US-China Rivalry Reaches New Depths

CHINESE FIRMS ARE increasingly involved in owning, operating, laying and equipping undersea communications cables — creating another front in the technology and telecommunications contest between Washington and Beijing.

Undersea fibre-optic cable is the backbone of global data transmission and communications. More than 400 cables beneath the oceans carry upwards of 95% of international internet data — everything from streaming videos to billions of dollars of sensitive financial transactions and encrypted government communications.

Thus, China’s growing presence and designation of undersea cables as a ‘marine strategic emerging industry’ — part of a broader goal of capturing 60% of the global market for fibre-optic communication equipment by 2025 — is seen in Washington as both a commercial rivalry and a geo-strategic threat.

The three big state-owned telecos, China Mobile, China Unicom and China Telecom, are the principal Chinese owners and operators of commercial cables, often as consortium members. The leading Chinese turnkey supplier and installer of undersea cables and the systems running them is HMN Technologies, formerly Huawei Marine Networks. It is now rebranded and 81%-owned by Shanghai-listed Hengtong Optic-Electric, the country’s largest producer of advanced submarine-grade fibre, after a restructuring to get around US sanctions on the Huawei group. 

HMN Tech says it has completed or is working on 108 projects worldwide involving 64,000 km of submarine cable. It is now the number four in the global industry, behind US-based SubCom, Nokia-owned Alcatel Submarine Networks (ASN) and Japan’s NEC Corp. The private sector dominates the installation side of the industry, as opposed to the owner-operator side, which has traditionally been dominated by a mix of private and state-owned telcos.

HMN Tech is estimated to have a 10% share of a worldwide installation market worth $5 billion last year and forecast to grow at 10% a year for the next seven years as the bandwidth-devouring giant cloud and social media platforms drive an investment boom in new capacity, including their own cables, and route prioritisation.

Geopolitics

Earlier this month, the World Bank pulled the plug on a cable project it was funding on which HMN Tech had reportedly outbid ASN and NEC for the installation contract. The East Micronesia Cable System (EMCS) would have connected three Pacific island nations, Nauru, Kiribati and the Federated States of Micronesia. 

However, it would have an onward link to the cable connecting Guam with the United States. Guam is a US territory, 29% of whose land area is occupied by US military bases. Washington let it be known that it objected to Chinese involvement in the EMCS because of a possible threat to US national security from potential Chinese espionage or disruption. The World Bank diplomatically decided that all three bids were ‘non-compliant, leaving the project in limbo.

Huawei’s first involvement in the industry dates back to 2009, a joint venture with the UK’s Global Marine, to lay a Hong Kong to United States cable. However, the People’s Liberation Army and the Ministry of Information Industry have played a strong role in developing the country’s submarine cable technology and capabilities since the 1990s. The PLA Naval University of Engineering and Hengtong Optic-Electric, along with others, established a joint submarine cable R&D laboratory in 2016 and the PLA-N has at least eight cable-laying and repair ships. As that might suggest, undersea cable technologies have dual-use.

The so-called ‘underwater great wall’ — a network of subsurface sensors connected by cable networks — is central to the PLA-N’s monitoring of in-shore waters (and beyond) for submarine activity, similar to the US SOSUS system that monitored Soviet-era submarines. During the Trump administration, one of the concerns of US security planners was how this could erode American naval superiority in the South China Sea.

Trump

These concerns aligned with the Trump administration’s twin objectives of stymieing both China’s indigenous technology development and the modernisation of the PLA. This was a broad front. The administration barred the use of Huawei equipment in government procurement contracts in 2018; the following year, it put Huawei and 68 affiliates on its Entity List, which stopped the use of any of its gear in US networks. However, a couple of measures had specific relevance for China’s undersea cable capacity.

One was the formalisation of an ad hoc US interagency group known as Team Telecom that advised the US Federal Communications Commission on national security issues. The Commission routinely referred applications for licences for operating landing points for undersea cables to the ad hoc group. Referring them to the new committee did not provide a substantive change in that regard. However, like the updating of the Committee on Foreign Investment in the United States (CFIUS), the more formal structure and stringent deadlines for reviews will likely have a chilling effect on new applications from consortia with Chinese members. 

The Trump administration also called for closer scrutiny of submarine cables connecting the United States to ‘adversary countries’. Of the three cables directly connecting the US and China, two are partially owned by Chinese state-owned companies.

Hong Kong

A year ago, with its attention focused on Beijing’s imposition of a national security law on Hong Kong, the Trump administration blocked approval for the city to be a landing point for a fourth direct link, the Pacific Light Cable Network (PLCN). This connects Los Angeles and Hong Kong with branches to Taiwan and the Philippines and was backed by Google, Facebook and Dr Peng Telecom & Media Group. The latter is a former speciality steel smelter turned Beijing-based internet services provider listed on the Shanghai exchange. The Trump administration argued national security grounds, albeit with its customary lack of public evidence.

