National Security Law for Hong Kong

Hong Kong protests against Extradition bill. Courtesy - Wikipedia

Amid all confusion, what exactly Chinese National People Congress (NPC) did?

Last week NPC voted in favor of introducing new security legislation for Hong Kong - a former crown colony of the British Empire. Rumor is that law may be passed in NPC as early as August. In their words, it is to “prevent, stop and punish” threats to national security by outlawing acts and activities of secession, subversion, terrorism, and foreign activities in Hong Kong's affairs. Beijing will most probably bypass the Hong Kong legislature and add the bill to Annex III of Basic Law (Hong Kong's constitution).

After the passage of this Law in NPC, Hong Kong administration need to set up new security institutions to safeguard National Security. This also allows mainland intelligence and other agencies to operate in the city whenever needed.

Three main pillars of the new law

1. Secession and Subversion

What will be defined as secession and subversion is a very important question. For China, anything which challenges the supreme authority of the party and its functionaries can come under that wide umbrella. In addition to that, in an authoritarian society challenging even the local arm of the party can be considered as the same. Who will try, people booked under these acts? Existing Hong Kong courts or special courts? Will the spider web of firewall of China and omnipresent security system will come into Hong Kong? Will the relatively free (compared to mainland China) Hong Kong end up as any other territory of China? Possible answers to these questions do not instill much confidence among the international community.

2. Terrorism

Just like China has its own version of everything, Terrorism with Chinese characteristics will be very different from what generally accepted as terrorism.

3. Foreign interference in Hong Kong’s affairs

I do not think any country in the world dare to interfere in Chinese affairs. Even those criticizing China for human rights violations do not dare to interfere in Chinese internal matters. Otherwise, you will hear something about millions of Muslims locked up in China’s eastern provinces. Even Islamic countries do not utter a word. Forget about Chinese internal matters, countries do not even dare to stand up to China during the South China Sea crisis.

This law might affect organizations which have democracy or human rights anywhere in their name or articles and (or) receiving donations from foreign institutions.

It is not the first time Hong Kong is facing this situation. Long back in 2003, then Hong Kong administration tried to introduce National Security bill to implement Article 23 of Basic Law. However, they were forced to withdraw the bill after severe protests by the people of Hong Kong. Even in last year, China did not take any drastic steps during the long protests in Hong Kong.

Police and Protesters in Hong Kong Streets - During anti-Extradiction bill protests. Photo courtesy: Wikipedia

But this time things are different. Why? 

1. Hong Kong elections – opposition had a landslide victory in last November for district council elections. This election was conducted after long anti-extradition bill protests. Now new elections are coming up in September for Hong Kong legislative council, in which most probably pro-democracy candidates will win.

2. China is on the back foot due to the wild spread of SARS-COV-2. Hiding the seriousness and mishandling the same early in the cycle was criticized heavily across the globe.

3. This is an election year in US. China might be waiting for US election results; to see whether Trump will go or not. As per their calculation, a new democratic administration in Washington may be more amenable to Chinese suggestions and threats.

4. Hong Kong is not the engine of growth for China anymore. Hong Kong is important, very important but its relative power viz-a-viz other Chinese cities reduced drastically over the decades.

5. For Xi this is very important; after the reverses in law introduced in last year in Hong Kong as well as setbacks in Belt and Road initiatives, he wants to show that he can still get the things done.

6. When the entire world is trying to fight COVID with tooth and nail, many countries are not in a position to fight China. I do not think most countries will do anything other than issuing some statements with carefully chosen words.

7. Chinese power viz-a-viz US is on the rise in the South China Sea region, South Asia, Africa etc, and in numerous multi-lateral agencies. With US isolationist policies under Trump administration, not many countries want to cross the line with China.

8. China is not a party to the International Courts of UN, so there is no point in someone challenging China there. By the way, China already defied another international court order on the South China sea and hardly faced by the backlash.

9. I think most countries already accepted the fact that if not today then tomorrow Hong Kong will be part of China - just like any other Chinese provinces. It is just a matter of time.

10. China thinks that setbacks due to the loss of special trading status and other relations of Hong Kong with the US, UK, and EU are affordable.

11. China may also be testing the waters on how the world will react to the eventual integration of Hong Kong with mainland China and abolishing ‘One country two systems’ policy.

