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The US has significantly intensified its efforts to thwart China and Huawei’s 5G dream while dramatically raising the heat in the trade war.
President Trump finally signed the long-rumored executive order that will block purchases of Huawei equipment in the US but the move with far more serious implications for Huawei is the addition of Huawei to the Department of Commerce’s “Entity List”. The US government will soon require any American firms selling to Huawei to get a license, and if the US decides not to grant licenses for key technology components Huawei’s business globally could be severely damaged. It may not be quite as bad as the ZTE death sentence last year but it looks close.
Perhaps Trump has no intention of implementing these new controls any time soon and instead is using them as another lever to get China to agree to the trade deal terms. Perhaps General Secretary Xi will give Trump a call and work out a reprieve. We will find out soon enough I guess, though the mood in the US towards China is much darker now than it was a year ago, and even more bipartisan.
And the mood in China appears to be hardening as well, and certainly the propaganda since the last round of talks failed looks to be painting Xi into a no-surrender nationalist corner.
I am not sure the Chinese understand what looks to be growing support here for Trump’s tariffs and more broadly his tougher line on China, and how Trump and his team increasingly see this fight as a political winner into the 2020 election.
Squawk Box @SquawkCNBCSteve Bannon and @tomfriedman talk trade...and the world will never be the same. https://t.co/vmfUwB3KuW
The Huawei move had been delayed as the trade talks progressed. Sanctions under the Magnitsky Act for the Xinjiang human rights disaster have also been held back. Will we start seeing tougher initiatives from the US across several dimensions now that the trade talks look busted?
It is starting to feel like we are on the verge of a very sharp downturn in the US-China relationship.
Thanks for reading.
The Essential Eight
1. US targets Huawei
The Trump administration on Wednesday slapped a major Chinese firm with an extreme penalty that makes it very difficult for it to do business with any U.S. company, a dramatic escalation of the economic clash between the two nations.
The Commerce Department’s Bureau of Industry and Security said it was adding Huawei Technologies Co. Ltd. to its “Entity List,” known to some as the “death penalty.”
This listing makes it virtually impossible for companies to survive once U.S. firms are discouraged from doing business with them. The Commerce Department said it had reached this decision because Huawei “is engaged in activities that are contrary to U.S. national security or foreign policy interest.”..
Huawei smartphones use the Android operating system. With this listing, Google would be barred from exporting Android to Huawei unless it got a waiver from the Commerce Department. The chips in the phones are also made by U.S. companies, which would need waivers to sell to Huawei, said an official familiar with the matter .
I, DONALD J. TRUMP, President of the United States of America, find that foreign adversaries are increasingly creating and exploiting vulnerabilities in information and communications technology and services, which store and communicate vast amounts of sensitive information, facilitate the digital economy, and support critical infrastructure and vital emergency services, in order to commit malicious cyber-enabled actions, including economic and industrial espionage against the United States and its people. I further find that the unrestricted acquisition or use in the United States of information and communications technology or services designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of foreign adversaries augments the ability of foreign adversaries to create and exploit vulnerabilities in information and communications technology or services, with potentially catastrophic effects, and thereby constitutes an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States.
This action by the Commerce Department’s Bureau of Industry and Security, with the support of the President of the United States, places Huawei, a Chinese owned company that is the largest telecommunications equipment producer in the world, on the Entity List. This will prevent American technology from being used by foreign owned entities in ways that potentially undermine U.S. national security or foreign policy interests,” said Secretary of Commerce Wilbur Ross. “President Trump has directed the Commerce Department to be vigilant in its protection of national security activities. Since the beginning of the Administration, the Department has added 190 persons or organizations to the Entity List, as well as instituted five investigations of the effect of imports on national security under Section 232 of the Trade Act of 1962.”
“The Trump administration action is a grave escalation with China,” Eurasia Group analysts Paul Triolo, Michael Hirson and Jeffrey Wright wrote in a note. If fully implemented, the blacklist would “put at risk both the company itself and the networks of Huawei customers around the world, as the firm would be unable to upgrade software and conduct routine maintenance and hardware replacement.”
China urges the U.S. to stop the mistake of carrying out the executive order barring U.S. companies from using telecommunications equipment made by Chinese company Huawei and its 70 subsidiaries, Chinese Ministry of Commerce spokesperson Gao Feng said in a media conference.
