Huawei CFO arrested, expect trade talks to continue as US-China tech strains intensify

The big China news today is the arrest at the Vancouver airport of Meng Wanzhou (孟晚舟), Hauwei CFO and deputy chairperson, as well as the daughter of Huawei founder Ren Zhengfei. Meng was transiting through Canada on her way to South America.

The US requested the arrest and want her extradited to the US apparently as part of an investigation into Huawei’s possible violation of US sanction on Iran.

Today’s newsletter is in a different format as it is just a note about Huawei and possible ramifications. We have a last shipment of stuff from China arriving any minute so I have to deal with movers this AM.

My quick thoughts:

• The arrest will probably not derail the US-China trade talks. China needs the talks to succeed and so while they may become more contentious I will guess they will not stop. See this from Caixin - Beijing Vows to Immediately Implement Trade Truce Over Energy, Cars and Agriculture Products:

  The Ministry of Commerce said Thursday China will immediately start implementing agreements on agricultural products, energy and cars that were reached at the weekend summit between Chinese and U.S. leaders over their ongoing trade dispute.

  Calling the talks with the U.S. “smooth,” Ministry Spokesman Gao Feng said at Thursday’s news conference that China is “fully confident” it will reach an agreement with the U.S. in 90 days, though he didn’t offer details. He added that the talks will also address areas such as intellectual property rights, technology cooperation, market access, and the trade imbalance [商务部：未来90天将以取消所有加征关税为最终目标];

• Meng was detained the same day as the Trump-Xi talks. Buenos Aires is 5 hours ahead of Vancouver, so it is possible the Chinese side did not know at the time of the meeting. They certainly knew by the time the Ministry of Commerce issued its statement about the Buenos Aires meeting and trade talks, so I see that as another sign that the trade talks will likely continue. (I admit that I first heard of her arrest Tuesday evening, but given how explosive it is I did not want to say anything without a second source. Sorry, I wish I could have given you all a 12 hours+ head start on this.);

• Not that Xi and the CCP need another reminder of the existential threat that US technological dominance poses, but this case will be used as another rallying point in the increasing efforts to reduce reliance on the US, and is just yet another move in the spiraling US-China technology competition;

• While this case appears to be about Iran sanctions specifically, it certainly fits within the broader campaign by the US to block Huawei from 5G networks outside of China, and especially in the Five Eyes alliance countries (US, Canada, UK, New Zealand, Australia). In the last few weeks we have seen the UK, Canada, New Zealand and Australia all start blocking Huawei from 5G. Whether or not this detention is part of a broader US “whole of government” strategy I do not know, but expect Xi and his colleagues to see it as part of a broader US conspiracy;

• I wonder if President Trump knew this arrest was coming. There were rumors months ago of a draft executive order against Huawei over Iran sanctions violations. It is certainly possible that Trump did not know the specifics or the exact timing. While it is a legal matter that should be ring-fenced from the broader US-China relationship we know from the ZTE case that President will use cases like this as bargaining chips, and that the Chinese will certainly not see this as anything but a broader US campaign;

• Huawei is less reliant on US technology than ZTE so any US export sanctions against the company are unlikely to be a corporate death sentence as it was for ZTE, such restrictions would hurt Huawei and would hurt its US suppliers;

• There is no guarantee that this case will be resolved any time soon. The Canadian courts have to weigh in, and that process towards either release or extradition could run for a while;

• Expect China to use whatever methods they can to pressure the Canadians, but threats will not go over well in Ottawa;

• Sorry to be a broken record but I will say this again: any foreign and especially US technology firm that has supply chain reliance on China needs to be deep into planning for reducing that reliance, no matter how hard, painful and expensive such a shift would be. Frankly boards of directors of those firms are negligent at this point if they are not pushing the company to do this planning;

• I have seen speculation that China may retaliate by arresting a US tech executive. That would certainly be explosive, but I am not sure Beijing would do that without a very clear legal case as it would undermine the massive propaganda campaign the Party has undertaken to portray the PRC as open for foreign business and as the defender of the global trading system. However, if I were a US tech executive I would delay travel to China for a bit or go on a vacation if based there…

Even if there is a trade deal as discussed in Buenos Aires it will no nothing to change the trajectory of the growing US-China technological competition.