Sajeev

References

1. What safeguards are needed for Hong Kong’s new national security law? Who could get caught by it? Legal eagles flag concerns - SCMP

Falling Chinese Currency amid rising US-China tensions, Hong Kong crisis and COVID

People's Bank of China HQ- Beijing; Photo Courtesy: Max12Max, Wikipedia

When the dragon starts dancing wildly, it is going to make others nervous and markets volatile. Currently, when the world economy is crashing due to COVID related lockdowns and production losses, China is adding more fuel to fire by voting a plan to introduce new security laws to Hong Kong - former Crown colony of the British Empire. Hong Kong Crisis and rising tensions with US is causing yuan to fall farther - lowest level against USD in eight months [1].  Chinese central bank was intervened for the 9th consecutive trading day [1] in the market to release the downward pressure on yuan.

Just after US Secretary of State's declaration to the US Congress that, they do not consider Hong Kong suitably autonomous from mainland Chinese rule; National People's Congress voted in favor of introducing new laws. Whether the city is autonomous or not is an important factor in deciding whether Hong Kong will continue to get preferential economic and trade treatment from the US. Losing this status will force a lot of companies operating there to reevaluate their strategy; this can even threaten Hong Kong's future as Asia's financial hub.

The ironic fact is, depreciation in yuan hurts the US, European and other nations which imports Chinese products much more than it affects China. However, it is very risky for the Chinese to let the currency slip as other countries will declare China a currency manipulator and add penal tariffs on imports from China.

The question is will China's central bank defends yuan’s fall and stabilize it; if yes, then how long?

References

1. China steps in to defend the yuan, as US tensions andHong Kong uncertainty send currency tumbling - SCMP

Standing up to China: Vietnam going ahead with Oil Explorations in Vanguard Bank

Blue are Chinese Controlled and Green are under Vietnamese Control

Vietnam extended the operations of oil rig on Vanguard Bank to September. This is a direct challenge to Chinese position of owning everything within nine-dashed line (almost entire South China Sea). China already deployed a survey ship - Haiyang Dizhi 8(Marine Geology 8), and multiple coast guard ships to the area; apparently to disrupt the operations and force Vietnam to back down from its current stand.

World, especially South China Sea coastal states were (and still are) watching whether Hanoi will back down like in 2018 or go ahead with operations. Last year, Hanoi under tremendous pressure from China cancelled Repsol's contract. Four years before that, Chinese moved their own oil rig to the region, setting of anti-China riots in Vietnam. Later China withdrew that rig. Two years before that, in 2012, China took over Scarborough Shoal. Probably Vietnam learned lessons from past events and realized that, backing down is not going to help its claims in anyway. Interestingly this time, decision to extend the operations came right after US DoD released a statement backing Hanoi.

Vanguard bank is coming inside Chinese nine-dash line. But it is hard for anyone to back Chinese claims other than China. These pieces of uninhibited (mostly submerged) geographic features are energy rich and located around 200 nautical miles off Vietnams coast but more than three times of that distance from China. Nine dashed line runs as far as 2,000km (1,200 miles) from Chinese mainland to within a few hundred kilometers of the Philippines, Malaysia and Vietnam.

Vanguard Bank

History of Rig in Vanguard Bank

This rig is in a block which is part of 'Nam Con Son' project (developed by BP and ConocoPhillips in early 2000s) to carry gas by pipeline to mainland. Today, natural gas from Block 06-01’s Lan Do field provides approximately 10% of Vietnam’s total energy needs. Rosneft acquired TNK-BP in 2013 and they became block's operator. In May 2018, Rosneft contracted Hakuryu-5 to drill a new production well in 06-01 at a second gas field called Lan Do. Despite possibility of Chinese opposition, Rosneft went ahead with drilling at Lan Do and another field, Phong Lan Dai, in Block 06-01. In May 2019, Rosneft contracted the Hakuryu-5 to drill another well in 06-01.

CCGS Haijing 35111 - Dancing in Malaysian Oil fields

Since 2013, China maintains a near-constant coast guard presence around Luconia Shoals. Most areas of this geographic features are underwater at high tide but still claimed as islands by Beijing and Taipei.

