China Brief: 9-15 July 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 allegations of IP theft, protests in Hong Kong, and regional natural hazard risks, among other developments.   

China & United States – Likely resumption of US sales to Huawei lessens trade risks

Hong Kong – Security risk: Low – Police, protesters clash in two separate protests over weekend

China & Taiwan – Tensions escalate, heightening political risk

China – Natural hazard risk: High​ – Yangtze River sees first flood this year

Vietnam & China – Stand-off in South China Sea heightens maritime risks

China – Political risk: Medium – Seven foreign teachers detained over alleged drug-taking in Xuzhou, Jiangsu Province

China & United States – IP theft cases highlight risks posed by insider threats

China – Natural hazard risk: High – Arrival of sanfu heralds the hottest period of the year, increasing health risks

China & United States – Washington temporarily relaxes Huawei ban

China, United States & Mexico – US announces new duties on some steel imports

Taiwan & United States – Arms deal likely to elevate diplomatic tensions with China

Hong Kong – Security risk: Low – Chief executive calls extradition bill ‘dead’; many activists unconvinced

China – Political risk: Medium – Public pressure results in harsher punishment for foreign violator of traffic laws

China & United States – Washington seeks to extradite Chinese researcher for IP theft


China & United States – Likely resumption of US sales to Huawei lessens trade risks

15 July: The US Department of Commerce may approve new licences for product sales to Chinese telecommunications giant Huawei within two to four weeks, according to comments published by Reuters news agency on 15 July attributed to an anonymous senior US official.

Why it matters: The comments provide an indicative timeframe for the resumption of sales to Chinese electronics manufacturer Huawei Technologies, which has been effectively subject to a US export ban since 15 May. In the one-month outlook, however, there are likely to be delays in licence applications as commerce department officials review each application on a case-by-case basis. Exporters of US products to Huawei and its foreign subsidiaries should factor the likely resumption of licence approvals into operational and strategic planning, and consult with stakeholders from the commerce department on the relevant licence requirements.

Hong Kong – Police, protesters clash in two separate protests over weekend

HONG KONG – Security risk: Low

15 July: Police and protesters clashed on 13 and 14 July in two separate protests in Hong Kong’s New Territories as unrest moved away from the area around the local administrative and business centre. Unrest on 13 July occurred in Sheung Shui, close to the border with China, and was related to local opposition to so-called ‘parallel traders’ from the mainland who buy goods in Hong Kong to sell in China. Far more serious clashes took place in Shatin – a satellite city between the downtown area and the Chinese border – on 14 July, following a peaceful protest march against plans to extradite suspects to China by up to 100,000 people. At least six people were seriously injured after the police intervened.

Why it matters: A2 Global warns that the two events indicate any large-scale protests against the extradition bill or other issues will end in violent confrontations, regardless of the protesters’ intentions. As a result, A2 Global advises companies to recognise this threat and devise and adopt defensive strategies to mitigate the risk to their employees, property, assets, and operations.

China & Taiwan – Tensions escalate, heightening political risk

15 July: Beijing said on 15 July that neither it nor Chinese companies will conduct business with US companies that are involved with arms sales to Taiwan. On 14 July, Beijing said that naval and air forces from the People’s Liberation Army (PLA) will carry out routine drills close to the Taiwan Strait over the coming days.

Why it matters: Beijing’s announcement comes amid strained Sino-US relations as a result of the trade war. They are likely a retaliation for the US government’s approval of sales of USD2.2 billion worth of arms to Taipei on 8 July – the largest since Donald Trump became president – as well as Taiwanese President Tsai Ing-wen’s reception for UN representatives in New York on 11 July. As Taiwan’s leaders were previously barred from making public appearances during transit stops in the US, the meeting signals that Washington is giving Taipei more leeway in its diplomatic efforts. Trump has taken steps to increase Washington’s diplomatic relations with Taiwan, which China views as a rebellious province. A2 Global advises US companies with interests in China to assess the impact of Beijing’s announcement on their operations – screening for their risk exposure via ties to implicated US firms – and factor this into their strategic and operational planning.

China – Yangtze River sees first flood this year

CHINA – Natural hazard risk: High

13 July: The Yangtze River’s first flood this year occurred on 13 July in the middle and lower reaches, with water levels of Jiujiang River and Poyang Lake exceeding the alarms, according to the ministry of water resources. The ministry issued flood prevention notices local governments of Jiangsu, Anhui, Jiangxi, Hubei, Hunan, and Shanghai.

Why it matters: Although the authorities have not issued a timescale for the flood, the likelihood that it will continue in the one-week outlook is high. This is due to prolonged heavy rain that has been forecast. A2 Global advises companies with staff and assets in the affected regions to monitor updates and assess their vulnerability to flooding. Site managers should review their facilities’ flood defences and consider acquiring sandbags or flood boards where necessary.

