China Brief: 30 July - 5 August 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 increased regulatory scrutiny of small banks, large tech companies’ anti-graft campaigns, and breaches of personal data, among other developments.

China – Corruption risk: Extreme – Tech giants’ anti-graft campaigns highlight corruption risks

China – Security risk: Medium – High profile media personality’s information leaked, highlighting cyber risks

China – Corruption risk: Extreme – Billionaire charged with avoiding USD1.8bn in aluminium anti-dumping tariffs

China – Political risk: Medium – Small bank shareholdings probed, highlighting increased regulatory scrutiny

China – Political risk: Medium – Government suspends Taiwan tourist visas for residents of 47 mainland cities

Hong Kong – Security risk: Low – Multinational beauty retailer’s website breached, highlighting cyber risks

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China – Tech giants’ anti-graft campaigns highlight corruption risks

CHINA – Corruption risk: Extreme

5 August: Local media reported on 5 August that technology giant Baidu sent an email to its employees last week warning against illegal acts and referring to the company’s security department for serious breaches. According to the email, the company has dismissed 14 employees allegedly involved in 12 cases of internal corruption, including infringing on trade secrets and engaging in bribery. On 2 August, transportation company Didi Chuxing Technology Co. announced it had expelled 30 staff members over alleged collusion and bribery in the first half of 2019.

Why it matters: The companies’ actions illustrate the extensive corruption risks in the country. In 2013, President Xi Jinping launched an anti-corruption campaign that has targeted key political and corporate figures. The latest move indicates that Chinese companies are following suit, likely in a bid to signal loyalty to and curry favour with the Communist Party of China (CPC). Further companies to carry out such purges include e-commerce company JD.com and lifestyle services company Meituan-Dianping. A2 Global advises businesses to carry out thorough due diligence when engaging with businesses. Ensure screening processes include identification of corruption allegations and other accusations of misconduct such as IP theft. Verify that private companies – these have become increasingly taken under government control – maintains good relations with the CPC, in order to ensure business continuity.

China – High profile media personality’s information leaked, highlighting cyber risks

CHINA – Security risk: Medium

3 August: The phone number of Wang Yibo, a Chinese pop idol, dancer, and actor, was leaked and sold by scalpers online on 3 August. Wang recently disclosed on social media platform Weibo that he had received 194 calls from unknown numbers and claimed this has ‘gravely affected his life’. A later investigation revealed that on Chinese social media many scalpers have traded celebrities’ personal information including their ID numbers, phone numbers, QQ number, WeChat accounts, and hotel and flight information at very cheap prices.

Why it matters: The scalpers’ source for the leaks remains unconfirmed. However, the incident highlights loopholes in personal data protection in the country. Although unlikely to be directedly targeted, high-level foreign business executives are advised to protect their personal information through data encryption and security software, and minimize the sharing of sensitive business data through mobile devices.


China – Billionaire charged with avoiding USD1.8bn in aluminium anti-dumping tariffs

CHINA – Corruption risk: Extreme

1 August: US prosecutors on 31 July indicted Chinese billionaire Liu Zhongtian, his company, several individuals, and shell companies, on charges of money laundering, wire fraud, and conspiracy. This includes the alleged evasion of USD1.8 billion in anti-dumping tariffs on aluminum exported to the US from China Zhongwang Holdings.

Prosecutors’ accusations include the usage of a complex financial fraud scheme as of 2008 that is suspected to be ongoing, in which large amounts of aluminum were disguised as ‘pallets’ in order to avoid paying customs duties of up to 400 per cent. The indictment alleges that the defendants used a money-laundering scheme to funnel hundreds of millions of US dollars via shell companies to US-based aluminium companies controlled by Liu. The aluminium sales also artificially inflated the value of the publicly traded company and put investors worldwide at risk, according to prosecutors.

