Hostage-Taking In China Will Reoccur

M’LEARNED FRIENDS at China Law Blog have posted a rather salutary guide to hostage-taking in China — how to avoid it befalling you, not a how to do it guide, we should rapidly add.

Hostage-taking is far more common in China than is often realised, and in some cases, legal. China’s laws, judiciary and police make it easy to find pretexts for taking foreign nationals hostage.

It is a persistent threat for foreigners working in the country, which has added to the reasons that multinationals doing business in China have been pulling out foreign employees over the past year.

One of the prompts for the post is, self-evidently, the case of ‘the two Michaels’ — Michael Spavor and Michael Kovrig, the Canadians detained by Chinese authorities shortly after Huawei’s CFO Meng Wanzhou was arrested in Canada nearly three years ago on a US extradition request. They were released soon after she was on Friday following her deferred prosecution agreement with the US Department of Justice that will wipe away the fraud charges against her.

To this Bystander, the money sentence is:

China released the two Michaels literally within hours of Meng walking free, and it did so to let the world know that it did use the arrest of the two Michaels as hostage diplomacy and, even more importantly, to threaten the world that it would not hesitate to engage in hostage diplomacy again.

The full post, Meng Wenzhou, the Two Michaels and China Hostage Taking: What YOU Need to Know, is well worth the read.

The main takeaway from the two Michaels example is that diplomatic hostage taking works as a political tool, not least because authorities are not overly concerned about any international ill will China earns from such behaviour.

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Meng Wanzhou’s Homecoming Raises More Questions Than It Answers

Screenshot of US Dept of Justice announcement of deferred prosecution agreement with Huawei Technologies CFO Meng Wanzhou, captured September 25, 2021

CHINA’S POSITION ON the return of Huawei’s CFO Meng Wanzhou after nearly three year’s detention in Canada fighting an extradition request to face criminal fraud charges in the United States is clear: it has won a complete victory.

US Department of Justice prosecutors announceddeferred prosecution agreement on Friday under which Meng admitted misleading HSBC into processing transactions for Huawei that breached sanctions against Iran. In return, her prosecution on bank and wire fraud charges, to which she pleads not guilty, halts and the charges will be formally dropped by the end of next year if she complies with the agreement.

The extradition request against her thus became moot and was withdrawn. Meng was immediately released by the Canadians and boarded a plane chartered by the Chinese government to take her home to Shenzhen, posting to WeChat en route:

I am currently flying over the North Pole, heading in the direction of home, soon to enter the embrace of our great motherland. Under the leadership of the Chinese Communist party, our motherland is heading toward prosperity. If it was not for our strong motherland, we would not have the freedoms of today.

She did not mention what the one senior FBI official described as her admission as ‘evidence of a consistent pattern of deception to violate US law.’ All search results on Weibo relating to her admission of misleading HSBC are reportedly being blocked.

Foreign Ministry spokesperson Hua Chunying said:

Facts have proven that it is a political persecution case targeting a Chinese national with the aim of suppressing Chinese high-tech companies…The so-called fraud charges against Meng are nothing but pure fabrication…What the United States and Canada have done is a typical case of arbitrary detention.

It is the mirror image of the view Canadians will have of the detention of ‘the two Michaels‘, two Canadian nationals detained in China on espionage charges shortly after Meng’s arrest in Canada and released soon after her release on Friday.

Michael Spavor, who ran cultural exchanges with North Korea, was jailed for 11 years in August after being found guilty. The case of Michael Kovrig, a former diplomat, was still before the courts.

Throughout, authorities have maintained that the two cases were not connected with Meng’s while occasionally linking the two indirectly. However, the two Canadians were widely regarded in the West as diplomatic hostages in the Meng case.

While Canada has got its two citizens returned home, it is more difficult to see what the United States has gained. The US Department of Justices has published the deferred prosecution agreement, but there may be more unreleased detail concerning it to come out or even a secret side-deal.

We do know from reading the agreement that the deal requires Meng to refrain from saying anything that contradicts US prosecutors’ stated facts about the case, which are laid out in a four-page appendix to the agreement. This in a nutshell says that in a 2013 presentation to ‘financial institution 1’, Meng misrepresented the relationship between Huawei and Skycom, which operated in Iran, as a business partnership when in fact Huawei controlled Skycom. This caused the bank to provide banking services, that broke US sanctions against Iran.

However, any hopes that Meng’s release will ease strained US-China tensions to any significant degree appear optimistic.

