Last updated: May 25, 2014 8:37 pm

China clamps down on US consulting groups

Protesters hold placards as they march to the US consulate in support of Edward Snowden from the US in Hong Kong on June 15, 2013. Snowden, a former CIA technical assistant, is in hiding in Hong Kong after he arrived in the city on May 20 and blew the lid on a vast electronic surveillance operation by the National Security Agency, which has hit targets in China and Hong Kong. AFP PHOTO / Philippe Lopez (Photo credit should read PHILIPPE LOPEZ/AFP/Getty Images)©AFP

Backlash: marchers in Hong Kong protest against US electronic spying following the Snowden revelations

China has ordered state-owned enterprises to cut ties with US consulting companies such as McKinsey and Boston Consulting Group because of fears they are spying on behalf of the US government, according to people close to senior Chinese leaders.

The instruction comes days after the US Justice Department indicted five People’s Liberation Army officers on charges of cyber-espionage and stealing trade secrets from US corporations including Alcoa, US Steel and Westinghouse.

Beijing’s response to the indictments was swift, with a propaganda campaign in Chinese state media describing the US as a “mincing rascal” and “high-level hooligan”. The decision to ban state enterprises from working with western consulting companies marks a further escalation in Beijing’s response.

Management consultancies including McKinsey, BCG, Bain & Company and Strategy&, formerly known as Booz & Co, have extensive operations in China, which remains a rapidly growing market for them.

“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. “Right now the foreigners use their consulting companies to find out everything they want about our state companies.”

China’s leaders announced on Thursday that all foreign IT products and services sold in China would be subject to a new security screening process. Any company, product or service that fails the test will be banned from China.

The vetting will focus on products and services used in communications, finance, energy and any other industries the government considers related to national security or “public interest”, officials said.

Windows 8, the latest operating system from Microsoft, has already been banned in China because of security concerns, state media reported last week.

McKinsey, BCG and Strategy& all declined to comment on the consultancy ban but people familiar with their operations said they all still have some Chinese state enterprises among their clients.

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Private and multinational companies still make up a significant share of western management consultants’ clients in China so a ban on state business would hurt but probably not cripple their operations in the country.

Likewise, China is unlikely to completely banish US technology companies from the country given how reliant it is on western software.

“Windows is far too embedded in the Chinese economy for it to be banned completely, but certainly we should expect to see sensitive offices and systems reduce if not eliminate their use of it,” said Bill Bishop, an independent consultant based in Beijing. “Under President Xi Jinping, technology and implementation will look to be converging, so foreign tech firms should be very worried about their prospects.”

Despite decades of state-led efforts, China has failed to produce homegrown alternatives to the dominant US technology offerings.

In February, Red Flag Software, a company backed by the Chinese Academy of Sciences that was the biggest challenger to Windows systems in the country, closed its doors because of poor financial performance.

In the face of US accusations over cyber attacks and industrial espionage, Chinese officials say their country’s ministries, companies, universities and telecoms networks are under constant attack from the “US hacker empire”.

Additional Reporting by Gu Yu

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