years, this technology has been popular among local Chinese or foreign internet users to circumvent Beijing’s censorship regime, dubbed the “Great Firewall” by critics.

The German business world is concerned. “Restricting the use of private VPN tunnels will make German companies reluctant to do business in China,” said Volker Treier, the foreign trade chief the Germany’s DIHK chamber of commerce and industry. Production and supply chains of German and European companies may be impaired, he warned.

“41 percent of US companies surveyed said internet and VPN disturbances have already “very strongly” curtailed their operations”

US Chamber of Commerce in Beijing

The consequences of Beijing’s crackdown are already noticeable for many companies. An employee of a German consultancy based near Shanghai, who spoke on condition of anonymity, said it often takes several minutes and several attempts to connect to his VPN. Closing it completely, he noted, would significantly hinder the firm’s operations.

A German plastics processing firm with a plant near Shanghai said it has been experiencing similar disturbances for months. An employee there told Handelsblatt that the VPN connection was crucial to ensure that the company’s Industry 4.0 “smart-factory” applications remained encrypted and that data was securely transferred.

“It appears the Chinese government is seeking more control over data and data flows, as well as the exchange of information,” Stefan Mair, a senior member of Germany’s BDI industrial lobby, told Handelsblatt. China, he added, wants total control of its digital sphere.

Beijing is trying to allay those fears. Earlier this week, an official with China’s Ministry of Industry and Information Technology said state-sanctioned internet operators “will be unable to intercept information on your business.” Whether international companies operating in the country buy that remains to be seen, however. According to a survey published this week by the US Chamber of Commerce in Beijing, 41 percent of US companies surveyed said internet and VPN disturbances have already “very strongly” curtailed their operations and competitiveness in China.

Many firms are also concerned about the lack of details on how the new regulations will be implemented, according to BDI’s Mr. Mair. “This raises doubts about legal certainty and may affect the attractiveness of China as a business location,” he said.

DIHK director Mr. Treier called on the German government to find common approaches with Beijing in “the cyber dialogue” between the two countries, which has been in the works for a long time. Chancellor Angela Merkel and Chinese Prime Minister Li Keqiang had already agreed on such a dialogue in 2016. But the meeting has yet to happen.

Dana Heide is a political correspondent for Handelsblatt in Berlin. Sha Hua is a correspondent for Handelsblatt in Beijing. Jean-Michel Hauteville adapted this story for Handelsblatt Global. To contact the authors: heide@handelsblatt.com, hua@handelsblatt.com

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