Google and Facebook subsequently were permitted to light the Los Angeles-Taiwan and Los Angeles-Philippines links only. As a result, the leg to Hong Kong has stayed dark.

PLCN’s fate has had a chilling knock-on. Three consortia of other planned trans-Pacific cables to Hong Kong withdrew landing license applications, including Amazon, Facebook and China Mobile’s proposed Bay to Bay Express linking San Francisco to Hong Kong cable, the China Telecom, China Unicom, Facebook, Tata Communications and Telstra Hong Kong-America cable between Hong Kong and Hermosa Beach in California; and Google’s Hong-Guam cable. In addition, two other proposed trans-Pacific cables, Facebook’s Bifrost and Facebook and Google’s Echo, announced earlier this year that they would avoid Hong Kong landing points.

This suggests that Hong Kong will not be a growing gateway for trans-Pacific cables as long as US-China tensions persist. However, that will not necessarily stop it from remaining an intra-Asian regional cable landing hub.

Biden

The East Micronesia cable example suggests that the Biden administration is carrying through with the thrust of its predecessor’s policy. That includes extending its discouragement of other countries from using Huawei and other Chinese telecoms equipment manufacturers’ kit in their 5G networks and other critical infrastructure to undersea cable systems. 

The Biden administration is starting to rally its allies around the idea of creating a more cohesive and updated legal framework to protect undersea cables. These are covered by Articles 113-115 of the UN Convention on the Law of the Sea (UNCLOS) and the International Convention on the Protection of Undersea Cables. The latter dates to the 1880s and has 36 signatory nations. China is not among the three dozen.

As most cables are privately owned and operated, the US wants to establish stricter global standards and norms for private companies to make their cables and network management systems secure from cyberattacks and physical disruption. 

This would go beyond the code of conduct of The International Cable Protection Committee (ICPC), a forum for submarine communications and power cables companies. It would also include greater sharing of intelligence between governments and companies on cyber threats to the cables. This Bystander understands that the United States raised both these notions at the recent G7 and NATO summits.

Vulnerabilities

Submarine cables are surprisingly vulnerable for such critical infrastructure. There are an estimated 150-200 accidental fractures a year. Undersea earthquakes can break them, but ships’ anchors and fishing nets snagging them are the most frequent cause. In the Soviet era, there was a suspicion that Soviet trawlers deliberately fished for cables.

US security planners fear that Chinese trawlers could employ the same tactic, particularly against Taiwan in the event of conflict or the threat of it, or even just as a muscles-flexing exercise. Taiwan is a telecoms hub for the region, so the damage to regional economies and financial markets could be severe.

A different set of concerns surrounds espionage risks and an adversary’s ability to divert or monitor data traffic. This is an additional concern for governments. They use the global network of commercial undersea cables for their communications, albeit encrypted. Government-owned classified or military cables are surprisingly uncommon.

There are three ways to hack into undersea cables’ data: 

• remotely via backdoors in the kit inserted during manufacturing or in the network management software systems; 
• infiltrating facilities at the landing points or where the cables connect to domestic networks; and 
• tapping the cable directly on the seafloor. 

The last is technically the most challenging and beyond most countries’ capabilities. Unverified reports say that the United States, the United Kingdom and Russia have managed it by using specialist submersible craft to place physical listening devices on cables. Earlier this month, a Foreign Ministry spokesman accused the United States of ‘unacceptable’ espionage of undersea cables.

Believing that Chinese espionage efforts concentrate on targeting landing points, the Biden administration is addressing the first two attack points by pushing ahead with Trump’s strategy of banning approvals for equipment in US telecommunications networks from foreign companies deemed national security threats, i.e., Huawei and ZTE, and getting their kit removed from US networks. 

The US Congress passed the Secure and Trusted Communications Networks Act in 2019, authorising the FCC to do that through its rule-making. Earlier this month, the FCC said it was moving onto the next stage of that process — public comments on the proposed rule that would revoke the certification of any equipment listed by the 2019 Act, signalling it had had a green light from the Biden administration.

Digital Silk Road

China sees undersea cable networks as a component of its Digital Silk Road under the One Belt, One Road initiative. For example, HMN Tech has laid or is laying cable under the Java, Andaman and South China Seas, the Gulf of Thailand and the Indian Ocean.

It is also laying a 15,000km submarine cable connecting Pakistan to East Africa and Central Europe (PEACE) via the Red Sea, another project on which the United States has been expressing disquiet. The Peace cable will have a landing point at Gwadar in Pakistan, whose port is owned by state-owned China Overseas Port Holdings and where China will likely have a military base. The Peace cable would connect to China from there by an overland route through Pakistan.