Vietnam & China – Stand-off in South China Sea heightens maritime risks

12 July: Two Chinese and four Vietnamese heavily armed coast guard vessels have been engaged in a stand-off since last week at the oil and gas rich, territorially disputed Vanguard Bank of the Spratly Islands, in the South China Sea.

Why it matters: The stand-off, which has occurred despite the countries’ governments pledges in May to settle maritime disputes by negotiation, heightens the risk of anti-China sentiment in Vietnam in the three-month outlook. In 2014, such sentiment increased when a Chinese oil rig accompanied by escorts that approached the disputed Paracel Islands was confronted by Vietnamese vessels. Hanoi and Beijing accused each other of allowing vessels to ram one another, and Chinese businesses were attacked in Vietnam, amid waves of anti-Chinese protests. In 2018, China restructured control of its coast guard, transforming it from a civilian to a military organisation with enhanced capabilities. This removed the buffer of a non-military authority in maritime law enforcement. Chinese businesses in Vietnam are advised to factor the increased likelihood of anti-China protests into their operational planning. Logistics managers should assess the impact of the stand-off on the security of their cargo, and divert shipments, if necessary.

China – Seven foreign teachers detained over alleged drug-taking in Xuzhou, Jiangsu Province

CHINA – Political risk: Medium

12 July: Nineteen people in Xuzhou, Jiangsu Province have been detained over alleged drug-taking, 16 of whom were foreigners. Unidentified sources claimed that seven of the foreigners were teachers at EF Education First, an international education company headquartered in Switzerland that has branches in multiple Chinese cities. The case is currently under investigation, with 18 of those detained having been put under administrative detention, and one under criminal detention. EF has not confirmed whether the teachers were its employees.

Why it matters: The case has sparked wide discussion on Chinese social media, with increasing calls for a crackdown on ‘immoral’ and ‘unqualified’ foreign teachers. The arrest is likely to result in increased regulatory scrutiny of foreigners working and living in China. A2 Global advises companies to ensure that staff are sufficiently informed of and adhere to local laws, in order to avoid compliance and reputational risks.

China & United States – IP theft cases highlight risks posed by insider threats

12 July: US carmaker Tesla is seeking the help of US technology firm Apple to bolster its case against a former employee who allegedly stole self-driving technology – including source code and over 300,000 documents – before defecting to a Chinese rival, according to a court filing from 3 July. The employee admitted in a filing on 8 July that he had uploaded Tesla’s autopilot source code to his personal Apple iCloud account before joining XMotors.ai, the US-based research division of Chinese carmaker Xpeng.

Why it matters: In 2018, a Chinese employee accused of having stolen technology from Apple also before joining XMotors.ai pleaded not guilty in a case brought forward by the US Justice Department. The incident also comes amid another recent case of suspected IP theft in which a software engineer is involved. According to prosecutors on 11 July, a Chinese-born naturalised US citizen is accused of stealing copies of over 3,000 electronic documents including source code and other proprietary information from a US-based locomotive manufacturer in 2014-2015 before joining an unidentified company in China.

The cases highlight the damages that insider threats can cause, including IP theft. Businesses are advised to conduct thorough due diligence when screening applicants, as well as ensuring 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. 

China – Arrival of sanfu heralds the hottest period of the year, increasing health risks

CHINA – Natural hazard risk: High

12 July: The country has entered ‘sanfu’, the hottest period of the year. This year this is expected to last for 40 days, from 12 July to 20 August. Temperatures in this period usually range from 35C to 39C, with some places recording more than 40C. Cities and provinces in the north-west, northern, and eastern parts of the country have issued alerts for the high temperatures.

Why it matters: High temperatures increase the likelihood of disruptions in power supply. The high energy consumption of air conditioning during sanfuis likely to cause temporary power outages in both commercial areas and factories. A2 Global advises businesses to factor this into their operational planning and ensure they have a stable backup power supply. Staff working in industries with intensive manual labour – especially outdoors – are more vulnerable to heatstroke during this period. Businesses are advised to factor this into their operational planning in order to mitigate health risks and adjust service availability accordingly.

China & United States – Washington temporarily relaxes Huawei ban

10 July: The US said on 9 July that it will issue licences to US companies to sell products to Chinese telecommunications company Huawei Technologies Co. Ltd. (Huawei) ‘for a limited time period’ where the products in question pose ‘no threat to US national security’. However, businesses will still need to apply for licences to sell listed items to the company.

Why it matters: Washington’s announcement is a temporary relaxation on the export ban imposed by the Trump administration on 15 May. The relaxation follows US President Donald Trump’s announcement of a truce in the US-China trade war last month at the G20 summit in Osaka, Japan, and is likely to ease soaring Sino-US tensions amid the ongoing trade war between the two countries. The move signals that compliance and reputational risks associated with transacting with Huawei and its affiliates will de-escalate over the next three months, while supply chain risks to US companies are also reduced in at least the three-month outlook. While unlikely, a removal of Huawei from the entity list was trigger a further de-escalation of risks. A2 Global advises businesses to factor the de-escalated risks into their strategic and operational planning.