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Related stories:

Canada arrests Huawei’s global chief financial officer in Vancouver - The Globe and Mail broke the story

This is like a sudden attack’: China lashes out at Canada over arrest of Huawei executive - The Globe and Mail. Irony and self awareness are not character traits of official spokespeople:

“Detaining a person without providing an explanation has undoubtedly violated her human rights,” said Chinese foreign ministry spokesman Geng Shuang. 

Remarks of the Spokesperson of the Chinese Embassy in Canada on the issue of a Chinese citizen arrested by the Canadian side:

At the request of the US side, the Canadian side arrested a Chinese citizen not violating any American or Canadian law. The Chinese side firmly opposes and strongly protests over such kind of actions which seriously harmed the human rights of the victim. The Chinese side has lodged stern representations with the US and Canadian side, and urged them to immediately correct the wrongdoing and restore the personal freedom of Ms. Meng Wanzhou. We will closely follow the development of the issue and take all measures to resolutely protect the legitimate rights and interests of Chinese citizens.

Arrest Shakes Huawei as Global Skepticism of Its Business Grows - The New York Times:

A “declaration of war” against China was how Hu Xijin, the editor in chief of Global Times, a state-run newspaper known for its nationalist tone, described Ms. Meng’s detention on Weibo, a Twitter-like service.

Gavin Ni, the chairman of Zero2IPO Group, an influential research and consulting firm in China’s investment industry, wrote on his WeChat social media account: “The China-U.S. competition is not merely a trade rivalry, but a rivalry on all fronts. Carry on, our motherland!”..

“The Chinese government and Chinese companies must face these new circumstances, take up new countermeasures and get through this stage of crisis,” Fang Xingdong, the founder of ChinaLabs, a technology think tank in Beijing, said on Thursday. “This is a necessary rite of passage for China’s global technological rise.”

Arrested Huawei CFO Sabrina Meng Wanzhou told staff ‘one may accept the risk of temporary non-compliance’ in some cases - South China Morning Post:

Huawei chief financial officer Sabrina Meng Wanzhou, who was arrested in Canada and is facing a US extradition request, had told employees in an internal talk on compliance that there are scenarios where the company can weigh the costs and accept the risks of not meeting the requirements of the law. 

Meng took part in an internal question-and-answer session on October 29 with her father, Huawei founder Ren Zhengfei, where father and daughter shared their views on compliance

Huawei founder’s debutante daughter Annabel Yao: ‘I still consider myself a normal girl’ | South China Morning Post. Another daughter, Harvard student, participant at the Le Bal des Débutantes in Paris.

China’s Huawei should not be allowed in UK 5G telecoms - Financial Times - Charles Parton: 

Let us leave aside the debate as to whether Huawei is a private company. Dispelling the fog in the pursuit of transparency has progressed little over the years. What is clear — the Party has told us so — is that through the Party committee embedded inside private companies the CCP has an enormous say in their affairs. Furthermore, recent national security legislation lays down that companies must do the Party’s bidding when called upon to do so for national security reasons... 

There is a further, more powerful argument. The intelligence sharing agreement between the “Five Eyes” — US, UK, Canada, Australia and New Zealand — is of immense importance. This is not just about sharing intelligence, for example on terrorism or security threats, but about working together on designing and operating those systems and technologies for intelligence collection. 

Three of the Five Eyes have ruled out Huawei from their own systems. They will not trust the UK fully if Huawei is inside our systems, even with the “cell”. .. 

Should the government be willing to bet our security on the benevolence and restraint of the CCP? In the light of its current repression of its own people, its aggressive foreign policy and interference abroad, that surely crosses the border from naïveté into irresponsibility.

Thanks for reading.