"The executive order is an abuse of national security and unilateral trade sanctions," Gao said, adding that the U.S. should respect market economy rules and build a transparent and unbiased commercial environment for foreign companies.
China has always asked Chinese enterprises to follow the laws of the countries where they are based and will take necessary measures to protect Chinese companies' rightful interests.
In a statement to CNBC on Thursday, Huawei said that further moves to block it from the U.S. market could have a damaging impact on America’s 5G development.
“Huawei is the unparalleled leader in 5G. We are ready and willing to engage with the US government and come up with effective measures to ensure product security,” a spokesperson for the company told CNBC.
“Restricting Huawei from doing business in the US will not make the US more secure or stronger; instead, this will only serve to limit the US to inferior yet more expensive alternatives, leaving the US lagging behind in 5G deployment, and eventually harming the interests of US companies and consumers,” the statement said. “In addition, unreasonable restrictions will infringe upon Huawei’s rights and raise other serious legal issues.”
The ban is not yet effective.
A similar U.S. ban on China’s ZTE Corp had almost crippled business for the smaller Huawei rival early last year before the curb was lifted...
Out of $70 billion Huawei spent for component procurement in 2018, some $11 billion went to U.S. firms including Qualcomm, Intel Corp and Micron Technology Inc, and they could see that revenue disappear.
The company has been developing and perfecting its own smartphone OS, according to four people familiar with the company’s plans.
The company started building its own operating system after a US investigation into Huawei and ZTE in 2012, one of the people said, asking not to be named discussing confidential matters. Huawei also has its own OS for tablets and personal computers, the person said.
The Shenzhen-based company, which claims to be the “unparalleled leader in 5G” and recently overtook Apple in global smartphone sales, has been stockpiling critical US components for almost a year, according to separate reports by research houses Haitong and Canalys. The move was to ensure it can continue making its products that rely on core technology from US suppliers such as Intel and Qualcomm.
On Tuesday, Sen. Josh Hawley (R-Mo.) introduced a bill to bar exporting large categories of technologies to China including artificial intelligence, robotics, semiconductors and advanced construction equipment.
Hawley and five other Republicans also proposed another bill to bar Chinese students from science or engineering schools connected with the People’s Liberation Army from receiving U.S. visas.
Another bill around 5G and supply chain threats introduced Tuesday was the Supply Chain Act, sponsored by Sens. Marsha Blackburn (R-Tenn.) and John Cornyn (R-Texas). This legislation would require “long-term scenario and strategic planning” between the government and private sector to assess the risk vulnerability of the nation’s information and communications technology marketplace, and to develop strategies to mitigate these risks.
In a report from the Henry Jackson Society (HJS), the authors go on to claim Huawei “has long been accused of espionage” – a claim denied repeatedly by the firm – and notes that “while there are no definitely proven cases”, a precautionary principle should be adopted.
2. US-China trade
China said on Thursday (May 16) it "does not have information on the US plan" to come to Beijing to continue trade talks amid escalating trade tensions between the two giants.
Q: You had been using the word "trade disputes" when replying to questions related to the China-US trade talks previously. But you began saying "trade war" from yesterday. What is the reason for such change? Is it because China believes the trade disputes have escalated?
A: I think you may have over-interpreted our words.
As I kept saying, China doesn't want a trade war, but is by no means afraid of fighting one. It is the US, not China, that defined the trade friction as a trade war and started it. The countermeasures China has taken are entirely for legitimate self-defense.
The latest "Taoran Notes", says no point in talking if the US is not sincere and does't respect China's bottom lines, again brings up the Korean War - 没诚意，来也白来，谈也白谈
Excerpts via a slightly edited Google translate:
In addition, if anyone thinks that China is bluffing, it will only be another major miscalculation after the war to resist U.S. aggression and aid Korea.
In those days, we said that if we cross the 38th parallel, we must send troops.
Some people did not believe that they had misjudged, and then they were educated by facts and returned to the 38th parallel.
Now we say that we will take countermeasures against anyone who imposes tariffs on us.
Do you believe it or not?...
