China Brief: 4-10 June 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 developments concerning the US-China trade war, supply chain risks regarding Huawei, and a protest in Hong Kong, among other subjects.

China, Vietnam & United States – Hanoi cracks down on falsely labelled Chinese exports

Hong Kong – Travel risk: Low – Further protests expected on 12 June during extradition bill debate; clashes probable

China & United States – Facebook halts app pre-installations on Huawei smartphones

China & Canada – Chinese customs increases inspections of Canadian pork shipments

China – Political risk: Medium – US automaker fined for antitrust violations, highlighting increased political risk

China & Australia – Government-backed university hacked, underscoring cybersecurity risks

China – Political risk: Medium – Financial data firm removes Tiananmen stories, highlighting compliance risks

China, Vietnam & United States – Hanoi cracks down on falsely labelled Chinese exports

10 June: On 9 June, the Vietnamese government announced it will impose higher penalties on Chinese goods entering the country. This is due to Chinese goods being rerouted to Vietnam for export to the US. These are unlawfully relabelled as Vietnamese, allowing Chinese companies to sidestep US tariffs against Beijing. Vietnam’s customs department had detected numerous illegal transfers of goods – including aluminium, steel, textiles, and agricultural products – and fraudulent certificates of product origin. The government said this includes packaging on Chinese goods being labelled as ‘made in Vietnam’ before certificates of origin are processed, citing an example of Chinese plywood shipped to the US via a Vietnamese company. Vietnamese customs are bolstering inspection and supervision of goods in a crackdown on such practices, according to Hanoi.

Why it matters: Vietnam has greatly benefitted from the US-China trade war and attendant supply chain alterations – or trade diversions – with its economy being boosted by 8 per cent from the first quarter of 2018 to the first quarter of 2019, according to Japanese investment bank Nomura. Despite tax increases on transporting various items – including semi-finished products, equipment, and machinery – and the heightened cost of a certificate of origin, an increasing number of Chinese manufacturers have relocated to the country. This is due to the US tariffs, as well as lower land and salary costs. A2 Global advises US businesses sourcing goods from Vietnam to conduct rigorous third-party due diligence before engaging with suppliers, ensuring they are in compliance with local laws and regulations.

Hong Kong – Further protests expected on 12 June during extradition bill debate; clashes probable

HONG KONG – Travel risk: Low

10 June: The territory’s Legislative Council (LegCo) is due to debate a controversial extradition bill on 12 June which had triggered a massive display of opposition on Sunday (9 June) and that culminated in violence between the police and protesters. Around 360 mainly young men and women were detained following the unrest around the LegCo building in Hong Kong Island’s Central business district. At least eight police officers were injured, along with an unknown number of protesters, during the disturbances.

Why it matters: A2 Global warns that there is a high probability of violent unrest on Wednesday at the LegCo building and the nearby Central, Admiralty, and Wanchai streets. The police are likely to deploy or hold in reserve a large number of officers to overwhelm any demonstrations that breach the law. Radical opponents of the extradition bill, or other elements seeking a confrontation with the police, will have had time to plan their tactics. As a result, A2 Global expects any unrest to be more violent than that experienced on Sunday night and the early hours of Monday (10 June) morning. As 13 June is a working day, A2 Global advises companies with offices or other premises in the area around LegCo to ensure their properties are secured against vandalism or other forms of damage, including the deployment of additional security personnel. Other staff should be made aware of the potential threat on 12 June, with measures taken to ensure their safety and security.

China & United States – Facebook halts app pre-installations on Huawei smartphones

7 June: Reuters news agency reported on 7 June that US technology company Facebook Inc. has suspended pre-installation of its applications – including Instagram, WhatsApp, and Facebook – on smartphones from Chinese technology company Huawei Technologies Co. Ltd. (Huawei).

Why it matters: Unlike Google LLC’s suspension of its Google Play store and apps – which is subject to a 90-day reprieve, and does not include current Huawei models – Facebook’s ban is effective immediately. This means it is applicable to any smartphone that has yet to leave the factory, according to an anonymous source quoted by Reuters. Although many US, Japanese, and British technology firms supplying crucial hardware components have severed ties with Huawei since the US imposition of an export ban in May 2019, Google and Facebook’s actions indicate that software companies are also following suit. In order to mitigate reputational and compliance risks, US technology companies and companies licensing technology from the US should assess their exposure to blacklisted companies, such as Huawei and its affiliates. Failure to comply with the US ban can result in punishments including denial orders and civil and criminal penalties.

