China Brief: 21-27 May 2019

A2 Global's China Brief contains assessments of events and policies that may impact commercial interests, personnel, and assets throughout Greater China. This edition looks into escalating supply chain risks, forced tech transfers, and industrial safety standards, among other subjects
China - Political risk: Medium -Supply-chain risks escalate as more companies cut ties with Huawei 

China & Indonesia - Second night of rioting in capital Jakarta; police allege many protesters were organised and paid 

China - Political risk: Medium -Global supply-chain disruptions as more companies sever Huawei ties 

Hong Kong, Germany & China - Germany granted Hong Kong activists refugee status 

China - Political risk: Medium - Study claims China a major source of illegal gas emissions 

China & United States - US grants Huawei three-month partial reprieve

China - Political risk: Medium - European Chamber of Commerce reports increase in forced tech transfers 

China - Political risk: Medium - State-linked NGO urges foreign firms to source responsibly after chemical blasts

China  - Supply-chain risks escalate as more companies cut ties with Huawei 

CHINA -  Political risk: Medium 

23-24 May: Amazon Japan - the local unit of US technology retailer Amazon - suspended its sales of Chinese technology firm Huawei Technologies Co. Ltd. (Huawei) products from its website. Meanwhile, the SD Association, the global industry body responsible for setting standards for memory cards, has also apparently cut ties with the firm, according to unconfirmed media reports. If confirmed, this would mean that Huawei is barred from manufacturing products with SD or microSD slots. The day before, UK telecommunications providers EE and Vodafone announced they have removed Huawei from their 5G launch plans.

Why it matters: The developments follow several, mostly US and Japanese companies severing ties to Huawei. This is likely due to the compliance and reputational risks associated with the firm. For Japanese companies, this may also be due to US President Donald Trump's state visit to Japan on 25-28 May. Technology companies especially those in the communications sector with business interests in Western countries should assess their exposure to blacklisted companies, such as Huawei and its affiliates, and factor the possibility of trade sanctions into their strategic planning. Logistics managers sourcing components from Europe and the US are advised to factor the possibility of supply chain disruptions into their operational planning. 

China & Indonesia - Second night of rioting in capital Jakarta; police allege many protesters were organised and paid 

22-23 May: The security forces clashed with hundreds of protesters overnight in disturbances that followed the declaration that President Joko Widodo had defeated his opponent Prabowo Subianto in the country's 17 April elections. Much of the unrest was concentrated around the Election Supervisory Board (Bawaslu) headquarters in in the administrative city of Central Jakarta in the capital Jakarta, where protesters once again attempted to storm the heavily defended building. Other groups set fire to food stalls and attacked security personnel with a wide variety of home-made weapons or paving. Hundreds of arrests were reported, as well as at least 350 injuries. Six people died and more than 200 were injured in rioting in Jakarta the previous night. 

Why it matters: A2 Global assesses that the police claim that many of the protesters who rioted were from other regions of Indonesia, were organised, and had been paid to participate in the disturbances, is almost certainly accurate. The implication Prabowo or his supporters were responsible for paying and marshalling the mainly young protesters will challenge the new administration in terms of how to respond to such actions, potentially prolonging the instability. Further, rumours the police involved in controlling the protests and rioting contained personnel from China gained widespread credence, despite being demonstrably false. The addition of anti-Chinese sentiment into an already volatile situation is of great concern to that community as well as the wider business establishment. A2 Global warns that any serious anti-Chinese violence could quickly involve Beijing, either in direct action to protect and evacuate its nationals or in longer-term investment decisions. Given the high level of tension and uncertainty in Jakarta, A2 Global continues to warn all foreign nationals to avoid Jakarta's central districts as well as any large gatherings or concentrations of security force personnel later today. The next potential period of unrest is after Muslims leave their mosques on 24 May. 

China - Global supply-chain disruptions as more companies sever Huawei ties 

CHINA - Political risk: Medium 

22-23 May: Media reported that internal documents from the UK-based Japanese-owned chipmaker Arm Holdings showed that it had instructed staff to suspend all active contracts, support entitlements, and any pending engagements with Chinese technology firm Huawei Technologies Co. Ltd. (Huawei). It also appears that Arm is set to stop supplying products such as blueprints and graphics technology to the company. Also yesterday, several major Japanese mobile carriers UQ Mobile, KDDI Corp. SoftBank Corp., and NTT Docomo announced they have postponed the sale of the Chinese firm's newest smartphones. On 23 May, Japanese electronics firm Panasonic announced it has severed ties with Huawei. 

Why it matters: The developments are in line with A2 Global's prediction that, after Google LLC and several US chipmakers severed ties to Huawei, other companies would follow suit. This is likely due to the compliance and reputational risks associated with engaging with the firm. On 16 May, the US Department of Commerce added Huawei to its "Entity List" which constitutes a de facto ban on doing business with US companies over national security concerns. Technology companies especially those in the communications infrastructure sector with business interests in Western countries should assess their exposure to blacklisted companies, such as Huawei and its affiliates, and factor the possibility of trade sanctions into their strategic planning. Logistics managers sourcing components from Europe and the US are advised to factor the possibility of supply chain disruptions into their operational planning. 