China, United States & Mexico – US announces new duties on some steel imports

10 July: In a statement released on 8 July, the US Department of Commerce said it will instruct the Customs and Border Protection agency to collect cash deposits from importers of fabricated structural steel (FSS) from Mexico and China. The duties have been implemented over ‘unfair’ subsidies provided to Mexican and Chinese exporters. The cash deposits range from 30-177 per cent of the value of the imports. While the tariffs have already come into force under a preliminary decision, a final decision will be taken around 19 November.

Why it matters: The imposition of tariffs follows petitions filed earlier this year by the American Institute of Steel Construction, and forms part of US President Donald Trump’s wider trade disputes with both countries, particularly over the issue of the US trade deficit. While these tariffs only apply to FSS products, similar measures would likely be imposed if the commerce department determines that subsidies are being provided to exporters of other metals products. US firms sourcing steel from Mexico and China should factor higher costs into financial planning, and consider alternative suppliers where appropriate.

Taiwan & United States – Arms deal likely to elevate diplomatic tensions with China

9 July: The US Department of State approved a potential arms deal with Taiwan, estimated to be worth around USD2.2 billion. The deal comprises of the sale of 108 M1 Abrams tanks, 250 man-portable air-defence missiles and other related equipment. China raised objections to the deal, calling on its immediate termination. Congress has 30 days to approve or rescind the deal.

Why it matters: China’s objections ratchet up diplomatic tensions with the US government of President Donald Trump, which has been entrenched with an ongoing trade war with Beijing. The Chinese government and Trump administration have weaponised trade, which has had profound impact in the international business community. Retaliation by China against Taiwan and US businesses is a potential tactic, particularly against the defence industry. Businesses are advised to monitor these developments for any indicators that may impact operations, staff travel, and the supply chain, and ensure contingency plans are fit for purpose and ready for implementation.

Hong Kong – Chief executive calls extradition bill ‘dead’; many activists unconvinced

HONG KONG – Security risk: Low

9 July: Hong Kong’s Chief Executive Carrie Lam Cheng Yuet-ngor said on 9 July that a proposed bill that would have permitted suspects in the territory to be extradited to China for trial was ‘dead.’ However, she also noted ‘even if [the bill] is withdrawn today, it can be re-tabled at the Legislative Council within three months’. The contentious bill, and broader concerns over China’s growing influence in Hong Kong, has led to weeks of unrest in the territory.

Why it matters: A2 Global notes that Lam’s latest iteration of the extradition bill’s status is unlikely to lessen opposition of many pro-democracy and other activists towards the local administration and China while reducing popular support for them within the wider community. A2 Global warns that this risks creating a hard core of activists prepared to carry out potentially extreme forms of action, including violence, against targets they view as supportive of the government and China. This could include foreign interests, and A2 Global advises international companies to review whether they may be viewed as possible targets and assess measures to counter any impact on their staff, assets, and operations.

China – Public pressure results in harsher punishment for foreign violator of traffic laws

CHINA – Political risk: Medium 

9 July: A large number Chinese social media users demanded a harsher punishment for a foreign student at Fujian Agriculture and Forestry University in Fuzhou, Fujian province, who assaulted a police officer on 9 July. The student had broken Chinese traffic law by illegally having a person riding on the back of an electric scooter and aggressively pushed a police officer who had stopped him. Penalties for the foreign student included a small fine and the writing of a statement of remorse. Netizens criticised the punishment as too lenient and debated whether foreigners are granted special treatment. Public pressure has led the university to place the student on disciplinary probation.

Why it matters: Rising anti-foreign sentiment in China – likely fuelled by tensions stemming from issues such as the ongoing China-US trade war and Canada’s arrest of Huawei Technologies Co. Ltd.’s CFO Meng Wanzhou – is exerting pressure on Chinese authorities and is likely to result in increased regulatory scrutiny. A2 Global advises companies to ensure that staff are sufficiently informed of and adhere to local laws, in order to avoid compliance and reputational risks. 

China & United States – Washington seeks to extradite Chinese researcher for IP theft

9 July: Washington is seeking to extradite a Chinese researcher from Switzerland for allegedly helping receiving stolen secrets from his scientist sister, who was employed with Glaxo-Smith Kline, worth USD550 million, according to Swiss documents released on 8 July. The brother sent these secrets to accomplices in China who then would then use the secrets at a Chinese state-backed company called Renopharma and then subsequently sell the company for up to USD2.2 billion, according to prosecutors.

Why it matters: The accusations raise concerns that China is using highly skilled citizens to carry out intellectual property theft on its behalf. They also highlight the significant damages and losses that insider threats can cause. Businesses are advised to conduct thorough due diligence when screening applicants, as well as ensuring 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.