Chinese coast guard ship (CCGS) Haijing 35111 started patrolling waters near Luconia Shoals. This area is near to coast of Malaysia’s Sarawak State. Haijing 35111's patrolling area (May 10 to 27 as per Automatic Identification Data - AIS) includes parts of oil and gas block SK308. This block is currently licensed to Sarawak Shell (subsidiary of Royal Dutch Shell). Sapura Drilling recently won the contract for Sapura Esperanza rig to drill a series of new wells at natural gas field F14. This is one of three fields Sarawak Shell is developing in block SK308. As per Asia Maritime Transparency Initiative(AMTI), AIS signals showed that two Malaysian offshore supply vessels (OSV) - Executive Excellence and Executive Courage - apparently servicing the rig by travelling back and forth between the block and Sarawak coast. On May 21, Haijing 35111 circled provocatively close to vessels and came within 80m.

CCGS Haijing 35111 in Vanguard Bank

At the end of May, Haijing 35111 returned Hainan port for a few days before heading south again. Since June 16, it has been patrolling an area 190 nautical miles off the coast of South Eastern Vietnam. Patrols are centered on oil and gas Block 06-01, located northwest of Vanguard Bank on Vietnamese continental shelf.

On July 2, vessels which supplies Hakuryu-5 where leaving the rig when CCGS 35111 maneuvered between them at high speed, passing within 100 meters of each ship and less than half a nautical mile from the rig. After patrolling Block 06-01 for nearly a month, 35111 traveled to the Chinese outpost on Fiery Cross Reef from July 12 to 14, presumably to resupply, before returning to its post near the Hakuryu-5.

China rise stakes with Haiyang Dizhi 8(Marine Geology 8)

On July 3, Haiyang Dizhi 8, a survey vessel owned by China Geological Survey (CGS), began surveying a large area of seabed northeast of standoff at Block 06-01.

Haiyang Dizhi 8 is the one which undertook, oil and gas survey across two blocks - Riji 03 and Riji 27. In 2012 China declared these and seven other blocks off the coast of Vietnam open for foreign bidding. As expected, there were no takers.

This survey vessel is protected by other coast guard vessels. Haijing 37111 and two unidentified CCG ships have accompanied the Haiyang Dizhi 8 since July 3. Vietnam dispatched two Coast Guard Vessels - KN 468 and KN 472 - from Cam Ranh Bay. They are shadowing survey ship since July 4. AIS data shows that the survey ship continues to operate, surrounded by its CCG escort which boxed out Vietnamese vessels attempting to intervene.

Highly Dangerous Situation

Current situation is highly dangerous. What happens when one of the CCG ships, in its dangerous maneuvers, hit either Vietnamese Coast Guard ship or damage the rig itself. It might be an accident, but does any governments across the region will consider it as accident? Already reports of current confrontation is reaching Vietnamese public; this will only rise the anti-China sentiment further. Under such a situation it will be difficult for Hanoi to back down or give any concessions to China in any future discussions.

Dialogue is required

Solution for this perpetual tense situation in South China is constructive dialogues. However, ASEAN nations doesn't stand a chance if dealing with China one on one. As a group they have some power and can lead to meaningful discussions. Unfortunately, that is also not gaining steam. ASEAN is trying to come up with a Code of Conduct at South China sea; but pace is very slow. No one want to take the risk of upsetting China.

Current chair of ASEAN - Thailand - don't want to fast-track the negotiations. Bangkok is pushing the issue to next chair, which is interestingly Vietnam. Currently under ASEAN, it’s the responsibility of Philippines to coordinate dialogue between ASEAN and China. They will be in that role till 2021. China probably want the code of conduct in place when Philippines is still in that position. In this case China might have to stand down from its claim of entire sea and everything under it. A settlement based on UN laws on sea with minor adjustments might be a good idea for trade and bilateral relations. 

Something positive

One major change we can see is, countries are sending their white hulled Coast Guard Ships to support their claims, monitoring waters instead of more aggressive posturing with naval ships. Coast guard is more of a law and order policing agency and this change indicates less aggressiveness from participants side. Probably a sign that, South China sea costal states including China want to deescalate things.

Sajeev

What makes current standoff interesting is, the joint venture company's Russian partner is none other than Russian oil behemoth Rosneft. Will Russia make some adjustments especially after recently concluded joint patrol with China over disputed Korean administrated islands in Sea of japan? It may not happen as it will upset their relations with Vietnam. Moreover, Resneft is just an operator. If Rosneft refuses, then Vietnam might find a replacement. I think Rosneft will be there. 