The piece concludes by saying that if the US insists on pursuing this trade war and trying to force China to surrender then:
"these gentle Chinese people will certainly use their best to turn themselves into the most respectable and most difficult opponents they have ever met since 1776.
Now that you have started playing, it is better to let some people clearly realize that the actual cost of extreme pressure will far exceed the benefits of delusion."
China has many options for retaliating against the US and is likely to implement tariffs that go beyond trade in goods, a former top government official says
Wei Jianguo, a former vice-minister in the Ministry of Commerce, says China has the ‘willingness to act to fight a prolonged war’
China’s sincerity and kindness to move forward the negotiations have been seen by all over the last year, and it always keeps promises. Regrettably, the US went back on its words and attempted to make profit from raising unreasonable trade demands and exerting extreme pressure on China. This is nothing but miscalculation.
China’s forbearance is never weakness and its sincerity is not to be trampled on by the US. China will never make concessions on issues of major concerns or allow its core national interests and interests of its people to be hurt. China is resolute to safeguard its national interests and dignity.
The US is doing nothing but tarnishing its own reputation and image through imposing extreme pressure and proposing unreasonable requirements.
China has three trump cards to deal with the US on trade.
The first one is a total ban on the export of rare earths to the US. Rare earths are the raw materials for non-ferrous metals, which are indispensible in chip-making. China's rare-earth production accounts for a majority of the world's total.
The US has its own rare-earth reserves but it would take years for the US to restore its own rare-earth industry to meet its needs for chip production. Even when the US finishes re-establishing the industry, China would have completed R&D on high-end chips and started to export its own products.
US national debt is the other card.
Walmart Chief Financial Officer Brett Biggs told Reuters that higher tariffs will result in increased prices for consumers. He said the company will seek to ease the pain, in part by trying to obtain products from different countries and by working with suppliers’ “costs structures to manage higher tariffs.”
the company said it had been working for six months to change its supply chain and that it expects minimal impact at this point.
“We still have some manufacturing happening in China. But we’ve greatly, greatly reduced our exposure working with our supply chain and our suppliers,” Chief Financial Officer Kelly Kramer said on a post-earnings conference call.
The Trump administration plans to delay auto tariffs by up to six months, stopping itself for now from widening global trade disputes, four sources told CNBC
3. Xi’s “New Vision of Development” from 2016
An article by Xi Jinping, general secretary of the Communist Party of China Central Committee, entitled "Deepening Understanding of the New Vision of Development," was published Thursday in the 10th issue of the Qiushi Journal this year...
"We must base our development on innovation, cultivate new impetus for development through innovation, and create development models that give full play to our first-mover advantages," the article reads...
The article places emphasis on the establishment of a new system for opening up and the improvement of the quality and level of opening up, noting that efforts must be made to follow the trend of economic globalization and make full use of the advanced scientific and technological achievements and management experiences of human society.
Xi’s comments, carried in the latest issue of the ruling Communist Party’s influential bimonthly theoretical journal Qiu Shi, were made in a speech in January 2016, and originally published a year later in a collection of Xi’s speeches.
In the piece, re-published as the economy faces strains during a protracted trade war with the United States, Xi takes an unvarnished look at the problems the country faces.
“Though our economy has vaulted to second place in the world, it is big and not strong, and its bloatedness and frailty are quite prominent,” Xi said.
“This is mainly reflected in the lack of strength in innovation ability, which is the ‘Achilles heel’ of this lug of an economy of ours.”
Xi's article is an excerpt from a speech he gave in January 2016 to ministerial and provincial-level officials - 深入理解新发展理念 - 求是网:
Comment: Interesting that Qiushi keeps republishing Xi’s speeches from a few years ago, making the point that Xi has been right all along?
China will further support local enterprises to increase their innovation capabilities as the country is embracing a new round of industrial reform and aiming for high-quality development, according to an executive meeting of the State Council.
The meeting chaired by Premier Li Keqiang Tuesday called for better use of fiscal and financial policies to inspire enterprises to enhance their input on research and development (R&D).
4. Canadian hostages formally arrested
The Chinese government has formally arrested Michael Kovrig and Michael Spavor, two Canadians it says provided state secrets to foreign organizations, after holding them incommunicado for months.
