China Brief: 14-20 May 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 in the US-China trade war and inter-communal tensions between Chinese businesses and locals in Cambodia and Myanmar, among other subjects.

China – Political risk: Medium – Western businesses break ties with Huawei following US export ban

China & United States – US government orders severe sanctions against China’s Huawei telecoms company; Beijing’s response awaited 

China & Myanmar – Protest at Chinese cement plant highlights tensions with aggrieved locals

China & United States – Six Chinese companies added to US banned entities list 

China & Cambodia –  Intercommunal tensions flare in southern port city

China & United States – Beijing imposes tariffs on USD60bn worth of US goods

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China – Western businesses break ties with Huawei following US export ban

CHINA – Political risk: Medium

20 May: On 19 May, Reuters news agency reported that US multinational technology company Google LLC has suspended business with Huawei Technologies Co. Ltd. (Huawei) that requires proprietary technical services, software, and hardware. Only apps and services that are publicly accessible via open source licensing are exempted. While current owners of Huawei smartphones will still be able to download and update apps from the Google Play store for users of the Android operating system, future versions of the phone will not have access to these services – which include YouTube and Gmail.

Why it matters: The announcement comes amid news reports on 19-20 May saying that US chipmakers Qualcomm Inc, Broadcom Inc, Xilinx Inc, and Intel Corp had instructed staff not to supply critical hardware and software components to Huawei until further notice, and that German chipmaker Infineon Technologies AG had suspended shipments to the Chinese technology company. These developments are in the wake of the US blacklisting Huawei on 16 May. A2 Global notes that further companies are likely to follow suit. Technology companies – especially those in the communications infrastructure sector with business interests in Western countries – should assess their exposure to blacklisted companies such as Huawei and its affiliates, and factor the possibility of trade sanctions into their strategic planning. Logistics managers sourcing components from Europe and the US are advised to factor the possibility of supply chain disruptions into their operational planning.

China & United States – US government orders severe sanctions against China’s Huawei telecoms company; Beijing’s response awaited 

16 May: The US Commerce Department on 15 May announced it had barred China’s Huawei Technologies Co. Ltd and 70 affiliates from acquiring components and technology from US companies without prior US government approval. The Commerce Department’s decision to add Huawei to the US government’s ‘Entity List’ followed President Donald Trump’s earlier action in signing an executive order barring US companies from using telecommunications equipment made by unnamed firms deemed to pose a national security risk. The Chinese government has yet to formally respond to the latest US measures.

Why it matters: A2 Global warns Beijing’s response is likely to target US corporations in line with its insistence that Huawei is a private company with no direct links to the Chinese government or ruling communist party. Many US electronics companies, notably Apple Inc., manufacture and market their products in China making them theoretically vulnerable to Beijing’s response to the latest Huawei ruling. However, these factories employ directly or indirectly millions of local workers and any measures that compromised their livelihood is certain to be viewed by the Chinese government as highly destabilising.

Nevertheless, Beijing will have to make clear its position and may conclude targeting selected US entities and even individuals for detailed scrutiny of their operations, conduct, tax, and compliance status would send a message back to Washington at senior boardroom level. As a result, A2 Global strongly advises US companies with operations and staff in China to ensure they are aware of this threat and consider measures on how to mediate its impact. Further, it is also advisable to delay any senior corporate travel to China until it is clear how Beijing will respond to the latest developments.

China & Myanmar – Protest at Chinese cement plant highlights tensions with aggrieved locals

16 May: Police fired rubber bullets and used tear gas injuring at least 20 people during interdiction operations at a demonstration near Patheingyi township, Kyaukse district in Myanmar’s central Mandalay region on 15 May. Local community members were protesting the expansion of a cement plant and the use of Chinese workers in its construction. At least four vehicles and part of the plant were destroyed by fire during the disturbances.

Why it matters: A2 Global notes the incident highlights growing opposition to the involvement of Chinese companies and their imported workforce. According to media reports at least 500 Chinese nationals are working on an extension to the Myanmar Conch Cement Co. Ltd’s Alpha Cement Plant. Little or no compensation is reported to have been offered to the affected local communities for a service road linked to the project and built across their land.

A2 Global warns that unresolved issues relating to the seizure of land and the introduction of migrant labour can create deep divisions between local communities and the state that encourage disruptive political and criminal intervention. More broadly, all foreign companies operating in Myanmar should ensure their local partners are compliant not only with national laws but are aligned with corporate social responsibility and human rights policies.

China & United States – Six Chinese companies added to US banned entities list 

15 May: The US Department of Commerce’s Bureau of Industry and Security has added six Chinese companies to its ‘Entity List’ of companies subject to export bans on sensitive US goods – including technology – according to media reports on 14 May. Four of the companies – these also have offices in Hong Kong – are alleged to have violated US export controls by attempting to procure US goods that would have supported Iran’s weapons of mass destruction and military programmes. The other two are alleged to have engaged in activities contrary to US national security interests by exporting technology to the Chinese military-linked academic institutions, Chinese state-owned enterprises, and Chinese defence firms.

Why it matters: A2 Global advises companies to factor the export bans into their operational and logistical planning, and assess the impact they will have on their supply chain. Companies should also factor the bans into their compliance- and third-party due diligence procedures when engaging with Chinese organisations. They can be found on the Federal Register website. For guidance on the Entity List, consult the BIS website.

China & Cambodia –  Intercommunal tensions flare in southern port city

15 May: According to media reports on 14 May, Chinese organised crime gang members have threatened to cause instability in the southern port city of Sihanoukville and the surrounding Preah Sihanouk province. During the past decade, Chinese developers have built more than 100 casinos and numerous hotels and resorts in the province, almost exclusively for use by tourists from China. Local police say Chinese nationals are the most prolific foreign criminals in Cambodia, with 240 detained in the first quarter of 2019, out of a total of 340 foreigners arrested.

Why it matters: A2 Global warns that a violent confrontation between Chinese criminal elements and either Cambodian police or local people in Sihanoukville or Preah Sihanouk Province now appears inevitable, unless Beijing intervenes. Foreign companies should be aware anti-Chinese sentiments are pervasive throughout the military and police, as well as the general populace, putting in doubt their ability or willingness to tolerate growing criminality by Chinese nationals or effectively intervene in the event of clashes with locals. This could result in violence in Sihanoukville and the capital Phnom Penh. A2 Global strongly recommends companies reassess the threat this may pose to their staff, property, assets, and operations.

China & United States – Beijing imposes tariffs on USD60bn worth of US goods 

14 May: On 13 May, Beijing imposed tariffs on 5,140 US goods worth a total value of USD60 billion, set to come into effect on 1 June. The targeted products – which include chemicals, machinery, consumer goods, coffee, spinach, and batteries – will bear duties ranging from five to 25 per cent. 

Why it matters: Beijing’s announcement comes after the US imposition of tarrifs on USD200bn worth of Chinese goods that came into effect on 10 May, and likely constitute retaliatory tariffs in the ongoing trade war between the two countries. A2 Global advises businesses to assess how the tariffs will impact operations and factor higher prices into their purchasing strategies. Logistics managers sourcing the targeted US products should assess the impact of the tariffs on their supply chain, and, if necessary, seek alternative suppliers.

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