China Brief: 6-12 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 developments regarding protests in Hong Kong, backlash over politically sensitive geography, and the US-China trade war, among other subjects.

China – Political risk: Medium – Social credit blacklist for logistics sector to heighten regulatory scrutiny

China – Political risk: Medium – Multinational fashion brands face backlash over politically sensitive geography

Hong Kong – Political risk: Minor – Chinese media toughens criticism of foreign firms’ alleged protest role

China – Political risk: Medium – Websites of over 29 Fortune 500 companies remove politically sensitive maps

Hong Kong – Travel risk: Low – Washington upgrades travel advisory for territory

China & Brazil – Postponing of minister’s visit elevates operational risks for meat sector

China & United States – In tariff retaliation, Beijing suspends purchases of farm products

China & Taiwan – China's film regulator bans mainland Chinese movie industry from awards hosted in Taiwan

China & United States – US declares China a ‘currency manipulator’

China & United States – Flag carrier suspends Beijing-Haiwaii flights amid escalating trade war

China – Social credit blacklist for logistics sector to heighten regulatory scrutiny

CHINA – Political risk: Medium

12 August: A draft of a document of companies to be added to a social credit blacklist of the logistics sector remains open for comment until 14 August. The document was introduced by the National Development and Reform Commission (NDRC) – the country’s macroeconomic management agency – on 1 August. The list, which will be published on the Credit China website for blacklist and social credit information, will focus on companies that have a history of mishandling personal data; infractions include the illegal distortion, disclosure, or collection of personal data without consent.

Why it matters: China’s logistics sector is largely driven by its large e-commerce market, in which leaking and mishandling of private information has been a recurring issue. The move is the latest in a series of government steps to curb the mishandling of personal data; regulators have established a cross-ministry task force to probe applications from companies, including voice recognition firm iFlytek and Alibaba’s food delivery platform Ele.me, which collect more data than is allowed. Companies included on the blacklist will be subject to penalties by multiple government organisations if blacklisted by one, indicating an extensive heightening of regulatory scrutiny. A2 Global advises logistics businesses to factor the blacklist into their strategic planning.

China – Multinational fashion brands face backlash over politically sensitive geography

CHINA – Political risk: Medium

12 August: Chinese brand ambassadors to several multinational fashion brands, including Givenchy, Coach, Versace, and LVMH, on 12-13 August severed ties to the companies over designs in which Taiwan and Hong Kong are depicted as independent countries. The announcements by influencers – these include one by supermodel Liu Wen – announcements regarding these severances gained significant traction on social media platform Weibo. The brand ambassadors’ actions follow local media reports last week, which said that 29 unnamed Fortune 500 companies – these are ranked by US business magazine Fortune in an annual list of the 500 largest businesses by total revenue for their respective fiscal years – at the behest of the country’s ministry of natural resources, had removed maps from their websites that Chinese authorities claim misrepresent the country’s boundaries.

Why it matters: The actions suggest that the government is exerting pressure on media personalities to force multinational businesses to ensure their products adhere to local sensitivities regarding political geography. A2 Global advises businesses to ensure that political geography – including lists of countries and maps presented on websites and other resources such as product designs – reflect local sensitivities to mitigate political and reputational risks.

Hong Kong – Chinese media toughens criticism of foreign firms’ alleged protest role

HONG KONG – Political risk: Minor

9 August: The Global Times – an English-language newspaper controlled by the Communist Party of China – on 8 August warned Hong Kong’s flag carrier, Cathay Pacific Airways, it would ‘pay a painful price’ for its alleged actions in supporting protests in the territory, citing incidents in which airline staff appeared to support protesters. Other sources noted that China was also angered by the airline’s link to air traffic controllers it employed, and whose absence during the 5 August ‘general strike’ led to the closure of one of Hong Kong International Airport’s (HKG) two runways.

Why it matters: Cathay Pacific is largely owned by the UK-based Swire Group, with state-owned Air China as another major shareholder. The Global Times is used by the CPC to signal displeasure with the actions of foreign states and companies, often prior to more direct action. Such moves would be in line with A2 Global’s repeated warnings. Beijing’s anger over the Hong Kong protests, and the limited number of options available that would not cause China great international harm, makes foreign companies vulnerable as a means to pressure from overseas governments. A2 Global warns that Beijing can be expected to increase its rhetoric against vulnerable companies, with more material action also probable if the crisis continues.

China – Websites of over 29 Fortune 500 companies remove politically sensitive maps

CHINA – Political risk: Medium

9 August: The websites of 29 unnamed Fortune 500 companies – these are ranked by US business magazine Fortune in an annual list of the 500 largest businesses by total revenue for their respective fiscal years – have removed maps that Chinese authorities claim misrepresent the country’s boundaries, following requests by the ministry of natural resources, according to local media on 7 August. The ministry deems these maps ‘problematic’, as they do not represent the country’s territorial claims in the South China Sea or exclude islands such as Hainan and Taiwan. Last week, the ministry launched an investigation into a popular television drama over similar reasons; it plans to launch a nationwide campaign for increasing awareness of China’s official map on 29 August, the country’s national day for surveying and mapping.

Why it matters: In recent years, many international companies have incensed the Chinese government by, for example, including Taiwan and Hong Kong on country lists. In the first half of 2018, an apparent infraction by hotel chain Mariott International – which was forced to temporarily shut down its website and application – resulted in a crackdown on around 40 multinational companies’ descriptions of political geography. The government’s recent actions indicate heightened scrutiny for businesses in relation to political geography. A2 Global advises businesses to ensure that political geography, including lists of countries and maps, presented on websites and other company resources reflect local sensitivities to mitigate political risk.