Mr. Kovrig, a former diplomat, has been accused of gathering state secrets and intelligence for overseas entities. Mr. Spavor, an entrepreneur who helped people travel to North Korea, is accused of stealing and illegally providing state secrets to foreign entities.
The two men were arrested “recently,” said China’s foreign ministry spokesman Lu Kang. He would not comment on where the men are being held or whether they have been provided access to a lawyer.
The men have “been officially arrested” for state secrets-related crimes, Mr. Lu said. However, he said they have been “accused” of wrongdoing rather than formally indicted. The offences he described are, in the most serious of cases, punishable by death...
Both men are now being held in a formal detention centre, which is more akin to a jail, according to two people familiar with their situation
5. Pigs, worms and Hu Chunhua
The full extent of the damage to the country’s $128 billion pork industry is still being fathomed, and any estimate of the economic impact from the virus on the swine industry will be “stunning,” Li Xirong, director of the China Animal Agriculture Association, told more than 400 people involved in the sector at a meeting in the eastern city of Wuhan Thursday.
Signaling the danger posed by the innocuous-looking grub to China’s corn, cotton and soybean industries, a major pest prevention center under the country’s Ministry of Agriculture and Rural Affairs (MOA) on Tuesday warned of a "visible increase" in the pace of the invasion, and urged farmers to “grab crops from the mouth of the pest.”
The insects were first detected on the Chinese mainland in January in the southwestern border province of Yunnan. They are believed to have passed from Southeast Asia into China, where they have ravaged around 1,080,000 mu (720 square kilometers) of farmland in 13 provincial-level regions.
Those figures, from the MOA unit, are far higher than the 127,000 mu figure given in a U.S. government report last week.
An invasive pest that feeds mainly on corn has devoured 720 million square meters of crops in 13 Chinese provincial-level regions, mostly in the south and southwest, and is moving northward at an alarming pace, the National Agro-Tech Extension and Service Center warned Tuesday [草地贪夜蛾侵入13省份为害春玉米] ...
The fall armyworm was first detected in China on Jan. 11 in Pu’er — a city in the southwestern Yunnan province that’s famous for its eponymous variety of tea. “The insects have been expanding rapidly across the country and will (soon) establish their breeding grounds, which would pose a serious risk,” said the agro-tech center
Hu Chunhua has a tough job - Senior official stresses all-round revitalization of rural China - Xinhua:
A symposium was held Wednesday calling for in-depth study and implementation of the discourses of Xi Jinping on agriculture, rural areas and rural residents to achieve all-around rural revitalization.
Hu Chunhua, a member of the Political Bureau of the Communist Party of China (CPC) Central Committee and chief of the central rural work leading group, attended the symposium and made a speech.
6. Chinese and the Australian election
"Our evidence suggests that accounts aligned more closely with the Government in Beijing have a clear anti-Liberal (Government) story coming out of them," said Dr Jensen, a senior research fellow at the University of Canberra's Institute for Governance and Policy Analysis.
Across a period of five months from November 2018 to March 2019, the researchers analysed the Australian content on 47 of the most visited WeChat Official accounts in mainland China, 29 of which were aligned with the CCP.
Organisers of a Chinese-language press conference for Labor’s Banks candidate Chris Gambian, Chinese internet company NetEase, confirmed they barred the Vision China Times in Australia for their stance on the Chinese Government.
The Chinese community accounts for 1.2 million of Australia’s 25 million people and makes up as much as 15% of the voter base in some battleground contests...
To reach Chinese-Australian voters, the main parties are hitting the streets and turning to Chinese messaging app WeChat. The prime minister used the platform to highlight an interview with a Chinese-language media outlet in April. Labor enlisted its Mandarin-speaking former Prime Minister Kevin Rudd to voice WeChat videos, and Mr. Shorten in March invited 500 Mandarin-speaking voters to interact live on the platform before the election was called.
Comment: WeChat is the primary channel for information consumption by much of the Chinese diaspora. Any government worried about CCP influence and interference needs to be paying much more attention to WeChat.
7. Mapping a hack
According to the report, the Ministry of Foreign Affairs of Cyprus and the overall COREU diplomatic network -- used to facilitate communication between all 28 EU countries -- had been compromised, leading to the exposure of diplomatic cables and far more besides. Over 100 organizations are believed to have been targeted, including trade unions and think tanks.
