According to the NY Post, a new “company law” that took effect in July 2024 is raising alarms among U.S. firms operating in the country. This legal change requires multinational corporations with more than 300 employees in China to appoint an “employee representative” to their Chinese subsidiaries’ boards of directors. Critics fear that these representatives will act as proxies for the Chinese Communist Party (CCP), embedding potential espionage and control mechanisms within the operations of American firms.

The corporate law, part of China’s broader strategy to strengthen its influence over foreign companies, could give Beijing unprecedented access to sensitive information held by U.S. corporations. According to sources familiar with the matter, these “representatives” are likely to have strong ties to Chinese authorities or even be active CCP members. This setup has sparked concern over intellectual property theft, surveillance, and coercion of employees.

Espionage Fears and National Security Risks

The inclusion of employee representatives within corporate boards raises significant security concerns, especially for tech giants like Microsoft, which employs over 10,000 people in China. One anonymous U.S. House aide explained, “They can tell a [Chinese intelligence] agent, ‘This is the person you need to talk to. If you want to coerce them, here’s who they are… I have access to employee data. This is their wife. This is where they live. This is where their kid goes to school.’”

Paul Rosenzweig, a former Homeland Security official, warned that China’s strategy has shifted from external control of corporations to embedding operatives internally. “Now they’re adding an internal control, an employee representative. If you wanted to be ungenerous, you could call him a Communist Party spy,” he said.

Microsoft in the Crosshairs

Microsoft’s presence in China is under heightened scrutiny, not only because of the number of employees it has in the country but also because of the nature of its software, which is deeply integrated into critical infrastructure in the United States. The company has already faced significant cyber threats from Chinese hackers. Last year, Chinese cyber actors infiltrated the email accounts of Commerce Secretary Gina Raimondo and other U.S. officials through Microsoft systems, exacerbating the concerns surrounding the company’s operations in China.

Microsoft executive Brad Smith, during a congressional hearing earlier this year, suggested that the company is largely immune from certain Chinese laws. “There are two types of countries in the world,” Smith said. “Those that apply every law they enact, and those who enact certain laws but don’t always apply them. And in this context, China, and that law, is in the second category.”

However, this stance has not comforted lawmakers. Rep. Carlos Gimenez (R-Fla.) warned that the company’s entanglements in China are becoming increasingly perilous, saying, “Sooner rather than later, all of these corporations are going to find that they’re going to be absorbed into the CCP and into China.” He urged firms to extricate themselves from the region, highlighting the potential dangers of continuing operations under the new legal framework.

Broader Implications for Foreign Companies

The new corporate law could apply to a range of foreign firms beyond Microsoft. Other multinational corporations, particularly those in technology and defense-related industries, are likely to face similar risks. The law’s provisions allow the CCP to wield greater control over internal corporate affairs, potentially giving China an edge in technology transfers and intellectual property theft.

The law’s timing is particularly concerning given that U.S. firms, including Microsoft, are developing advanced technologies like artificial intelligence, which could be critical in maintaining global competitive advantage. According to a House aide, “The corporate law is one method through which China could put pressure on them to keep the AI lab… What they’re going to do is just steal all the data, every single bit of data.”

Political Responses

U.S. lawmakers have been vocal in their opposition to China’s growing influence over foreign businesses. Sen. Marsha Blackburn (R-Tenn.) described China’s latest corporate move as part of an ongoing strategy of intellectual property theft. “Beijing’s latest move, which will likely embed CCP officials further into companies, shows how far the government’s grasp extends,” she said.

Rep. John Moolenaar (R-Mich.), chairman of the House Select Committee on China, added that no company in China can be considered truly private. He warned American firms to be vigilant: “The Chinese Communist Party will settle for nothing less than complete control at your expense.”

Massive Intellectual Property Theft Concerns

China’s new corporate law represents a watershed moment in the country’s relationship with foreign businesses. By embedding CCP-linked representatives within corporate boards, the Chinese government is extending its reach into the internal workings of U.S. firms, raising concerns about security and intellectual property theft. For companies like Microsoft, which have long sought to balance their global interests, this latest development may force a critical reassessment of their presence in China.

As Derek Scissors, chief economist of the China Beige Book, noted, “The company law will be interpreted in whatever way the CCP deems fit at the time, so none of the revisions matter.” Firms now face an uncomfortable choice: adapt to China’s rules or risk exposure to espionage and coercion.