Why it matters: The indictment comes amid the intensifying US-China trade war, which has seen tit-for-tat levies imposed by either side and is looking unlikely to end anytime soon, as negotiations between Beijing and Washington are not producing any tangible results. These levies have caused significant trade diversion, as well as prompted fraudulent practices by firms seeking to avoid their payment. A2 Global advises businesses to conduct thorough third-party due diligence and screen for compliance with tariffs. Companies with connections to the entities in the indictment should assess the extent of their exposure to any potential reputational or compliance risks and devise a strategy to mitigate these.

China – Small bank shareholdings probed, highlighting increased regulatory scrutiny

CHINA – Political risk: Medium

31 July: The government is increasing its scrutiny of small banks shareholders, according to media reports on 31 July. This is over concerns that many of these small banks have an outsized influence because of their ties to large shareholders and the rest of the financial system. Earlier in the month, the China Banking and Insurance Regulatory Commission (CBIRC) requested financial firms and banks to disclose details of any shareholders with stakes of over five per cent, as well as business transactions with their majority shareholders, according to a regulatory notice. Regulators have also been conducting checks with smaller banks over the past two months to investigate potential misuse of capital linked to the transferring of ownership interests and stakeholders, according to unidentified sources quoted by Reuters news agency.

Why it matters: The increased checks come amid concerns that large, debt-laden private enterprises are acquiring significant stakes in small banks – without regulatory approval – for their loans. This increases the likely continued growth of non-performing loans (NPL). These are exposing the financial system to mounting vulnerabilities to financial shocks – the NPL ratio reached a 10-year high in January – amid slowing economic growth and the US-China trade war. A2 Global advises businesses to factor the increased regulatory scrutiny into their strategic planning.

China – Government suspends Taiwan tourist visas for residents of 47 mainland cities

CHINA – Political risk: Medium

31 July: The government announced on 31 July that it is indefinitely suspending individual tourist visas for residents of 47 mainland Chinese cities – including major commercial hubs such as Beijing, Shanghai, and Xiamen – as of 1 August.

Why it matters: The move comes amid heightened tensions between the mainland and Taiwan, which Beijing views as a rebellious province. These escalated after Taiwan carried out a USD2.2 billion arms deal with the US on 8 July. Beijing has retaliated through sanctions on US businesses linked to the arms deal, and it is conducting military exercises near Taiwanese waters until 2 August. The move comes five months before Taiwan’s presidential election; Beijing limited group tours to Taiwan in 2016, when pro-Beijing President Ma Ying-jeou was replaced by pro-independence President Tsai Ing-wen. It also comes two months before a weeklong holiday in October when millions of Chinese tourists travel domestically, including to Taiwan. A2 Global advises Taiwanese businesses – especially in the tourism and retail sectors – to factor the visa suspensions into their strategic and operational planning.

Hong Kong – Multinational beauty retailer’s website breached, highlighting cyber risks

HONG KONG – Security risk: Low

30 July: French beauty retailer Sephora announced on 29 July that its database of online customers in Australia, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, Thailand, and New Zealand has been breached over the last two weeks. An unspecified number of users’ personal information, including beauty preferences, encrypted password, email address, gender, date of birth, and first and last name, has been exposed to unauthorised third parties.

However, the company stated that credit card details have not been accessed and that there has been no evidence that any personal data has been misused. In response, Sephora has taken measures including contacting those affected, is reviewing security systems, and offering personal data monitoring services for its customers. Independent experts that investigated the incident found no traces of a cyberattack and ‘no major vulnerability’ on the company’s Southeast Asia websites.

Why it matters: That experts found no traces of a cyberattack suggests an insider threat. A2 Global advises businesses to conduct thorough due diligence when screening applicants, as well as ensure that sufficient monitoring processes for existing staff are in place. Ensure that staff are informed of non-disclosure agreements and the penalties that violations could incur. Human resource and IT security managers should instruct staff who are Sephora customers to take extra care to confirm the authenticity of any communication purporting to be from the company in the three-month outlook, due to a heightened risk of fraudulent emails impersonating staff members. Cyber-security managers should regularly review their cyber defences and assess their threat profile. Ensure devices are updated with the latest security software and consider providing employees with additional training to raise awareness of these risks.