True, Meng’s case was a particular and personalised irritant in bilateral relations because she was the daughter of Huawei’s founder Ren Zhengfei. Nonetheless, a larger US racketeering indictment against Huawei will continue, bolstered by Meng’s admissions in the agreement.

The company says it will defend itself against vigorously, and US-China relations remain fraught, the more so, the more triumphant the reaction in China to Meng’s return.

In that light and at this point pending the revelation of more quid pro quos, the outcome to Meng’s case seems a big win for China, a moderate success for Canada and not much of anything at all for the United States. However, we suspect the other half of the story is still to be told.

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China Doubles Down On Its Crypto Crackdown Again

CHINA IS INTENSIFYING its elimination of cryptocurrencies, banning all trading and mining and promising a crackdown on any illegal activity, according to a joint announcement by the central bank and nine other regulatory agencies.

While the campaign against crypto dates back to at least 2017, the latest announcement reaffirms May’s ban on financial institutions, payment companies and internet firms from facilitating cryptocurrency trading.

The People’s Bank of China also now says that overseas cryptocurrency exchanges providing services in mainland China will be illegal. This closes a loophole being used to evade May’s domestic trading restrictions. Any Chinese citizen aiding or abetting a foreign exchange is now explicitly at risk of investigation.

The central bank added that it had improved its systems for monitoring crypto-related transactions and speculative investing.

As for reasons, the preamble to the announcement says:

Recently, virtual currency trading hype activities have risen, disrupting economic and financial order, breeding illegal and criminal activities such as gambling, illegal fund-raising, fraud, pyramid schemes, and money laundering, and seriously endangering the safety of people’s property.

The announcement sent the prices of cryptocurrencies, notably Bitcoin tumbling, along with the share prices of crypto and blockchain-related companies.

Before the clampdown, Chinese miners accounted for more than half of the world’s crypto supply. The National Development and Reform Commission (NDRC) says ‘such activities contribute little to China’s economic growth, spawn risks, consume a huge amount of energy and hamper carbon neutrality goals’. It has told local governments that it is ‘imperative’ to wipe out crypto mining.

Crypto miners use powerful, energy-hungry computers designed to verify bitcoin transactions in a process that produces new bitcoins. That is a bad look internationally for a country touting its net zero carbon ambitions, and especially amid domestic power shortages for industry.

Following May’s crackdown, most Chinese mining relocated to Central Asia and North America, with cheap energy and policy support. However, the latest announcement suggests that not all of it has moved. The hunt is clearly on for any that remained.

None of the latest measures applies to the state digital currency, the digital yuan or e-yuan, now being trialled in several regions.

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Lithuania To China: Don’t Call Us…

Screenshot of Huawei P40,  Xiaomi Mi 10T and OnePlus 8T 5G smartphones

LITHUANIA KNOWS A thing or two about standing up to large Communist states. It also has previous with China, most recently over the naming of Taipei’s representative office in Vilnius as Taiwan’s, which led to Beijing demanding Vilnius recall its ambassador.

Thus the exhortation this week by its defence ministry to Lithuanians to throw away their Chinese smartphones and not buy new ones fits a pattern.

The advice followed a cybersecurity analysis by the ministry’s National Cyber Security Centre (NCSC) of three 5G-enabled smartphones introduced into the Lithuanian market last year and seen in the screenshot above. There is one each from Huawei, Xiaomi and OnePlus, a brand of BBK Electronics that also owns the Oppo and Vivo brands. 

The NCSC found that:

  • Huawei’s official app gallery directs users to third-party online stores that sell malicious or virus-infected apps, raising data breach risks; 
  • all three devices routed user data through servers based in third countries such as Singapore that are not covered by the EU’s General Data Protection Regulation and are Chinese company-owned, meaning the data would have to be turned over to Chinese authorities on request; and 
  • Xiaomi’s smartphones have a built-in censorship feature, which it says is deactivated in Europe but, the NCSC says, can be activated remotely. 

Each device uses a variant of Google’s Android operating system.

Huawei says no user data is sent externally and Xiaomi that it does not censor communications. However, the NCSC’s findings will confirm the mounting fears in Western countries that Beijing is using the commercial prowess of its technology companies to advance the deployment of its growing cyber capabilities, particularly for espionage and data gathering. 

The NCSC will release further findings by the end of the year, likely intensifying the European backlash against Chinese hardware.

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Evergrande’s Two Aspirin Help For Now

FOR A COMPANY whose $300 billion of debt sent shivers through investors around the world, sketchy news that it has resolved a $36 million interest payment that was due on Monday seems more a palliative than the curative medicine investors are taking it to be.