China & Canada – Chinese customs increases inspections of Canadian pork shipments

6 June: A Canadian government source stated on 5 June that Chinese customs are increasing inspections of Canadian pork. The source also said that the measures include thorough document reviews of all pork shipments, the opening of all containers for inspection, and, in some cases, the inspection of all cartons. Beijing has said this is due the African Swine Fever (ASF) outbreak affecting China, and the implementation of anti-smuggling measures.

Why it matters: The increase in inspections likely constitutes a reprisal measure by Beijing for Canada’s arrest of Huawei CFO Meng Wanzhou and the ongoing extradition of her to the US over alleged Iran sanctions violations, as Canada has reported no cases of ASF. Previous reprisals have included the arrest, detention, and deportation of Canadian nationals in China, and the blacklisting of Canadian rapeseed imports. A2 Global advises logistics managers to assess the impact that increased inspections will have on supply chains and factor this into their planning. In light of heightened regulatory scrutiny, Canadian meat exporters should ensure that they are in compliance with all export requirements.

China – US automaker fined for antitrust violations, highlighting increased political risk

CHINA – Political risk: Medium

5 June: The State Administration for Market Regulation (SAMR), the country’s anti-trust regulator, fined Changan Ford Automobile Co., Ltd. (Changan Ford) – US automaker Ford Motor Co.’s (Ford) primary local joint venture with Changan Automobile Company Limited – RMB162.8 million (USD23.6 million) on 5 June. This is due to alleged legal violations relating to Changan Ford having set a minimum resale price on its cars in Chongqing municipality since 2013. The company says it is complying with the regulator and has taken corrective measures in its regional sales management.

Why it matters: The fine may constitute a reprisal measure amidst the ongoing US-China trade war, and potentially indicates a heightened scrutiny of foreign operations. In 2016, US-automaker General Motors Company’s local joint venture was fined RMB201 million (USD29 million) for antitrust violations. This was viewed as a warning to US President Donald Trump, who appeared to be planning the trade war. The incident also highlights the increasing political risk that foreign companies face in the country. The Chinese government announced on 31 May the planned publication of a list of ‘unreliable’ foreign individuals and companies that are designated as harming Chinese interests, providing limited details. Businesses should ensure they comply with local antitrust regulations, as failure to do so can result in a hefty fine.

China & Australia – Government-backed university hacked, underscoring cybersecurity risks

5 June: 
On 4 June, Australian National University (ANU) – a university said to have close ties to Australia’s security and government services, based in the capital Canberra – announced it had detected that a ‘sophisticated operator’ gained unauthorised access to 19 years of sensitive data in late 2018. This includes student academic records, passport details, bank account details, payroll information, tax file numbers, emergency contact details, personal email addresses, phone numbers, dates of birth, addresses, and names of visitors, students, and staff. ANU says it has increased IT security measures and launched an investigation into the incident.

Why it matters: In 2018, ANU stated it had spent several months trying to defend itself from attempts to access its systems, and local media speculated these originated from Chinese state-backed hackers. This comes after a hack that targeted the Australian parliament in February 2019, which was also speculated to have been carried out by such actors. Beijing has consistently denied any involvement in cyberattacks.

Businesses are reminded to regularly review their IT and cybersecurity measures and assess their threat profile – including the security of their network architecture – carrying out risk assessments to identify vulnerabilities to breaches. They should also ensure they are in compliance with the country’s data privacy regulations, including the Notifiable Data Breaches scheme. Cybersecurity managers should ensure devices are updated with the latest security software and provide cybersecurity awareness training to staff.

China – Financial data firm removes Tiananmen stories, highlighting compliance risks

CHINA – Political risk: Medium

4 June: Ahead of the 30th anniversary of the Tiananmen Square protests on 4 June, financial information provider Refinitiv – jointly owned by Thomson Reuters and Blackstone Group LP – blocked Reuters stories relating to the protests from appearing on its Eikon news platform. It had done so because the Cyberspace Administration of China (CAC), the country’s internet regulator, threatened to suspend its services in the event of non-compliance, according to anonymous sources quoted by Reuters. Although Refinitiv only intended to block the stories in China, a large number of users outside of the country could also not access the content.

Why it matters: Censorship has become more rigidly enforced under President Xi Jinping. In November 2018, the CAC issued more stringent censorship rules for online content, including punishments for online platforms – Chinese technology companies have also been targeted, with suspensions lasting from days to weeks – and individual users. A2 Global advises businesses to ensure they are in compliance with local regulatory requirements – including censorship rules – in order to maintain their licence to operate in the country.