China Brief: 5-11 March 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 includes developments on the National People's Congress in Beijing and the ongoing U.S. extradition of Huawei's CFO, as well as China's suspension of Boeing 737 MAX aircraft operations. 

China - Travel risk: Medium - All local carriers suspend Boeing 737 MAX aircraft operations following Ethiopian Airlines crash 

China & Canada - Chinese customs blacklists major Canadian canola exporter 

China -  Political risk: Medium - Tax cuts announced at National People's Congress 

China & Canada -  China accuses two detained Canadian nationals of conspiring to 'steal state secrets'

China – All local carriers suspend Boeing 737 MAX aircraft operations following Ethiopian Airlines crash

CHINA – Travel risk: Medium

11 March: The Civil Aviation Administration of China (CAAC) on 11 March ordered all the country’s airlines to suspend operations and services using Boeing 737 MAX aircraft with immediate effect. The instruction by China’s aviation regulating agency follows the loss of an Ethiopian Airlines Boeing 737 MAX8 aircraft shortly after taking from Ethiopia’s capital Addis Abba on Sunday with the loss of all 157 passengers and crew. In October 2018 a Boeing 737 MAX8 operated by Indonesia’s low-cost carrier Lion Air crashed soon after take-off from that country’s capital Jakarta, killing all 189 passengers and crew on board. According to the CAAC, Chinese airlines operate 96 Boeing 737 MAX aircraft. Indonesia and the Cayman Islands have issued similar orders. There is no indication when the ban will be lifted.

Why it matters: A2 Global warns the immediate withdrawal of Boeing 737 MAX aircraft from service will cause considerable disruption on domestic and regional air routes, as it is unlikely that China’s airlines have sufficient spare capacity to make up for the shortfall in seats. A2 assesses the carriers most likely to be severely affected include Air China, China Eastern, China Southern, Shandong Airlines, Shenzhen Airlines, and XiamenAir. We advise passengers to check with their airline before travelling to the airport or seek alternative means of travel, such as China’s high-speed rail network in the case of domestic journeys. 
hina & Canada – Chinese customs blacklists major Canadian canola exporter

6 March: On 5 March, Richardson International Limited, one of Canada’s largest grain processors and the largest fully Canadian-owned exporter, announced that it has lost its licence to ship canola seed to China. A document from Chinese customs showed that from 1 March it had blacklisted the company due to alleged contamination of Canadian exports, a claim that both the Canadian government and Richardson have denied.

Why it matters: The blacklisting coincides with the commencement of court proceedings on 6 March in Canada concerning the extradition of Huawei CFO Meng Wanzhou to the United States. As China reportedly receives around 40 per cent of Canada’s canola exports, the blacklisting may constitute a reprisal. A2 Global reiterates its advice to U.S. and Canadian companies operating in China to factor in the possibility of 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 further 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 – Tax cuts announced at National People’s Congress

CHINA – Political risk: Medium

5 March: Tax cuts of RMB2trillion (USD298 billion) are to be introduced, China’s Premier Li Keqiang announced at the session of the National People’s Congress (NPC) in the capital Beijing on 5 March. Value-added tax (VAT) for the construction and transportation industries will be reduced from 10 per cent to 9 per cent, and VAT for manufacturers from 16 per cent to 13 per cent. Plans for opening China up to further foreign investment and boosting spending, were announced earlier. The draft law on foreign investment will be debated on 8 March and put to a vote at the end of the session, the NPC said on 4 March.

Why it matters: The tax cuts announced by Li are more aggressive than the cuts of RMB1.3tn (USD194bn) in 2018. Additionally, plans of further opening foreign access to the Chinese market by eliminating technology transfer requirements and introducing a case-by-case approval system are likely to ease trade relations between China and the U.S., potentially reducing the political risk for businesses operating in China. Chinese and foreign firms may face a more level playing field in terms of investment, except for foreign firms in industries to be placed on a ‘negative list’. A2 Global advises businesses to monitor developments around the NPC sessions, especially any announcements likely to have an impact on their immediate interests in the country. Tech businesses in particular are advised to monitor developments around the intellectual property legislation included in the draft foreign investment law.

China & Canada – China accuses two detained Canadian nationals of conspiring to ‘steal state secrets’

5 March: China’s state-run Xinhua News Agency on 4 March reported that two Canadian nationals detained on 10 December 2018 had jointly conspired to spy on China and ‘steal state secrets.’ Michael Kovrig and Michael Spavor’s detention has been widely linked to the arrest of China’s Huawei telecommunications company’s chief financial officer Meng Wanzhou in Canada on 1 December on a United States extradition warrant. Meng has been accused by the U.S. Justice Department of violating that country’s sanctions on Iran and has been held under arrest in the Canadian city of Vancouver as legal arguments over her case continue.

Why it matters: China’s decision to accuse the two detained Canadians of acting in concert to spy on the country is in line with A2 Global’s earlier warnings that the Chinese government would respond to Meng’s continuing detention with heightened rhetoric and more direct action against Canadian, and potentially U.S., interests. The Canadian and U.S. governments can be expected to respond to this development, which may well further exacerbate diplomatic ties.

As a result, we repeat our advice to U.S. and Canadian companies with staff in China to assess whether any personnel are specifically vulnerable to being investigated due to their role or contacts, and consider how their interests may be best protected. We also advise any non-essential corporate travel to China is reviewed to assess whether Beijing takes further action against Canadian or other countries’ nationals linked to the continuing Huawei dispute.