References

1. The Diplomat.
2. Foreign Policy
3. Asia Maritime Transparency Initiative

Notes

1. Automatic Identification System (AIS) data. All oceangoing vessels over 300 tons are required to broadcast this data.
2. Vanguard bank is guarded by three operational rigs in DK1 cluster. DK1 rigs are complex structure of steal on sea, where there are facilities to host small detachment of soldiers.
3. Vanguard Bank
    U.S. Board of Geographic Names: Vanguard Bank
    China: Wan'an Tan, 万安滩
    Taiwan: Wan'an Tan, 萬安灘
    Vietnam: Bãi Tư Chính
    Occupied by: Vietnam
    Legal Status: Submerged
    GPS: 7° 30' 49" N, 109° 39' 58" E

New Russia-China Military Alliance in Asia-Pacific?

Russian Air Force A-50

South China Sea is crowded - with oil tankers, commercial ships, naval vessels, newly minted islands, fishing boats, white hulled coastguard ships carrying flags of different countries. Chinese policy of transforming entire South-China Sea to Chinese lake is going to make it crowder. During these times 'Sea of Japan' was relatively calm. However, coordinated patrol (probably first ever) of Russian and Chinese planes on July 22 suddenly made it a point of interest.

Beriev A-50 airborne warning and control aircraft launched from Russia's eastern military district, joined two Tu-95MS strategic bombers and met up with two H-6K long range bombers and a KJ-2000 battle management aircraft in Sea of Japan. During its combined patrol, A-50 flew close to South Korean controlled island - Dokdo (also claimed by Japan, they call the island ‘Takeshima’) - and crossed South Korean Airspace over the island twice. First while it was going to East China Sea and second time, when it was coming back. South Korea launched her fighters (18 F-15K Slam Eagle and KF-16 jet fighters) to intercept the joint patrol and fired warning shots in quick bursts. Russia deny all of this, as per them, South Korean actions are 'aerial hooliganism' and 'unprofessional maneuvers'.

Apart from A-50 which crossed South Korean airspace over the islands, other aircrafts in this group violated self-declared air defense identification zones (ADIZ) of both S.Korea and Japan. 'Air Defense Identification Zone (ADIZ)s' are different from sovereign air Space. ADIZ is beyond a country's national airspace - beyond 12 nautical miles from host country's shoreline - where identification of aircrafts is performed. This allows host country more time to respond to a hostile airplane. However, ADIZ is not defined or recognized by any international treaty/law.

Japan also scrambled her fighters in response to Russia-China joint patrol. As Japan is a party to island dispute, they condemned actions of all three - Moscow, Beijing and Seoul.
This incident revels some significant changes which may become very important in near future in South and East Asian theatres.

1. Institutionalized military relationship between Russia and China

Moscow’s relationship with Beijing is growing strong day by day. Earlier, the relation was based on economic necessities of both nations. Russia needed to diversify its petrochemical consumer base, they can't have all their gas and oil going to EU through Ukraine with whom Moscow has an adverse relationship. Hence, energy hungry China gave them some maneuvering room in case of a future US/EU sanctions due to any Russian adventurism in Eastern Europe. At the same time, China also need an alternate oil and gas supply route which doesn’t pass through Indian ocean (right under the nose of Indian and US navies) and then through geographical chokepoint known as Malacca Straight. It was a marriage of convenience. It won’t be wrong to say that Russia was a bit reluctant to go for a full Chinese embrace. Chinese also didn’t want to identify as twin brother of Russia.

On military side, Moscow withheld supply of fighter jet engines (fearing the duplicates popping up on next day). However, this changed later. Currently China is planning to buy 5th generation Su57E fighter jets. This is in addition to Su-35 fighter jets Beijing is already buying from Moscow. China got possession of first batch of S400 missile air defense regiment last year. Slowly, this marriage of convenience is going to the next level. Since 2012, both countries are conducting joint exercises and other consultations. Last year, Beijing participated in Vostok 2018 military exercises.

2. Freedom of Navigation in Air

US is frequently conducting Freedom of Navigation of Seas operations in South China sea. As none of the South China Sea nations has the power to stand up to China one on one basis; and in the absence of a regional military framework like NATO, China is free to do whatever they want to do. To protect her own and allies interest US led navigation operations are a problem for complete Chinese dominance. In addition to that, US military planes neither recognize nor identify on Chinese ADIZs.

Hence, joint patrol with Russia over a disputed island can be considered as a tit for tat action from Beijing. The question is, will this be a onetime event or going to be a new normal. This also depends on how far Russia is willing to go in upsetting her otherwise good relations S.Korea and Japan.