Even though it is the equivalent of a doctor telling a patient to take two aspirins for a broken leg and see how they feel in the morning, the announcement by Hengda Real Estate, the main property unit of the world’s most indebted if no long largest real estate developer, Evergrande, that it reached an unspecified agreement with holders of one of its onshore bonds appears to have eased the pain in the financial markets.

International investors have now returned to worrying about something they at least think they understand how to worry about, inflation and stimulus unwinding. Evergrande’s financial accounting is more opaque than even central bank monetary policy.

However, the announcement said nothing about the little matter of an offshore bond on which an $84 million coupon payment falls due on Thursday, although it has a 30-day grace period.

On Monday, Evergrande reportedly missed interest payments to at least two of its biggest lenders. Authorities remain concerned about the systemic financial risk that Evergrande’s sprawling debt obligations pose if there is a disorderly collapse of the group.

They also worry about the potential spillover into the real economy, which risks social instability and thus is a political matter. The group owes $147 billion to unsecured trade creditors such as suppliers, while some 1.5 million disgruntled buyers of Evergrande homes off plan who now face losing their deposits will, at the very least, vent to let off steam, even if more serious protest will be contained.

One reason that the amount owed to trade creditors is so eye-popping is that Evergrande systematically deferred payments to its suppliers so it could cut its interest-bearing liabilities, which it succeeded in doing, reducing them by some 145 billion yuan ($22.4 billion) to 571.7 billion yuan as of end-2020..

For now, the ‘d’ word has been avoided — and authorities have the administrative tools to ensure it stays that way. That will dull the pain and provide temporary relief, if not a cure.

Update: Regulators have reportedly instructed Evergrande to focus on completing unfinished properties or repaying deposits while avoiding a near-term default on its dollar-denominated bonds. Beijing is also said to have told local officials and state-owned enterprises to step in with bail-outs only as a last resort in the even of a disorderly collapse of the property developer.

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China Will End Coal-Fired Power Plants Abroad If Not Yet At Home

CHINA WILL STOP funding the construction of overseas coal-fired power stations under the Belt and Road Initiative, President Xi Jinping told the UN General Assembly meeting in New York via a video link.

The decision will be taken as a welcome, if somewhat symbolic, boost to global control of greenhouse gas emissions, with the next round of COP climate discussions due to take place in Scotland in November.

However, Xi was light on details of how the policy change would be implemented; his announcement amounted to a single sentence in his speech. It appears that China has not funded any coal-fired power stations abroad so far this year, although it has accounted for the majority of new coal projects around the world in recent years.

The bigger switch for China, the world’s largest emitter of greenhouse gases, would be to wean itself off its dependency on coal for domestic power generation.

Half the coal burned in the world is burned in China, and in the first half of this year, authorities approved the construction of 24 new coal-fired domestic power plants, according to Greenpeace, although that is a fall of 80% from the same period last year.

Many of these plants will have a lifespan of 40 to 50 years. That will make meeting Xi’s other climate commitments made last year at the UN, including China achieving peak emissions before 2030 and then transitioning to carbon neutrality by 2060, challenging to achieve.

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OECD Leaves Its China Growth Forecast Unchanged

THE OECD’S LATEST update to its Economic Outlook, published today, leaves its forecasts for China’s growth rate for this year and next unchanged from its May projections of 8.5% and 5.8%, respectively.

By comparison, for the G20 countries, the OECD is forecasting 6.1% growth this year, down 0.2 of a percentage point from its previous forecast, and 4.8% for 2022, up 0.1 of a percentage point.

In passing, we should note that China is not a member of the OECD, although it has a participatory working relationship with it. Thus, China does not get the detailed discussion in the OECD’s commentary on its Economic Outlook that the International Monetary Fund would give it.

That said, the OECD’s latest numbers would put China pretty much back to its pre-pandemic growth path. However, they stand in contrast with some recent suggestions that economic growth is slowing more rapidly amidst the turmoil and uncertainty caused by the reining-in of the tech sector and wealthy entrepreneurs under President Xi Jinping’s emerging ‘common prosperity’ drive.

Growth laboured in the second quarter and may prove to have been flat or close to it when the third-quarter GDP figures are published on October 18. Recent high-frequency economic indicators covering August are pointing to a sharp slowdown in retail sales and falling property prices in the wake of last year’s measures to lower the debt levels of real-estate developers. Localised lockdowns to enforce zero-tolerance of Covid-19 transmission will also disrupt growth.

The OECD does note signals of slowing business output in China, including the softening of purchasing managers’ surveys since May, suggesting some moderation in the pace of the recovery, although at levels consistent with continued growth. This softening was reflected in other Asia-Pacific economies but more marked than elsewhere in the world.

