What should you do when China increases its regulatory scrutiny?

Chinese regulators have recently taken a hard stance against homegrown technology and education companies, raising concerns about, among others, anti-competitive issues, data security and social issues arising from the after-school tutoring industry. In July, the stock markets responded with massive sell-off; hundreds of billions were erased from valuations.

In parallel, the U.S. Securities Exchange Commission called for additional disclosure requirements for initial public offerings of Chinese companies, increasing difficulties for Chinese companies to obtain foreign investment.  In response, as reported in this Wall Street Journal article, the Chinese Securities Regulatory Commission has since tried to de-escalate the situation by stepping up communications with the SEC and, at the same time, pledging to coordinate with other local supervisory departments to enhance policy transparency and predictability going forward.

Given the recent regulatory enforcement trend, businesses operating in China may want to pay more attention to any emerging regulatory risks, assess the impact on current business models and evaluate different options to stay compliant in the evolving regulatory environment. Similarly, when the regulators knock on the door with enquiries, it is critical for companies to provide meaningful response in a timely manner.  Irrespective of the nature of enquiries, companies should conduct a thorough internal review to establish the facts around the matter in question, preserve the evidence and, where applicable, identify the root cause of the issues identified and determine appropriate remedial actions.  

The above process is usually time-critical and requires specialized skills and experience in local laws and regulations, risk assessment, investigation, remediation design and implementation, business operating model design, etc. Companies are advised to consult experienced business and legal advisors when planning for such regulatory review exercise.