The infiltration of the network was attributed to the Strategic Support Force (SSF) of the People's Liberation Army (PLA), China's elite hacking team.
When the New York Times published a story in December based on a combination of hacked diplomatic cables belonging to the European Union, as well as sensitive information belonging to the United Nations, we, the BlackBerry Cylance Threat Intelligence team, took notice...
As we will demonstrate in greater detail below, we connected this domain to a host of other, disparate Chinese APT groups whose tasking, targeting, and toolsets have been literally all over the map. We also found evidence suggesting that different Chinese APT groups have also been using the same malware - and in some cases, the same exploit builder.
8. Facebook can’t quit its China dream
Facebook is eyeing an indirect path around China’s great wall. Blocked from operating there directly, the $520 billion social network is considering alternatives that include taking minority stakes in local tech firms, people familiar with the matter have told Breakingviews..
Facebook has discussed potential minority stakes with investment funds and other companies, according to people familiar with the matter, though it is moving slowly and has yet to make any decisions.
Comment: Taking local stakes was a suggestion I made to an FB exec during a meeting in Beijing several years ago. It was dismissed out of hand.
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Business, Economy and Trade
China US Treasury Holdings March 2019: 1st Decline Since Nov - Bloomberg It was only a slight reduction -- the stake slipped by $10.4 billion, the first drop since November -- but that was enough to bring the position down to a two-year low of $1.12 trillion, according to data the U.S. Treasury Department released Wednesday.
Western Companies Get Tangled in China’s Muslim Clampdown - WSJ $$ Adidas AG, Hennes & Mauritz AB, Kraft Heinz Co. , Coca-Cola Co. and Gap Inc. are among those at the end of the long, often opaque supply chains that travel through China’s northwest region of Xinjiang. Residents there are routinely forced into training programs that feed workers to area factories, according to locals, official notices and state media.
Exclusive: Elite New Committee to Chart Future Course at Alibaba - Caixin Alibaba Group Holding Ltd. has set up a 13-person committee to make and execute economic strategy for the e-commerce giant and its Ant Financial affiliate, as founder and internet mogul Jack Ma gets set to retire later this year, Caixin has learned...The elite new committee’s formation — part of the broader overhaul — occurred in the first quarter of this year, several company sources told Caixin. It will include five sub-committees as well as several other divisions.
China Proposes First Amendments to Outdated Copyright Law in Nearly a Decade-Caixin The revisions are expected to include provisions on live broadcasts, new rules for digital products, and regulations on users’ rights over digital works they’ve paid for. Provisions for increasing compensation for those whose copyright is violated and greater punishments for violators may also be included. Drafts of amendments to the law were presented in 2011 and 2014, but progress has been slow. The revision process has revived as China faces an extraordinary number of copyright lawsuits. A Supreme People’s Court source told Caixin that copyright cases account for 70% of intellectual property matters that come before the court.
Former JPMorgan Banker Charged With Bribery in ‘Sons and Daughters’ Program - WSJ $$ The city’s antigraft agency said Catherine Leung Kar-cheung, a former vice chairwoman of JPMorgan’s Asia-Pacific investment banking business, bribed the chairman of a logistics company by offering to employ his son at the bank. The Independent Commission Against Corruption said Ms. Leung made two employment offers in connection with an initial public offering of the logistics company, which it didn’t name. The offers, it said, were made between 2010 and 2011. The agency said Ms. Leung has been released on bail and is due in court on May 20.
Brokers brave China's FX market crackdown in hunt for household high rollers - Reuters In a statement to Reuters, China’s State Administration of Foreign Exchange (SAFE) reiterated that forex margin trading is illegal in China. “The Internet knows no national boundaries, but there must be national boundaries for financial licenses. Cross-border financial service providers cannot operate without a license,”
In Depth: Banks Go to War to Meet Beijing’s Goal of Lowering Rates for Small Businesses - Caixin A price war has broken out among banks competing to offer the lowest rates on loans to small businesses as the government has made supporting these companies a greater priority since last year. The price war among lenders is just one of several side effects of a government drive to lower funding costs for small businesses, which has also ratcheted up the competitive pressure on smaller lenders and sparked concerns that companies receiving low-rate loans could abuse their privilege by relending the cheap funds at higher rates.