At this point, the official growth target of ‘above 6%’ does not appear at risk. However, the critical near-term uncertainty remains the extent to which the Delta variant raises the risks of repeated or persisting lockdowns, with the disruption to domestic demand and supply chains that implies.

China has already seen a broad-based rise in its export prices. This reflects capacity constraints, supply disruptions and rising input costs from higher global commodity prices, half as high as a year ago. Amplified by the tripling of international shipping costs this year, that will weigh on global economic recovery and thus China’s growth.

On the upside, the OECD sees inflation in China moderating this year due to domestic food prices declining more sharply than producer prices are rising. It is forecasting consumer price inflation falling to 1.2% this year, from 2.5% last year, but rising to 2.2% in 2022, although that is 0.2 of a percentage point less than May’s forecast.

As with all economic forecasts, significant uncertainty remains around how the pandemic will evolve, the global pace and spread of vaccinations and containment measures affecting the reopening or closing of economies. In China’s case, there is the added uncertainty of a fragile real estate market and the potential debt crisis lurking behind it.

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Evergrande Poses Critical Test For China’s Policymakers

Screenshot of Evergrande Group web site home page captured September 20, 2021

AUTHORITIES BEGAN TO tighten their regulation of China’s property sector last year, fearing real estate developers’ debt was the country’s most significant systemic financial risk.

A slowing economy has only further exposed the property bubble and the extent of its over-leverage. The sector now faces a crisis that is coming to a head with the fate of one of its largest property developers, Evergrande, which has been offloading its properties at firesale prices to meet the new regulatory requirements. 

According to the National Bureau of Statistics, home sales (by value) fell 20% year-on-year in August, while new homes prices rose at the slowest rate this year. 

Evergrande, which faces defaults on some of its $300 billion of debt owed to its bankers this week, is widely considered on the verge of bankruptcy. Its scramble to sell assets fast enough to raise the cash to avoid defaults only pitches the property market into a vicious cycle of falling prices that risks bring down even more developers.

Evergrande’s share price has fallen by approaching 90% in the past six months, and global credit rating agencies have downgraded the firm’s bonds deep into junk territory. Yet Evergrande is ‘too big to fail’ both economically and politically. 

A bailout of some kind is all but inevitable. The open questions are how it will be dressed up to reduce moral hazard and assuage widespread outrage — beyond the collapse in home values, more than a million people face losing deposits on unfinished homes — and who will foot the bill? 

Secured creditors like bondholders account for one-third of Evergrande’s liabilities. Of the remainder, It owes about $147 billion in trade and other payables to suppliers. The risk of the impact rippling through the real economy is significant. Authorities may still be grabbling with quite how extensive and risky those supply chain linkages are.

A way will be found to move Evergrande’s bad debt into official hands, albeit, to mix metaphors, through gritted teeth. The scale of the required rescue is greater than anything experienced with Anbang and other over-extended corporate casualties. The political will also feels weaker, though it will be stiffened as needs be.

Authorities will also have to adjust the expectations of those who invest their savings in a home in the belief that property values never go down.

This all has some of the feeling to it of both the collapse of Japan’s property bubble in the 1980s and the Lehman Brothers bankruptcy in the United States in 2008. Evergrande is systemically important, and its failure would reverberate across the economy with unintended consequences, perhaps for years.  

The policy decision to be made is a very high-stakes one. Beyond avoiding a corporate credit crunch, there is the question of whether the potential impact on local authorities is fully understood. Is there reliable data on which to make that assessment?

This Bystander expects a cautious forced restructuring with the bad debt being buried, not resolved. Some executives will undoubtedly be labelled corrupt, official fingers of blame will be pointed at ‘speculators’ and punishments, arbitrary or otherwise, doled out. 

Other official fingers will be tightly crossed, hoping to get through the crisis without triggering the economic conditions that befell Japan in the 1990s or the political tensions in the United States that have followed the 2008 global financial crisis.

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China Applies To Join The Trade Pact Intended To Exclude It

CHINA HAS APPLIED to join the regional trade pact intended to counter its growing political and commercial influence.

The Commerce Department has confirmed it has lodged China’s application to become a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. This is the 11-nation successor to the Trans-Pacific Partnership signed on to by the United States as part of the Obama administration’s ‘Asia pivot’ but from which former President Donald Trump withdrew the United States as one of his first acts in office.

Beijing views deepening trade and investment ties in the region as a bulwark against the growing unified front being shown against it by the United States and its closest allies, as evidenced by the newly announced AUKUS security agreement between Australia, the United Kingdom and the United States.