Hong Kong – Washington upgrades travel advisory for territory

HONG KONG – Travel risk: Low

8 August: The US state department on 8 August upgraded its travel advisory for Hong Kong, calling for travellers to ‘exercise increased caution’, due to growing civil unrest in the territory over the past four months. The advisory notes that most of the protests in the territory have been peaceful, but some have turned violent.

Why it matters: The upgrade follows several other countries’ increased travel warnings for the territory, including Australia, Ireland, Japan, Singapore, the United Arab Emirates, and the United Kingdom. The warnings highlight the growing travel risk in Hong Kong. Ongoing mass protests which erupted against the government’s proposed amendment to the territory’s extradition law show little sign of abating in the one-month outlook. A2 Global advises travel managers to ensure staff are aware of the elevated travel risk when considering visits to the territory.

China & Brazil – Postponing of minister’s visit elevates operational risks for meat sector

7 August: A spokesman at Brazil’s agriculture ministry on 6 August said that a planned visit to China by agriculture minister Tereza Cristina Dias has been postponed from August to September.

Why it matters: Although no reason was given for the visit’s postponement, it was likely rescheduled due to delays in China granting export permits for 30 Brazilian meatpacking facilities. In the likely case that permits are eventually granted, this would be announced during the minister’s visit. There is a moderate likelihood that the granting of permits is delayed beyond September – China has only conducted online audits of four of the 30 meatpacking plants. Operations managers at Brazilian meat exporters with interests in the Chinese market should anticipate further licensing delays, assess their impact on operations, and adjust plans accordingly.

China & United States – In tariff retaliation, Beijing suspends purchases of farm products

7 August: The Chinese government on 6 August suspended purchases of US farm products, in retaliation for 10 per cent tariffs on USD300 billion worth of Chinese imports the US government announced last week.

Why it matters: The move comes amid an escalating US-China trade war; the US on 5 August labelled China a currency manipulator, and last week’s high-level negotiations in Shanghai failed to produce any tangible concessions. As China is a major destination for US farm products, the suspension will significantly impact the US agricultural sector. The decision indicates that the Chinese government is likely to impose tariffs on US farm products in the one-month outlook, given a weakening demand by Chinese consumers – US exports to China were down by USD1.3 billion in the first half of 2019 – and an increased sourcing of products including soybeans from alternative markets such as Brazil. A2 Global advises businesses in the agricultural industry to factor the suspension as well as likely tariffs into their operational and strategic planning.

China & Taiwan – China's film regulator bans mainland Chinese movie industry from awards hosted in Taiwan

7 August: China's film regulator on 7 August announced that actors, directors, and movies from mainland China are blocked from participating in the annual Taipei Golden Horse Film Festival and Awards on 23 November 2019 in Taiwan. Founded in 1962, the Golden Horse awards is one of the most prestigious awards in the Chinese-language film industry, which is often depicted as the ‘Chinese Oscars’. Mainland authorities did not provide a reason for the boycott and the Golden Horse awards’ organizing committee said the mainland’s decision was ‘regrettable’.

Why it matters: The boycott comes amid growing political tensions across the strait; the Chinese government announced a ban on individual mainland Chinese tourists from visiting Taiwan on 31 July. Discussion of a boycott started in 2018 after a Taiwanese documentary director campaigned for the island’s independence, which sparked outcry among mainland Chinese film industry representatives. Beijing has increasingly been asserting its control over Taiwan, which it views as a rebellious province, and the boycott indicates increased political risks associated with sensitive territorial disputes. A2 Global advises businesses to factor increasingly strained cross-strait relations and associated political risks into their strategic planning.

China & United States – US declares China a ‘currency manipulator’

6 August: The US Department of the Treasury on 5 August formally designated China as a ‘currency manipulator’. This came after the Chinese renminbi (RMB) fell sharply to below RMB7 to USD1 since 1 August, marking its lowest value in a decade.

Why it matters: The designation is the US’s first since 1994, when it also accused China of devaluing its currency to achieve an ‘unfair’ competitive advantage in international trade. While the designation has little practical effect beyond prompting Sino-US talks at the IMF, which were already underway prior to 5 August, it is politically significant, demonstrating a further escalation of mutually hostile trade practices. China’s devaluation came after the US announced 10 per cent tariffs on USD300 billion of Chinese products on 1 August.

Companies with interests in Sino-US trade should anticipate further retaliatory measures from Beijing in the one-month outlook. Such measures would likely include further devaluations of the yuan, the imposition of new and higher tariffs on US products, and disruptive trade practices including heightened regulatory scrutiny of US products. Affected companies should assess the impacts such variable retaliation has on financial and strategic plans, and supply-chain security.

China & United States – Flag carrier suspends Beijing-Haiwaii flights amid escalating trade war

6 August: Flag carrier Air China announced on 6 August that it is suspending all flights on its Beijing-Hawaii route from 27 August, following a review of its network. Passengers with tickets for flights after this date will receive a full refund, according to the airline. Air China has denied that US-China tensions are the reason for the suspension, instead citing ‘lack of growth’.

Why it matters: The escalating US-China trade war has resulted in a weakened demand for flights from China to the US. In June, the government warned Chinese tourists of the risks of travelling to the US, including thefts, robberies, and gun violence; US commerce department data indicates that the number of Chinese tourists travelling to the US has declined for the first time in fifteen years. A2 Global advises US businesses in the tourism and travel sectors to factor a decreased demand by Chinese tourists into their strategic planning. Business travellers should with bookings at Air China should re-confirm their flight status prior to departure.