China regulates user deposits held by new mobility providers - ECNS ix central government departments have jointly released a regulation on the use of deposits from users of new forms of mobility...It also said deposits are limited to 100 yuan for shared bikes and 8,000 yuan for ride-hailing services. Operators of platforms need to clarify the conditions for deposit refunds, it was added, and are banned from using deposits in investment and lending.
Faster and cheaper internet services to benefit Chinese economy - Xinhua China will extend gigabit broadband connection to more than 300 cities and cut the average service rates by 15 percent for small and medium-sized enterprises this year. The decision was made at the State Council's executive meeting chaired by Premier Li Keqiang on Tuesday in an effort to achieve multiplying effects of expanding domestic demand, boosting employment and improving people's lives.
Listed Company Denies Media Report, Says Truth is Worse - Caixin Global A WeChat subscription account specializing in workers’ rights said Sino Great Wall owed a total of 56 million yuan ($8.14 million) in backpay to its staff. The company denied the report on Tuesday, and clarified that due to liquidity problems, the unpaid salaries in fact total more than 81 million yuan, including those owed to staff from subsidiaries
Politics and Law
Henan Expands Control Over Christian Churches - Bitter Winter Bitter Winter received a document, adopted in March by the “leading group on ethnic and religious work” of a locality in China’s central Henan Province, that calls for the increased governance of all Christian venues. It lists a variety of control measures: from taking over ad repurposing of house churches, the management of churches’ finances to preventing the already closed down churches from reopening. All actions should be accompanied by praising the “kindness of the Communist Party” and making sure that all believers follow its leadership.
Foreign and Defense Affairs
‘The Chinese are our No 1 enemy’: why Beijing’s US$62 billion investment in Pakistan is the top target for Balochistan separatists | South China Morning Post Government officials say Islamabad has set aside US$9.1 million for security in the China-Pakistan Economic Corridor But the Balochistan Liberation Army has vowed to continue its attacks on Chinese projects and nationals, as they fear being turned into a minority in their own province
Hong Kong and Macao
Occupy poster boy Joshua Wong returns to jail in Hong Kong despite winning appeal for lighter sentence | South China Morning Post Activist was previously found guilty of contempt after not leaving a site in Mong Kok that judges had ordered cleared Wong’s sentence has been reduced from three to two months
Tech and Media
Microsoft opens largest AI & IoT lab in Shanghai - Xinhua Located in a 2,800-square-meter building in the Zhangjiang Hi-Tech Park of the Pudong New Area, the lab, which began operation Wednesday, is established in partnership with the state-run Zhangjiang Group. It is the fourth and also the largest such lab run by Microsoft around the world. Microsoft said the lab provides "all-around support" for enterprises inside and taps into the Internet of Things and AI technologies to fuel the digital transformation taking place across industries, including manufacturing, retail, healthcare, finance and urban construction.
NetEase overseas gaming, e-commerce businesses offset regulatory squeeze · TechNode Driven by strong performance in online game services and e-commerce, gross profit also jumped by nearly 36% year on year to RMB 8 billion, continuing growth from the previous quarter. Net revenues grew close to 30% year-on-year to RMB 18.36 billion ($2.74 billion), driven by increased online game service and e-commerce revenues and beating analyst estimates by a notable margin.
Didi reprimanded for introducing new shared bikes in Beijing in red tape snafu · TechNode Didi, which owns bike-rental services Qingju and Bluegogo, said it had removed 10,000 old Bluegogo bikes from the area a month earlier after being granted permission from the Zhongguancun administrative committee to better meet demand and help relieve traffic in the area. Xierqi belongs to Zhongguancun Technology Park. However, Didi did not obtain approval from the Beijing Transport Bureau, which banned in August new shared bikes.
Society, Arts, Sports, Culture and History
China set to host 2023 Asian Cup as South Korea scraps bid - Xinhua China last hosted the Asian Cup in 2004, reaching the final of that year's tournament. At the most recent edition of the tournament earlier this year, China advanced to the quarterfinals, where they lost 3-0 to Iran.