China Brief: 26 February - 4 March

A2 Global's China Brief contains assessments of events and policies that may impact commercial interests, personnel, and assets throughout Greater China. This edition includes developments on the U.S. extradition of Huawei's CFO, China's new draft regulations for biotechnology research, and the commencement of the two sessions of the National People's Congress in Beijing. 

China - Travel risk: Medium - Security in capital heightened for National People's Congress 

Canada, China & United States - Extradition hearing raises reprisal risk 

China - Political risk: Medium - Beijing drafts new regulations for biotechnology research 

China - Security risk: Medium-  Fracking operations halted in Sichuan as 10,000 protest over earthquakes 

China & United States - Report claims HSBC aided Washington in Huawei probe 

Hong Kong - Political risk: Minor- Beijing demonstrates authority over local legislature 

China & United States - U.S. senators call for heightened scrutiny of Huawei products

China – Security in capital heightened for National People’s Congress

CHINA – Travel risk: Medium

4 March: The two week-long legislative assembly of the National People’s Congress (NPC) is due to commence in Beijing on 5 March. The delegates will rubber stamp legislation, as well as ratify budgetary and personnel changes. Notably, a new bill concerning foreign investment regulations is expected to be passed, which would eliminate both the need for case-by-case approvals and technology transfer requirements for joint ventures.

Why it matters: The hosting of major political events in Beijing is regularly marked by a heightened security presence in response to an increased risk of civil unrest and terrorist attacks. Though additional security measures have been implemented nationwide for the NPC assembly, they will be most acute in the capital. The bags of passengers on the city’s rail system are reportedly being checked multiple times and liquids are being removed. A2 Global advises business travelers to factor travel disruptions into their planning, allowing additional time to reach airports, especially the more centrally located Beijing Nanyuan Airport (NAY).

Canada, China & United States – Extradition hearing raises reprisal risk

1 March: Canada approved the U.S.’ extradition request for Meng Wanzhou on 1 March. The approval has launched a formal extradition hearing for Meng, Huawei’s chief financial officer, who was arrested in December 2018 for allegedly violating U.S. sanctions against Iran. On 4 March, China accused two Canadian citizens resident in China and detained since Meng’s detention of spying.

Why it matters: Given the approval of Meng’s extradition and a concomitant elevation in tensions, A2 Global advises U.S. and Canadian companies operating in China to factor in possible reprisals by reviewing security and operational procedures. Reprisals could include delays in granting licences, processing shipments, and approving visas, as well as the detention of Canadian or American citizens in China. A2 Global reiterates its advice that U.S. and Canadian business executives and travellers should assess whether their business activities or relations with Chinese regulatory authorities might provide a pretext for detention or increased regulatory scrutiny.China – Beijing drafts new regulations for biotechnology research

CHINA – Political risk: Medium

28 February: On 26 February, Beijing unveiled new draft regulations for biotechnology research carried out in the country. China’s cabinet would be responsible for supervision and health authorities for the management of research that would be classified as ‘high risk’. This includes various forms of genetics research, such as gene-editing. Depending on the severity of infractions, scientists performing unauthorised research would face a range of penalties. These include: fines of between RMB50,000 (USD7,500) and RMB100,000 (USD15,000); a forced halting of their work; fines amounting 10 to 20 times the income earned from the research; a ban on working for six months to a year; and a lifetime ban.

Why it matters: The proposed regulations follow a controversial, allegedly state-funded, gene-editing experiment on babies carried out by a rogue Chinese scientist in November 2018. Although the scientist has since been placed under investigation, dismissed from his university, and halted from carrying out further work, the incident drew attention to China’s lax oversight of scientific research. In China as well as most other countries, it is illegal to carry out gene-editing for reproductive purposes, though China has allowed it for non-reproductive purposes. A2 Global advises companies with interests in the biotechnology sector to ensure that they are compliant with both the existing and the proposed research regulations and carry out third-party due diligence in the sourcing of their products from business partners and vendors.

China – Fracking operations halted in Sichuan as 10,000 protest over earthquakes

CHINA – Security risk: Medium

27 February: On 25 February, around 10,000 people in Rong County, in the western province of Sichuan, protested against fracking operations, which they claim caused two earthquakes in the county. Rong County officials confirmed that a 4.7 magnitude earthquake accompanied by an aftershock occurred on 24 February, and a further earthquake of magnitude 4.9 occurred on 25 February. By 26 February, two deaths and at least 12 injuries, as well as damage to thousands of homes and the displacement of hundreds as a result of the earthquakes were reported. Rong County has experienced 5 earthquakes since January. Opponents of fracking say they were triggered by the injection of water and chemicals into the earth for shale gas exploitation. Rong County officials responded by indefinitely suspending fracking operations on the same day.