HMN Tech has also laid a barely shorter cable of 14,530km connecting South Africa and the United Kingdom, with a dozen landing points along the west coast of Africa.

Authorities regard the company as a national champion, although the company, like its forebear parent, asserts its independence at every turn.

To this Bystander, this is shaping up to mirror the contest over 5G networks, with HMN Tech and the Chinese telcos squeezed out of undersea communications cables with landing points in the advanced economies where the United States and its allies hold sway, but growing their market share in the Global South where their lower prices and political and financing support from Beijing will prove attractive.

If there is a difference, it is that Washington and its allies can offer a realistic alternative to China in both the installation and operation of cables in a way it cannot with 5G networks.

Request To Reverse Telco’s NYSE Delisting Proffers Early Olive Branch

THE BACK AND forth over the New York listing of the shares of China Mobile, China Telecom and China Unicom HK takes another turn with the three state-backed telecommunications companies asking the New York Stock Exchange (NYSE) to review its twice reversed decision to delist them.

The NYSE took the action in response to the then US administration’s banning of investment by US citizens in companies deemed to have connections to the People’s Liberation Army.

In a filing to the Hong Kong Stock Exchange, where all three have their primary listing, the companies said that they had asked the NYSE to lift the suspension of trading in their shares pending the reviews.

The requests came as Joe Biden was sworn in as US president in succession to Donald Trump and China’s foreign ministry spokesperson made a call for a reset of US-China relations if not exactly a return to the pre-Trump era status quo.

In the past few years, the Trump administration, especially [ex-US Secretary of State Mike] Pompeo, has laid too many mines, burned too many bridges and destroyed too many roads in China-US relations, which are waiting to be cleared, rebuilt and repaired. I think both China and the United States need to show courage and wisdom, truly hear, see and show respect to one another. This is what we should do as two major powers.

As the Trump administration left office, Beijing imposed sanctions on several of its officials, including Pompeo, accusing them of having ‘seriously violated’ China’s sovereignty. This followed Pompeo’s designation of China’s actions against Muslim Uighurs in Xinjiang amounted to crimes against humanity and genocide and a host of other actions taken in its final weeks of office.

However, the Biden administration will be in no hurry to pick up any olive branches being extended in its direction. The new president did not include any China-related executive orders by Trump in the slew he overturned on his first day. Nor has the invitation to Taiwan’s representative in the United States to attend his inauguration ceremony gone unnoticed in Beijing.

NYSE Said Considering Reversing Its Reversal On Chinese Telcos Delisting

This is spinninng faster than a revolving door, and with about as much control.

The New York Stock exchange is reported to be reconsidering (Update: has U-turned on) its decision not to proceed with the delisting of three state-owned telcos, China Mobile, China Telecom and China Unicom HK that it announced last Thursday.

This follows a rebuking telephone call from US Treasury Secretary Steven Mnuchin to NYSE president, Stacey Cunningham. The White House, apparently, was as caught unawares by the exchange’s sudden reversal as everyone else.

The NYSE is now reportedly awaiting clarification from the US government about who and what exactly was banned by US President Donald Trump’s executive order in November that stops US investors holding stakes in companies with alleged ties to the Chinese military. The order is due to come into effect on January 11, nine days before he leaves office.

The whole back-and-forth seems to encapsulate the chaos over the United States’ China policy in the final days of the Trump administration.

NYSE Delisting Reversal May Reflect Hard Reality

THIS BYSTANDER IS as taken aback as anyone by the New York Stock Exchange’s abrupt and unexpected volte-face over delisting three Chinese telcos.

The only explanation the exchange has given for reversing its December 31 announcement that it was initiating the delisting of China Mobile, China Telecom and China Unicom HK to comply with a November executive order issued by US President Donald Trump, is that it no longer intends to move forward ‘in light of further consultation with relevant regulatory authorities’.

There is clearly more backstory to come out, including whose ‘relevant regulatory authorities’ were consulted.

The optimistic interpretation is that the about-turn reflects expectations of a less combative approach towards China once US President-elect Joe Biden takes office on January 20. Yet if that was the case, the NYSE could have slow-walked making its initial decision until after then.

To this Bystander. a more realistic explanation is that the NYSE has been given cause for concern that the trickle of listings moving from New York to Hong Kong will turn into a torrent and that Wall Street firms’ much-expanded access to China’s financial markets achieved over the past year — the real win of Trump’s Phase One US-China trade deal signed a year ago — is at serious risk of being cut back by retaliatory moves from Beijing.

At Tuesday’s foreign ministry’s daily press conference, spokeswoman Hua Chunying took the high ground, saying:

The role of the US as the global financial centre is dependent on the trust by global companies and investors in the inclusiveness and credibility of its rules. [Delisting} seriously breached the much-touted principles of market economy and fair competition, as well as international economic and trade rules.