3. Russia boosting military assets in Russian Far East

Considered as a land based European power, Russia want to be known as a major player in Asian theatre as well. Strategically also, opening a new theatre in East Asia will take the heat away from its otherwise stalemate operations in Ukraine. For some time, Russia was boosting her military presence in Russian far east with deployment of new S-400 air defense systems and Bastion anti-ship missile systems.

4. Backfire on Russia

Inserting unnecessarily into conflicts against countries with which Russia has otherwise good relations is going to backfire. If Russia is sending signals that it is ready to accept political cost on behalf of China; then it is not going to go down well with Seoul or Tokyo. In addition to that, new military alliance will only push other countries further into US orbit. Chinese are more calculative and do in depth analysis before they get into something. I don't think, Chinese are going to back any Russian adventurism in Eastern or Central Europe. In the end only Russians will end up paying the price.

It is to be remembered here that, last year Moon became the first ever South Korean president to visit Russia, and both countries’ air forces established a hotline as well.

5. More problems for US

Infighting between Seoul and Japan over WWII War Crimes, forced labor and Comfort Woman cases already affecting the trade between two nations. These issues are driven by passion and nationalism which is not going to fade away any time soon. In addition to that, China brought Cambodia fully into her orbit. New Chinese naval base and Cambodia’s purchase of Chinese weaponry is going to enhance these relations. Philippines' president hardly says any word against China despite multiple issues in South China sea, where Philippines ended up victims. Other countries in the area has deep economic links with China and are heavily dependent on Chinese investment. Vietnam may an exception here.

In addition to that, Chinese are entrenching her position in South China sea by building and weaponizing new islands.

6. Indian Context

India need to consider new political equations in East Asia very seriously. For more than six decades Russia remained as a major ally and weapon systems provider. At the same time, we have a lot of outstanding border issues with China. In addition to that, China is an all-time friend of Pakistan. It is to be remembered here that China blocked Indian demand for UNSC declaring Masood Azhar as terrorist numerous times. China also blocked India's entry to NSG.

In this situation, a Moscow-Beijing military alignment is not good news for India. Russia's movement to Chinese orbit is only going to push India further away from Russia and more to US. Moreover, if Russia is going to sell the same equipment to China - which Russia is selling to India now - there is no point of buying more from Russia.

7. China-Korea Relations

After deployment of THAAD missile defense system by Moon's predecessor (Park Geun-hye) China-South Korea relations spiraled downward. This also led to street protests in China and caused an estimated $10bn loss to S.Korean business. It is believed that, later S.Korea under Moon conceded to Chinese demands - No further US Anti-Ballistic missile systems, No integration to US led regional missile systems and no trilateral military alliance with US and Japan. In this situation, why China made this move?

It is to be remembered here that; China generally don't act on impulsion. They always move with a well thought out strategy. If we take this into consideration, then Beijing might have assumed a calculated risk. Current Korean - Japanese relations are not in good shape. Hence, patrol over a disputed Korean administrated island - which Japan also claims – may be enough as a rebuttal for US freedom of navigation operations on sea but not enough to push Korea to the other end. We will see in coming days whether Chinese crossed the line, or they just pushed the line little further. US under current administration is passive on issues related to South East Asian security framework. Hence some adventurism may not invite any big push back.

Crossing boundaries and firing warning shorts is risky. It is to be remembered here that, a Korean Air Lines flight (from New York City to Seoul via Anchorage, Alaska) was shot down by Soviet Su-15 interceptor after Boeing 747 was deviated from its original planned route and flew through Soviet's prohibited airspace due to technical problem. All 269 people on board were killed in that incident. Hope that, all stake holders will careful enough not to cause any accidents.

Sajeev

Note 1:

As per Reuters report, "Japan regularly scrambles fighters to intercept Chinese and Russian aircraft that fly close to its territory, with 999 such intercepts in the twelve months that ended on March 31".

Note 2:

In order to avoid taking sides with either allies, US call this island - 'Liancourt Rocks'.

References

1. WSJ
2. SCMP
3. National Interest

Fighting for future: US vs China

Huawei HQ in China

One thing which is very clear to those who follows US actions against Huawei is - it’s not about Huawei; it’s about future of supremacy in technology.

In past half century they faced this situation twice. First with USSR, which is now dubbed as space race era. With the end of towering USSR scientists Kirill Shchelkin, Yulii Khariton, Andrei Sakharov, Mstislav Keldysh, Boris Vannikov, Sergei Korolev etc USSR's technological challenge came to an end. After death of Sergei Korolev (which was accelerated by various Soviet programs), Soviets were not able to continue with their supremacy in space. Slowly but steadily leadership of USSR became more interested in political survival and maintaining military strength rather than funding huge S&T programs. With the disintegration of USSR that also came to an end.

