CANADA’S DECISION TO ban Huawei and ZTE from providing equipment for the country’s 5G network suggests that flesh is, at last, being put on the bones of the comprehensive new approach to China that Prime Minister Justin Trudeau has been promising since last year.
Nor can it be a coincidence, this Bystander suspects, that the announcement comes in the wake of the United States preparing sanctions against Hikvision and ahead of US President Joe Biden’s trip to US allies in Asia, where he will unveil the United States’ long-awaited Indo Pacific Economic Framework.
Canada’s decision brings Ottowa in line with the other members of the ‘Five Eyes’ intelligence-sharing community (the United States, United Kingdom, Australia and New Zealand).
The decision to ban Huawei and ZTE had been expected once China freed two Canadian citizens last September who had been ensnared in the diplomatic row caused by Ottawa acceding to a request from Washington to detain Huawei’s CFO, Meng Wanzhou, on suspicion of sanctions evasion.
Concerns among Canadia’s telecom operators about the extent of re-equipping that the bans will make necessary may have caused the subsequent delay. They will now have two years to remove any 5G equipment from the two Chinese companies already installed and five years to replace any used for current 4G service. However, there will be no government money to do so.
Beijing’s response has been boilerplate, accusing Ottowa of political manipulation and colluding with Washington. The Chinese embassy in Ottowa said in a statement:
China will comprehensively and seriously evaluate this incident and take all necessary measures to safeguard the legitimate rights and interests of Chinese companies.
That suggests some foot-stamping but likely little if any material retaliation.
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 announced a deferred 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.
THE CASES OF Robert Schellenberg, a convicted Canadian facing the death penalty in China, and Meng Wanzhou, Huawei’s chief financial officer facing extradition from Canada, have no legal connection beyond timing.
In November 2018, Schellenberg was sentenced to 15 years in jail, having been convicted of planning in 2014 to smuggle a large quantity of methamphetamine to Australia, a charge to which he pleaded not guilty.
The following January, after a one-day retrial ordered after he appealed the sentence, the Dalian Intermediate People’s Court ruled the original sentence was too lenient and imposed the death penalty.
This occurred shortly after police in Canada detained Meng while changing flights in Vancouver in response to an extradition warrant from the United States, where she is wanted on fraud charges.
Nine days after Meng’s detention, two other Canadian citizens, Michael Spavor, a businessman, and Michael Kovrig, a former diplomat, were arrested by authorities on espionage charges.
The two men were tried days apart in March; Spavor in Dandong and Kovrig in Beijing. No verdicts or sentences were announced after either hearing. Both were closed to Canadian diplomats on the grounds that trials involving state secrets are not open to the public.
Canadian officials expect at least one sentence, most likely Spavor’s, to be announced imminently. (Update: Spavor has been sentenced to 11 years in prison.) On August 10, a court in Shenyang denied Schellenberg’s appeal against the death sentence. He has one legal recourse left, an appeal to China’s Supreme Court.
The timing is pertinent. Meng’s appeal against her extradition is due to conclude on August 20.
It is difficult not to conclude that Beijing is exploiting the Canadians’ cases to put pressure on Canada. Canadian officials have called it hostage diplomacy.
Beijing denies any political connection, as would be expected: the judicial system is taking its natural course with three defendants facing serious charges.
The independence of the Canadian judiciary should insulate it from political pressure from Ottowa, should the Trudeau government choose to exert it. Doubling the jeopardy for Canadian Prime Minister Justin Trudeau, he likely faces a general election later this year. The cases are already a pre-campaign campaign issue in Canada.
However, even if Canada is steadfast in not releasing Meng as Beijing wants, or, even less likely, the Biden administration drops its extradition warrant for Meng, the potential arrest of foreign nationals may have a chilling effect on the Canadian or other governments in future. China’s legal system makes it straightforward for authorities to find pretexts for taking foreign nationals hostage.
TO LITTLE SURPRISE in these febrile times for China-US relations, US Secretary of State Mike Pompeo has declared that Hong Kong has lost its autonomy from China, and thus put at risk the city’s preferential trade treatment by the United States.