Leaving plenty of room for low cunning.

NYSE Delisting Move Reflects Hardening US Line Against China

THE NEW YORK STOCK EXCHANGE’S decision to suspend trading in the shares of China Mobile, China Telecom and China Unicom HK in preparation for delisting is mostly a symbolic move. The three state-owned companies’ businesses are domestic, and their shares are little traded in New York. Their primary stock exchange listing is in Hong Kong.

However, it is also symbolic of how the hardening of opinion against China in the United States is more widespread than just China hawks in the Trump administration.

All three telcos stand accused of having links with the People’s Liberation Army. Since November, US investors have been banned by US presidential executive order from buying and selling shares in Chinese companies designated by the US Department of Defence as being ‘Communist Chinese military company’. Both China Mobile and China Telecom were on such a list that the Pentagon published in June. China Unicom was added in an update published in October.

The NYSE says its move to delist the three telecoms companies is to be compliant with the executive order.

The list and executive order are part of the Trump administration’s attempts to slow both the PLA’s modernisation and the drive to develop indigenous technologies by denying Chinese firms access to US capital. Three of the world’s leading index providers, MSCI, FTSE Russell and S&P Dow Jones, have also dropped the proscribed Chinese companies from their indexes, depressing their stocks’ attractiveness to global investors.

More than 200 Chinese companies are listed on US stock markets with a total market capitalisation of $2.2 trillion. Prominent names like Alibaba and JD.com have pre-emptively taken secondary listings in Hong Kong.

The US House of Representatives has recently followed the US Senate in passing a bill requiring non-US listed companies (for which read Chinese firms) to comply with US stock exchanges’ auditing rules and disclose whether they are owned or controlled by a foreign government. Firms have three years to comply or face delisting.

The Trump administration has been ramping up its actions against China in its final weeks, intending to lock-in as much of its China policy as it can before it leaves office on January 20.

On December 18, it the Bureau of Industry and Security (BIS) in the U.S. Department of Commerce added more than 70 entities, including the high-profile chipmaker Semiconductor Manufacturing International Corp. (SMIC) of China, to the Entity List.

Listing effectively prevents a company doing business with any US firm as it requires the granting of a special export licence under the Export Administration Regulations (EAR) for any export, reexport or transfer to them of goods, software or technology. That licence is presumed to be denied for firms on the Entity List.

BIS followed that by announcing on December 21 that it was adding a new category, Military End User, to the EAR. Of the initial 103 entities so designated, 58 are Chinese.

China’s Telecoms Corruption Probe Widens As Beijing Shuffles Top Jobs

Hats are being shuffled in China’s fast-growing but corruption-tainted mobile telecoms industry. Xi Guohua is reportedly moving from the Ministry of Industry and Information Technology (MIIT), where he was a vice-minister, to take up the chairmanship of China Mobile. The country’s largest mobile phone operator has lost seven senior executives to corruption charges in the past couple of years and is currently the focus of an industry-wide corruption investigation being conducted by the Party’s discipline enforcers.

Xi will replace Wang Jianzhou, the 62-year old who had given up his chief executive role at China Mobile last August in what was presented as a corporate governance reorganization. A vice chairman of China Telecom, the no 3 in the industry, is moving to the ministry to be vice minister, while the company’s general manager Wang Xiaochu, is to become governor of Yunnan. No 2 China Unicom’s general manager, Chang Xiaobing, will replace him at China Telecom, with Lu Yimin, China Unicom’s president moving up to chairman.

The corruption probe into the telecoms industry is still unfolding, though the inquiries seem to revolve around embezzlement and bribe-taking. State media say the sums involved could exceed 350 million yuan. More than 60 senior and mid-level executives at the big three state controlled operators and government officials have been implicated so far.  All three of the largest telecoms companies are under investigation as are some of their data service providers, which is the fastest growing part of the business. Though the  network operators’ large size and state control protects them against the impact of corruption scandals to a certain extent, the probe is clearly expanding and it is uncertain where it will end.

China Makes VoiP Services A State Duopoly

China may skirt round a WTO challenge on its rare-earth exports, but a decision to protect its state-owned telecom companies from competition from VoiP providers such as Skype and UUCall seems to be on thiner ice.

The Ministry of Industry and Information Technology says that only the leading telecom companies — that would be state-owned China Telecom and China Unicom — have the right to offer services that link computers and telephones (via People’s Daily). There are no details of when the prohibition would come into effect or what punishments illegal VoiP providers face.

Inevitably, China is the world’s largest market for VoiP services, which are far cheaper than landline calls and are cutting into the state carriers’ duopoly profits. Shutting down the services won’t be easy. So MIIT’s announcement may be a warning to the VoiP providers not to grow too quickly, to give China Telecom and China Unicom time to find a way to live with them or smother them. Market force if not market forces.