Hong Kong, Germany & China - Germany granted Hong Kong activists refugee status 

22 May: German immigration authorities confirmed that two applicants from Hong Kong received refugee protection in Germany in 2018. Reuters news agency identified them as Ray Wong and Alan Li, former members of the Hong Kong Indigenous group which advocated Hong Kong's independence from China, and said they were granted refugee status in May 2018. The pair had been charged with rioting following protests in early 2016. They are believed to be the first Hong Kong residents to be granted refugee status in Europe. 

Why it matters: A2 Global notes the year-long period before news that the two men had received refugee status became public knowledge implies Germany, Hong Kong, and China saw no advantage in publicising the decision. However, China, which has ultimate control over Hong Kong's diplomatic and foreign relations, will view the German decision as unfriendly and is likely to retaliate in some manner. The decision also highlights growing concerns over Hong Kong's legal independence, viewed as one of the territory's primary business and economic advantages, further undermining the territory's international status. German businesses with interests in China should factor the likelihood of retaliation into operational and strategic planning.

 

China - Study claims China a major source of illegal gas emissions 

CHINA - Political risk: Medium 

22 May: A study published by internationally recognised academic journal Nature showed that around 40 to 60 per cent of the global rise in the illegal refrigerant trichlorofluoromethane (CFC-11) since 2013 could be traced back to China mainly the north-eastern provinces of Hebei and Shandong. The study was by Australia's Commonwealth Scientific and Industrial Research Organisation and the UK's University of Bristol. 

Why it matters: The chemical CFC-11 has been banned under the Montreal Protocol a 1982 international treaty on phasing out substances that deplete the earth's ozone layer, effective as of 1989 which China ratified in 1991. China has stepped up efforts to halt the production of ozone-depleting substances in 2018 it launched an inspection of 3,000 foam producers, which as recently as March 2019 resulted in the closing down of two CFC-11 manufacturers. But a 2018 report by the London-based Environmental Investigation Agency claimed that dozens of Chinese companies were still using CFC-11 in the production of polyurethane foam. A2 Global advises companies especially chemicals manufacturers to ensure they are compliant with the Montreal Protocol, as failure to do so can result in the forced closure of operations. Logistics managers sourcing polyurethane foam-based products  such as insulation for buildings and refrigerators from China, are advised to factor the possibility of supply chain disruptions into their operational planning. 

China & United States - US grants Huawei three-month partial reprieve

21 May: Media reported that the US Department of Commerce granted Chinese telecommunications giant Huawei Technologies Co Ltd (Huawei) a three-month partial reprieve the day before, from trade restrictions it imposed on the company on 15 May. The reprieve, which expires on 19 August, allows Huawei to purchase US products to maintain existing networks and provide software updates to smartphones. 

Why it matters: The reprieve aims to reduce the immediate disruptive impact on Huawei's customers, particularly mobile phone users who would otherwise be unable to download software updates. The reprieve does not, however, allow Huawei to purchase goods from US suppliers to make new products. A2 Global considers that a further extension to the reprieve is possible, yet highly dependent on progress in Sino-US trade negotiations and on the legal status of detained Huawei CFO Meng Wanzhou. Suppliers and consumers of Huawei products should adjust immediate operational planning and monitor further updates. Retaliatory actions against US technology firms in China are highly likely in the two-week outlook. 

China - European Chamber of Commerce reports increase in forced tech transfers 

CHINA - Political risk: Medium 

21 May: Media reported that the European Chamber of Commerce said the day before that 20 per cent of members were subject to forced technology transfers in exchange for access to the Chinese market. This is according to the chamber's annual survey, which was completed by 585 respondents in January and February 2019. The figure is a 10 per cent increase from two years ago. Some 39 per cent of members reported that transfers had occurred less than two years ago, while a quarter reported that they were ongoing. Sectors such as pharmaceuticals, medical devices, and chemicals were particularly affected, at 27, 28, and 30 per cent, respectively. 

Why it matters: Forced technology transfers have been a key point of contention in the US-China trade war. China passed new foreign investment legislation in March set to come into effect on 1 January 2020 that includes provisions on the practice, though it appears unlikely that this will substantially reduce forced technology transfers. A2 Global advises companies especially in sectors Beijing has deemed strategic, such as medicine, IT, energy and transportation equipment, and robotics to factor the increased risk of forced technology transfers into their strategic planning. 

China - State-linked NGO urges foreign firms to source responsibly after chemical blasts 

CHINA -Political risk: Medium 

21 May: Media reported that a study published on 17 May by the Institute of Public and Environmental Affairs (IPE) an influential non-governmental organisation with links to the Chinese government  has urged some foreign companies to source their chemical products from alternative suppliers in order to improve the country's industrial safety standards. Several multinational firms were identified in the report as indirect buyers of products from Chinese firm Jiangsu Tianjiayi Chemical Co., Ltd.s plant in the city of Yancheng, in the eastern-central Jiangsu province. These included: Swiss chemicals and biotechnology company Lonza, German chemical and pharmaceuticals firm Merck, German chemicals firm BASF, Swiss chemicals firm Clariant, and US conglomerate DuPont. 

Why it matters: The Yancheng chemical plant was closed following an explosion on 21 March that killed 78 people and injured over 600. A2 Global advises businesses sourcing chemical products from China to conduct thorough third-party due diligence before engaging with possible suppliers, ensuring that they comply with local industrial safety standards. In order to avoid reputational damage and mitigate exposure to political risks the IPE has a database of corporate environmental violations which is monitored by the government firms with existing relationships to suppliers in the region should conduct internal audits, and seek alternative suppliers if appropriate.