Last year, the US Congress passed legislation that requires the US State Department to certify annually that the city remains autonomous. In a statement, Pompeo said:
After careful study of developments over the reporting period, I certified to Congress today that Hong Kong does not continue to warrant treatment under United States laws in the same manner as US laws were applied to Hong Kong before July 1997. No reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China, given facts on the ground.
The statement comes hard on the heels of Beijing’s announced intention to write a new national security law into Hong Kong’s Basic Law, an intent that has brought hundreds of Hongkonger’s onto the streets in protest. There, they have been met with tear gas, pepper spray and police baton charges.
The State Department announcement paves the way for a range of punitive options for the Trump administration, from asset freezes and travel restrictions for top officials to US President Donald Trump’s favoured sanction of tariffs on Hong Kong exports. The president has promised an indication by week’s end of what he will do.
Foreign ministry spokesman Zhao Lijian has repeated the standard line that the national security law for Hong Kong is an internal affair for which it will brook no foreign interference, and warned that “if anyone insists on harming China’s interests, China is determined to take all necessary countermeasures”.
As this Bystander has noted previously, commerce and capital are going to have to choose sides over Hong Kong.
Meanwhile, the British Colombia Supreme Court in Vancouver has ruled that an extradition request by Washington for Meng Wanzhou, Huawei Technologies’ chief financial officer and the daughter of the company’s founder, can proceed. Meng faces fraud charges in the United States in connection with alleged violations of US sanctions against Iran.
This is far from the end of the matter. A hearing is scheduled for next month on whether Canadian officials acted lawfully while arresting Meng. Even if a Canadian court eventually recommends extradition, which has already cast a dark shadow over relations between Beijing and Ottawa, it will be Canada’s federal justice minister who will take the ultimate decision whether or not to hand Meng over for trial in the United States.
Update: On May 28, the National People’s Congress formally approved the proposal for Beijing to impose a national security law on Hong Kong,
The question before the house is this, is Canada’s relationship with China qualitatively different to its relationship with Malaysia. On the answer to that may well hang the answer to the question, is the Canadian government’s blocking of the $5.2 billion bid by Malaysia’s state oil company Petronas for Canadian gas producer Progress Energy, prologue for the same thing happening to CNOOC’s $15.2 billion bid for Canadian oil producer Nexen.
The Canadian government is walking a tightrope. It is suggesting both that Canada remains open, even welcoming, to foreign investment, and that each particular investment has to be what the country’s finance minister Jim Flaherty describes as ‘correct’. That will be particular true for Canada’s natural resources, which is pretty much the only Canadian assets foreign investors are interested in right now. That such deals are invariably big-ticket numbers only shoves them more firmly into the center of the spotlight of public scrutiny.
The Canadian government has minimized the degree to which the CNOOC bid is politicized by declining to hold a public inquiry. Instead it has given itself until mid-November to assess the bid. It has also promised to outline guidelines for state-owned companies bidding for Canadian firms.
This is all keeping investors guessing about prognosis for CNOOC’s bid. Before the Petronas decision, it was thought that CNOOC would get the nod. Now there are second thoughts. Ottawa has previous when it comes to keeping foreign companies at arms length from Canada’s natural resources. In 2010, it unexpectedly rejected a $39 billion bid by Australia’s BHP Billiton for Potash Corp, the world’s largest fertilizer maker.
On top of that, these are uneasy days for Chinese companies in North America. The U.S. House of Representatives’ Intelligence Committee issued a report earlier this month saying that telecoms groups Huawei and ZTE were a security risk and that American companies shouldn’t do business with them. Canada has expressed similar concerns.
Opponents of the CNOOC bid for Nexen are playing on such security fears. They have latched onto a description by CNOOC’s chairman Wang Yilin of the company’s deep-water drilling rigs in the South China Sea as “mobile national territory and a strategic weapon”. The disputed waters of the South China Sea are a long way from the shale sands of Canada, both geographically and politically, but such words travel badly.
The unease cuts both ways. Last Thursday, Superior Aviation Beijing’s planned $1.8 billion purchase of U.S. aircraft maker Hawker Beechcraft fell apart unexpectedly. Hawker’s chief executive rued China-bashing by U.S. presidential candidates for contributing to the collapse of the talks.