Later it was Japan. Her supersonic cruise in all spheres of economy and technology seriously threatened US supremacy. However, Japan was US ally and their supersonic growth came to abrupt halt in early 90s. Though Japanese firms kept on investing in technology and maintained leading position they were never able to be the Japans of 80s.

Now decades after victory in space race, US is facing tough competition from anther rising Asian power - China. China became pragmatic and broke shackles of ideological dogma during Deng era and started sprinting. Unlike Soviets (who were able to remain as single country due to military might), Chinese are more coherent, focused, planned and certainly do not want to make repeat the mistakes of their erstwhile neighbor. It’s a different matter that in Xi era, China looks more like moving towards Soviet's way).

China is pushing hard in Space. In response, US recently created a new space command and pulled back NASA from its cash strapped, less ambitious vision. Focus also changed from Atlantic theatre to Indo-Pacific especially in South China sea. In both cases US has an upper hand. However, when it comes to technology (especially in Telecom, AI, Face recognition etc) it’s a different ball game. In fact, lot of patents in this area are with Chinese. In facial recognition and associated technologies, there are hardly anyone who can compete with Chinese.

US don't have any companies with the stature of Huawei in telecommunications sector. Sure, they have Cisco, but they are in a different field. Then Qualcomm, again in related but different area. ARM is British (or Japanese because of Softbank?). We hardly heard anything about AT&T Bell which pioneered a lot of earlier innovations for a while. Bell Labs are currently under Nokia which is a Finnish company. You may be remembering another company called Western Electric. They underwent many transformations (became Lucent in between) and now under Nokia's umbrella. Then there is Ericson. Hold on... Ericson is Swedish.

Looks like US also understand this. After all they blocked sale of Qualcomm to Singapore based Broadcom on national security grounds. Investments by any Chinese firms to US companies holding key technologies were also blocked citing national security reasons.

In fact, all major 5G, high end telecom gear manufactures are non-US companies - Huawei (with over 100bn USD in revenue), ZTE, Nokia, Samsung and Ericsson. Now, you may be thinking what so special about 5G. Why US is worried?

5G is a major variable in future technological landscape. It’s going to revolutionize Telecommunication networks, Internet, Industrial IoT, Control of remote and critical infrastructure, Entertainment and Multimedia, Smart Vehicles and driverless cars, Transportation, Low latency machine communications, Smart homes, Smart city development, Security and surveillance etc.

US may probably never been in this situation for at least two centuries. While US was pumping billions of dollars for non-winnable wars in Afghanistan, Iraq etc Chinese pumped many billions into research as well as for investing in key western companies. They made state champions and created alternatives for major western technology giants. It is another matter that, during this sprint they hardly cared about intellectual property rights and patents. What US saw when they took a break in fixing Afghanistan and trying to get out of Iraq was Chinese leading world's transition to 5G!!!

Panicked, they acted fast, targeting leading Chinese companies Huawei, ZTE. ZTE almost came to its knees before US relaxed sanctions. Huawei was added to sanctions list. Following that Google pulled Huawei’s Android license. This means, Huawei phones can't use Android OS (I think they can still use opensource part of Android) and google services including play store.
Was Chinse companies’ victims?

I don't think anyone describes Chinese companies as pure victims. Main accusation against Chinese giants are theft of trade secrets and surveillance for Chinese state. When US asked Canadians to arrest Huawei's CFO (Meng Wanzhou - daughter of founder Ren Zhengfei) charges were theft of trade secrets and violations of sanctions against Iran. As a matter of fact, company founder Ren’s resume includes working for 'Information Technology research unit' of PLA (Chinese Army).

A little History of Huawei


2003 - Networking firm Cisco accused Huawei of intellectual property theft. Cisco later dropped the suit.

2005 - RAND Corporation study, commissioned by US Airforce (USAF) - noted that, "Huawei maintains deep ties with the Chinese military, which serves a multi-faceted role as an important customer, as well as Huawei’s political patron and research and development partner."

2007- FBI interviewed Huawei’s founder, Ren in 2007 in relation to potential violations of US trade sanctions on Iran.

2008 - Companies efforts to buy 16% stake in 3Com (provider of anti-hacking software for US military) was blocked.