The success of the application is far from assured. For one, existing members have to be unanimous in agreement to admit new members, which will come down to political decisions.

On more technical issues, there will be questions about whether China’s state subsidies, cross-border data transfer regime and labour practices comply with the pact’s standards, which were originally drafted to be difficult for China to meet.

These requirements are more stringent than for the rival regional trade pact that China leads, the 15-nation Regional Comprehensive Economic Partnership. RCEP is just one of several regional institutional arrangements with overlapping memberships (see diagram above).

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AUKUS Subs Will Stir Waters Already Ruffled

WHEN US OFFICIALS say that a particular policy move is not aimed at countering China’s growing influence, it is a good rule of thumb to assume that it is. Thus, with the security pact newly announced between the United States, the United Kingdom, and Australia, the awkwardly named AUKUS.

AUKUS seeks to provide Australia’s navy with the technology and advice to build at least eight nuclear-powered submarines, which will make it the seventh navy to deploy them. They will replace a dozen conventionally powered subs ordered from France but never delivered because of unresolved disagreements over local sourcing, among other issues.

That $90 billion order has been cancelled, to Paris’s displeasure. To add to European annoyance, the AUKUS agreement was announced the day before the EU was due to outline its Indo-Pacific strategy. The EU is increasingly being pushed into an uncomfortable no man’s land between Beijing and Washington.

It is unimaginable that Australia will deploy the subs anywhere but under the waters of the region. Equally, it is inconceivable to regard the announcement as anything other than a tighter drawing together of the three countries in a common ‘Indo-Pacific’ security alliance, which has China as its threat nation.

While the subs are the headline-catching element, the agreement also involves the trio sharing information and technology on intelligence and quantum technology. This will complement, not replace, existing arrangements such as the Five Eyes intelligence-sharing partnership between New Zealand, Canada and the AUKUS countries.

As such, it adds another layer to a growing set of overlapping security cooperation initiatives being advanced in response to China’s growing military power.

Australia will also buy cruise missiles from the United States for the Royal Australian Air Force as well as Tomahawk cruise missiles for its navy, which presumably the subs will carry.

Cruise missiles are the weapon of choice to attack, or at the least deter, naval aircraft carrier battle groups at sea. They also give Australia, and by proxy the West, the capability to strike targets inside China such as airfields and command and control facilities for the PLA’s integrated air and missile defence systems.

Beijing’s criticism of the deal has been swift, if somewhat pro-forma, perhaps because the military threat is some years out; the subs are unlikely to be deployed until 2040. By then, the PLA-Navy will have more of its own nuclear-powered subs in the water.

Foreign ministry spokesman Zhao Lijian said:

The nuclear submarine cooperation between the US, the UK and Australia has seriously undermined regional peace and stability, intensified the arms race and undermined international non-proliferation efforts. The export of highly sensitive nuclear submarine technology to Australia by the US and the UK proves once again that they are using nuclear exports as a tool for geopolitical game and adopting double standards.

He added that:

Seeking closed and exclusive clique runs counter to the trend of the times and the aspirations of countries in the region, which finds no support and leads nowhere. Relevant countries should abandon the outdated Cold War zero-sum mentality and narrow-minded geopolitical perception, respect the will of the people of regional countries and do more to contribute to regional peace, stability and development. Otherwise, they will only end up shooting themselves in the foot.

The time frame for building Australia’s subs will be lengthy. According to US President Joe Biden, the first 18 months of the agreement will be spent working out how to build the subs under these conditions without violating non-proliferation commitments.

Australia is a party to two regional non-proliferation agreements. Its prime minister, Scott Morrison, says that his country seeks to become neither a military nor civil nuclear power.

That the United States and the United Kingdom are ready to take the rare step of exporting sensitive nuclear technology to a non-nuclear nation underlines the serious intent of AUKUS. It may also spur Beijing to accelerate the build-out of its blue-water navy.

Australia’s nuclear submarines, when they do eventually launch, will provide another means of deterrence.

The AUKUS agreement has been welcomed in Tokyo and Taipei, and will be, if not so openly, in countries such as South Korea, Vietnam, Thailand, the Philippines and India, also concerned about China’s growing demonstrations of military power in the region.

However, other ASEAN members will be warier in pubic and private. Indonesia has expressed its concern ‘over the continuing arms race and power projection in the region’.

If the agreement does not worsen Australia-China relations, it will only be because they are already at such a low ebb. Canberra is arguably now the Western government that is most openly confrontational towards China save for Washington.

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