Why it matters: Though the protests have subsided and direct links between fracking and earthquakes are difficult to establish, A2 Global notes that public anger against fracking is likely to increase. A2 Global advises the personnel of any businesses involved with fracking in Sichuan to maintain heightened situational awareness and avoid any protests as a precaution. Security managers should reassess all potential security and safety threats to their assets and staff.

China & United States – Report claims HSBC aided Washington in Huawei probe

27 February: On 26 February, a report by Reuters news agency claimed that an internal investigation by British-headquartered HSBC in late 2016 and 2017 revealed that Chinese telecom giant Huawei had misrepresented itself to the bank. According to the report, HSBC documents state that Huawei maintained close financial ties to a front company in Iran, long after it had claimed to have severed them. HSBC reportedly conducted the investigation into accounts with Huawei, an alleged company in Iran, and a further associated company, in a bid to cooperate with the U.S. Department of Justice (DOJ), following a criminal investigation into the bank itself.

Why it matters: The revelations come amidst already heightened tensions between China and the two North American countries. These were sparked by Canada’s arrest of Huawei’s Chief Financial Officer, Meng Wanzhou, and ongoing U.S. attempts to extradite her over alleged Iran sanctions violations. A2 Global notes that the information revealed by Reuters is likely to provoke a response from Beijing, which will likely assume that foreign banks are cooperating with the DOJ in investigations related to Huawei and other Chinese technology companies. Foreign banks and other financial institutions with operations in China should factor in the likelihood of reprisals from the Chinese government. These could take the form of increased scrutiny of operations, executives being targeted and staff visa applications being delayed or rejected.

Hong Kong – Beijing demonstrates authority over local legislature

HONG KONG – Political risk: Minor

27 February: Hong Kong’s Chief Executive Carrie Lam Cheng Yuet-ngor on 26 February disclosed the Chinese government had issued an unprecedented letter demanding that the territory’s administration ‘report back’ to Beijing on its decision to reject the appeal of the Hong Kong National Party’s (HKNP) against a ban imposed upon in September 2018.

Why it matters: A2 Global notes that public issuance of the letter and its ‘tone’ indicates the Chinese government is prepared to increase pressure on Hong Kong by effectively ignoring the territory’s limited autonomy in pursuit of its own political priorities. The disclosure over the letter, which for many local people will be viewed as direct a challenge to Lam’s authority, status and even ‘face’, follows a proposal to permit the extradition of suspects to China, Taiwan and Macau from Hong Kong. The U.S. has made it clear that if such an arrangement was enforced, Hong Kong’s extradition treaty with that country could be compromised, as it almost certainly would be with the European Union, due to human rights concerns. We warn the two developments will increase existing concerns over the steady erosion of the ‘Basic Law’ accord that underpins Hong Kong’s British-based legal structure, further unsettling foreign and local corporate interests and potentially deterring investment.

China & United States – U.S. senators call for heightened scrutiny of Huawei products

26 February: On 25 February, eleven senior U.S. senators, including the bipartisan leaders of the Senate Intelligence Committee, wrote a joint letter to Energy Secretary Rick Perry and Homeland Security Secretary Kirstjen Nielsen, urging them to ban technologies produced by Chinese technology giant Huawei Technologies Co. from the U.S.’s electrical systems and infrastructure. The letter states that the government should consider banning Huawei’s inverters – electrical control systems which can connect to the wider electricity grid – due to the security threat they pose to the U.S. energy infrastructure. Huawei is already banned from providing services to the U.S. government over concerns about its reported links to Chinese intelligence services.

Why it matters: While the government is under no obligation to act on the senators’ concerns, it is likely to do so, given its bipartisan support, particularly from senior intelligence committee figures. The letter is a significant escalation of the scrutiny facing Huawei, expanding the scope of products which face potential bans from telecommunications equipment to other business areas, such as electrical systems. A2 Global advises U.S.-based firms to monitor legislative updates and factor heightened scrutiny of Huawei products into their strategic planning