2010 Motorola filed a lawsuit accusing Huawei of corporate espionage, but later settles with the company

2014- T-Mobile sued Huawei. Later US telecom companies excluded Huawei from their contracts

Reuters reports that, "A major Iranian partner (Skycom, a private company registered in Hong Kong) of Huawei Technologies offered to sell at least 1.3 million euros worth of embargoed Hewlett-Packard computer equipment to Iran’s largest mobile-phone operator in late 2010". Problems is as per reports, Ren’s daughter, Meng Wanzhou, served on board of Hong Kong firm. This firm is also considered as front-end for Huawei.

As per the same report, “an Iranian job recruitment site (Irantalent.com) describes Skycom as “a leading telecom solution provider” and goes on to list details that are identical to the way Huawei describes itself on its U.S. website: employee-owned, selling “solutions” used by “45 of the world’s top 50 telecom operators” and serving “one-third of the world’s population. On LinkedIn.com, several telecom workers list having worked at “Huawei-skycom” on their resumes. A former Skycom employee said the two companies shared the same headquarters in China. And an Iranian telecom manager who has visited Skycom’s office in Tehran said, “Everybody carries Huawei badges.”

Iranian project was to double prepaid customer capacity of Iranian telecom operator from 20m to 40m. As per this proposal (marked as Huawei confidential) requires HP hardware - one server, 20 disk arrays, 22 switches and software - in Tehran and Shiraz as part of hardware design. Total project cost was around 19.9mn euro. Same report states that, "...China’s ZTE Corp, a Huawei competitor, had sold or agreed to sell millions of dollars’ worth of U.S. computer gear, including HP equipment, to Telecommunication Co of Iran, the country’s largest telecommunications firm, and a unit of the consortium that controls TCI."

As per US authorities, Huawei "...retained control of Skycom, using it to sell telecom equipment to Iran and move money out via the international banking system… banks unwittingly cleared hundreds of millions of dollars of transactions that potentially violated economic sanctions Washington had in place at the time".

Another allegation is, Canicula (allegedly linked to Huawei) had business operations in Syria, another country that has been subject to U.S. and European Union sanctions.

Financial transactions via Skycom came to light during an HSBC internal investigation. HSBC was trying to dismiss criminal charges filed by US Department of Justice for violation of U.S. sanctions.

Security Risk

US intelligence agencies also fear that, Huawei equipment could contain 'backdoors' for Chinese state espionage. Huawei vehemently denied these claims. However, Australia and New Zealand went ahead and banned Huawei from building their mobile phone networks. Austria is trying to reduce overwhelming Chinese influence in their country. British are yet to ban the company but expressed reservations. It’ hard for British to say no to Chinese money during and after Brexit process.

In fact, Chinese law require companies to assist in national intelligence work. Well, you may be thinking isn’t US companies cooperate with US government in their intelligence gathering. Well, it’s a good questions and we know the answer from Snowden papers.

Ownership of Huawei

Ownership of Huawei is one of the most interesting puzzles in the game. You might be thinking founder Ren Zhengfei is the owner of the company. Interestingly no. He owns around 1%. Huawei is not a publicly traded company and never sold shares to public in last three decades. As per records, Huawei Technologies is wholly owned by a holding company called Huawei Investment & Holding. This holding company has two shareholders, Ren and Huawei’s labor union (Union of Huawei Investment & Holding).

Interestingly Huawei shares are different from normal shares. These shares can't be transferred to another or owned by nonemployee. If an employee exit Huawei, then company buys all shares back. If employee have certain seniority, then they many not buy it back. Labor Union, elect members to Huawei’s Representatives’ Commission, which in turn elects’ members of the board of directors. Union doesn't have any control over the operations of company.
Accusation (which Huawei trying to discredit but so far unsuccessful) is that Chinese party, military or government has significant control over Huawei.

Why American's Act Now?

China is very different from all other US enemies who are a threat to US interests. For e.g. whatever Russians do, they don’t pose a significate threat to US outside old USSR sphere of influence (except in Arctic). Moreover, Russians are neither investing in future nor cared about anything in economy other than Petro-gas and selling military weapons.

Iranians are a threat to US allies in Middle East including Israel. However, Iran won’t directly attack Israel.  In addition to that, Iran's strength is Oil and gas and its geographical position and influence over insurgencies in neighboring countries. Though Iran has a powerful army, its decades behind in military technologies and halfway across the world. Even minor disruptions, in global crude supply might not affect US market as they already became a net exporter of Oil due to significant shell oil extraction over past decades.