Like Washington, Ottawa faces a dilemma in framing its relations with China, which are of an order different to that of its relations with Malaysia (so our answer to our own first question is, yes). China is an important source of foreign capital as well as a growing customer for Canada’s exports. Ottawa doesn’t have much choice but to engage with its customer. It can do so with a lower intensity of geo-political competition than Washington does. But is still has to engage on the best terms it can get. We expect the CNOOC bid to go ahead, but with conditions imposed.
Reuters is reporting that Sinochem won’t proceed with a possible bid for the world’s largest fertilizer maker, Canada’s Potash Corp., currently subject to hostile $39 billion offer from Australia’s mining giant, BHP Billiton. The state-owned chemicals group had been consulting with investment bank advisors about putting together a consortium counterbid, possibly involving several sovereign wealth funds including Singapore’s Temasek. Reuters says its sources say these discussions are dead.
Potash Corp. produces a fifth of the world’s potash. (The picture above is of a Potash Corp. mine in Saskatchewan.) While the industrial logic for a Chinese bid for the leading producer of the nutrient most essential to boosting grain production to meet China’s booming food needs was there, at least for China, any bid that would have given a customer ownership of its supplier, and thus great pricing power, was always going to be looked on askance by the Canadian government. And the more so if the bidder for such a strategic asset was not just foreign but Chinese.
This political sensitivity may have been behind Sinochem’s decision not to proceed — and we should say that Sinochem has made no public pronouncement on any aspect of its intentions in all of this beyond that it is watching the situation with interest. Our suspicion is that Sinochem has no appetite for being involved in a hostile takeover battle. State-owned companies anywhere rarely launch hostile bids and when they do, they usually end up battered and bruised. Sinochem will no doubt remember the $18.5 billion hostile bid for Unocal of California by CNOOC in 2005 which ended with China’s third-largest oil producer withdrawing with its tail between its legs after running into a wall of xenophobia.
The lesson for China’s state owned would-be multinationals is that minority partnering is a more politically adroit way to go, as the state-owned aluminum group Chinalco did in 2008 when it bought into Rio-Tinto in partnership with Alcoa. Though that wasn’t an entirely happy story in the end, it did minimize political opposition to Chinese ownership of foreign natural-resource assets.
Sinochem’s exploration of a consortium bid would have been along the same tactical lines. Even if that particular proposed deal couldn’t be made to work, either because the numbers didn’t add up or the Canadian government was seen as likely to block any foreign-led bid, the thought of taking a stake large enough to have a voice at the table but small enough not to ruffle nationalistic feathers remains sound. A Canadian-led white-knight bid for Potash Corp. is still on the cards to thwart BHP Billiton. If it happens, this Bystander wouldn’t be surprised to see Sinochem as a minority partner yet.
China knew SARS and the 2004 outbreak of avian flu in its pigs, made mistakes in dealing with both, and is trying to make good on those in its reaction to the current outbreak of swine flu. Has it overreacted?
The World Health Organization has criticized Beijing for its quarantining — would forced detention and deportation be a more accurate description? — of groups from Mexico, Canada and other countries identified as being possible carriers of the virus despite a lack of any symptoms.
On Wednesday, more than 100 Mexican nationals, none of whom had displayed any symptoms of the virus and who were being quarantined at hospitals and hotels in China, were returned home on a chartered government plane.
China also lifted a preventive quarantine on a group of visiting Canadian students, being kept in a Changchun hotel, though, again, none of the students displayed any symptoms of the virus. The decision to release the students came after Canada had put on the diplomatic squeeze.
According to the WHO’s latest H1N1 flu situation report (see map below), Hong Kong has had one confirmed case (out of 1,893 worldwide) and no deaths; the mainland, none on either count.
Yet Beijing has has defended its measures, saying an outbreak in the densely populated nation could be catastrophic. As if to prove the point, 119 Chinese nationals stranded in Mexico returned to Shanghai on Wednesday and, though all are healthy, they have all been put in preventive quarantine for a week.
Authorities in the U.S. and Europe wouldn’t, at this point in the pandemic scare, have imposed involuntary quarantines to combat the virus. Has Beijing been prudent or discriminatory?