North Korea, despite all its grand standing; and Afghanistan don't pose any threat to US technological supremacy. As far as Europe is concerned, most economies (other than Germany) are cash strapped and they themselves looking for foreign investment (yes, including Chinese). Germany is a close US ally.

Made in China 2015 – 2025 - 2049

Huawei P30 phone with triple lens

With China its different. Chinese strength is not coming from any Oil and Gas deposits. China is the factory of world. After decades of building duplicates, they are moving towards original manufacturing. Getting contracts across the world from road construction to 5G rollout.

China aspires to be world's leading technological power. They came up with a plan – which released in 2015 - aims for developments in 10 key sectors by 2025. They also plan to achieve 70% self-sufficiency by 2049. Many of these plans violates many WTO provisions. Crashing of solar panel industry is a case in point. We will discuss this in another article.

Another issue is market access. While western markets are open for Chinese export, she put in place serious restrictions on opening her own market (which is very huge) to non-Chinese companies.

For investing or doing business in China foreign companies must enter into joint ventures with local firms. These agreements also required foreign firms to share key intellectual property and advanced technologies. Some rules were related later.

China also happens to be leading exporter of rare-earth metals. These metals are critical for electronics and battery manufacturing.

What will be Chinese reaction?

I don’t think Chinese will make any hard decisions. They think a lot before taking decisions. After all its the land of Sun Tzu. They will even wait till Trump’s term is over.

Some Chinese may be arguing for banning Apple. Will they do it? Very less chance. Apple phones are as Chinese as any other Chinese phones. Out of 800 suppliers for Apple approximately half comes from mainland China.  Why should they shoot on their own foot. However, Chinese users may choose not to buy Apple phones.

Many policy analysts argue that Chinese may ban export of rare earth metals. If US pushed had it is possible that, they might reduce export of rare earth metals. However, complete ban may not happen. After all, why to create significant disruptions in global chain when Chinese sits at a very important position in it.

How it is going to affect others?

Rough Waters for Huawei

Exclusion from using Android may not create significant impact in home market. However, in other markets - say, India - they won't be able to sell phones without Android OS and Google Services. They will face dip is revenue from overseas operations and without US chips (HiSilicon might not be able to provide a replacement for ARM or Qualcomm in immediate future) it’s going to be a hard struggle. Chinese government may compensate Huawei in one way or other. China may also try to get some reprieve for Huawei by making it as a bargaining chip in future US – China trade talks.
Costlier Telecom equipment’s

Equipment’s form Ericson and other companies will be costlier. This will delay 5G rollout and make it costlier.

Trade War

Tit for tat taxes exports between US an China will be a step back for freedom of trade, liberalization and globalization.


Alternate pressure point

For a set back here, China can create problems for US and allies elsewhere. May be boosting North Korea a bit. Building some more artificial islands in South China Sea etc.

Middle- East, Eastern Europe and Iran

A significant event in Middle East or Eastern Europe may take all the focus away from current problem and negotiations may go on slowly behind the scenes.
US

China will try to reduce import of US agricultural produce which will create problems for US president in key agrarian states.  After all US presidents must worry about elections unlike their Chinese counterparts. It is even possible that, China may simply wait till current US administration changes.

Whatever happens we are going to see a new technological race between US and China in coming days. Though it disrupts global supply chain and make a dent to global growth rates, we will eventually see more investments by US and China in science and technology. We will see more space explorations and even colonization’s of moon and mars. Who knows we may even bring fuel from moon to power machines in earth?

Sajeev.


References.

1. https://in.reuters.com/article/huawei-iran/exclusive-new-documents-link-huawei-to-suspected-front-companies-in-iran-syria-idINKCN1P21MKhttps://www.cnbc.com/2019/02/26/hsbc-probe-helped-lead-to-us-charges-against-huawei-cfo.html
2. https://www.cnbc.com/2019/02/26/hsbc-probe-helped-lead-to-us-charges-against-huawei-cfo.html
3. https://qz.com/1535995/the-full-list-of-crimes-huawei-is-accused-of-committing-by-the-us/
4. https://www.cnbc.com/2019/05/29/huawei-could-be-part-of-china-deal-but-cant-work-with-iran-marc-short.html
5. https://qz.com/1627149/huaweis-journey-to-becoming-us-tech-enemy-no-1/

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