SNAP SHOT: How will the arrest of Huawei CFO impact foreign businesses in China?

The chief financial officer and deputy chairperson of Chinese telecom equipment giant Huawei, Meng Wanzhou – a daughter of founder and chief executive Ren Zhengfei – was arrested in Vancouver, Canada, on 1 December, and the arrest made public on 6 December. She faces extradition to the U.S.

CONTEXT

  • Unspecified charges against Meng were filed by the U.S. Justice Department in the Eastern District of New York. While details of Meng’s arrest have not been released, the U.S. has been investigating Huawei over possible sanction violations against Iran since April 2018.
  • Meng was detained the same day that U.S. President Donald Trump and Chinese President Xi Jinping met at the G20 summit in Buenos Aires, Argentina, to discuss the ongoing Sino-U.S. trade war.
  • Independent commentators have suggested that the arrest is not directly related to Huawei but instead to investigations into financial transactions.
  • Huawei said on 5 December that it was ‘not aware of any wrongdoing’ by Meng, and Beijing has lodged protests with Washington and Ottawa.
  • Meng’s bail hearing was due to be held on 7 December in Vancouver. We assess that Meng will not be granted bail as she is thought to be facing serious criminal charges, and as a member of an elite and powerful Chinese family her finances and connections make her a serious flight risk.
  • The Minister of Justice of Canada, Jody Wilson-Raybould, must approve Meng’s extradition to the U.S.

ANALYSIS

DETERIORATION OF THE SINO-U.S. RELATIONSHIP

  • Meng’s arrest comes at a politically sensitive time in U.S.-Chinese relations and jeopardises a truce in the ongoing trade war agreed by Trump and Xi in Argentina. It is possible that the Chinese side did not know about Meng’s arrest during the talks. China’s Ministry of Commerce said it would immediately start implementing the agreements brokered by the two sides on agricultural products, energy and cars.
  • Huawei has been at the centre of a national security debate between the ‘Five Eyes’ intelligence community (Australia, Canada, New Zealand, the U.K. and the U.S.) with Australia, New Zealand and the U.S. banning the company from supplying their 5G mobile communications networks.
  • BT, a leading U.K. multinational telecommunications company, said on Wednesday (5 December) that it was stripping Huawei equipment from its 4G network, and would not use the Chinese company for its 5G network.
  • It was reported in international media on 7 December that Japan is set to ban government purchases of telecommunications equipment from Huawei and China’s other telecoms giant, ZTE. The Japanese government has not denied the report, while the Chinese government spokesman expressed ‘serious concern’.
  • The Chinese authorities may see the arrest of Meng as part of a greater U.S.-led conspiracy against China’s technological prowess, and part of a perceived effort by the U.S. to ‘contain’ China. The longer China is thwarted, the greater the potential for pushback from the Chinese authorities.

POTENTIAL RETALIATION

  • There is an immediate risk to in-country-executives due to the likelihood that the Chinese government will exploit the situation by using Meng’s arrest as a political tool. Those most at risk are U.S./Canadian-Chinese dual nationals who are based in China. China does not recognise dual nationality.
  • Beijing could signal its displeasure with Ottawa and Washington through the arrest of a high-level executive of U.S./Canadian-Chinese nationality, working for a high-profile Western company in China, or visiting China for business. We assess the first scenario is more likely.
  • A2 Global assesses that the potential exists for dual Australian/New Zealand/U.K.-Chinese nationals to be targeted but that they are not at the same risk as those from Canada or the U.S.
  • Senior level U.S/Canadian-Chinese dual nationals should not travel to China until the latest escalation in the U.S-China confrontation has subsided. If travel is essential, we recommend they travel on their foreign passport and be wary of carrying Chinese identification.
  • It is more likely that high-level foreign managers will be targeted, rather than junior foreign executives.
  • Beijing’s retaliation will be measured, so that it sends a signal to Canada and the U.S. without harming its key commercial links with the countries. Therefore, high-profile Western companies in China that produce non-essential goods are at high risk of being targeted.
  • It is advisable that high-level personnel from any Western company with ongoing regulatory disputes, such as non-compliance with China’s cyber law, or even minor issues, do not travel to China at this time.
  • This includes ethnic Chinese foreign passport holders, as Chinese authorities are currently preventing two U.S. citizens, Victor and Cynthia Liu, from leaving China in order to pressure their father, high-profile Chinese fugitive Liu Changming, to return to China to face criminal charges. Chinese authorities claim that the Liu children were in possession of Chinese nationality documents, thought to be Chinese identification cards.
  • High-level Japanese executives should also reassess their need to travel to China for business at the moment, as there is potential that they may also be a target of the Chinese authorities, due to long-standing Sino-Japanese tensions and Japan’s closeness with the West.

FORECAST

ONE-WEEK OUTLOOK:

In the one-week outlook senior U.S. and Canadian executives choosing to travel to China should keep the head office and security vendor informed of their daily travel and meeting schedule, and check in with both parties in the morning and evening. It is advised that the executives travel in pairs and inform the U.S./Canadian embassy or consulate in China of their travel plans.

ONE-MONTH OUTLOOK:

In the one-month outlook it would be advisable to use Hong Kong as an alternative venue for essential meetings. Although Beijing authorities have the authority to arrest a Western executive in Hong Kong, it would be considered a major escalation in U.S.-China tensions. Such a move, coupled with the recent expulsion of Financial Times journalist Victor Mallet, would severely tarnish Hong Kong’s reputation.

ONE-YEAR OUTLOOK:

A2 Global predicts that there may be an exodus of U.S.-based high-profile Chinese executives with Chinese state-owned enterprises and private businesses in the wake of Meng’s arrest. There is also potential that the offspring of Chinese government officials studying or working in the U.S., Canada and Europe may choose to return to China due to the worsening state of Sino-U.S. relations.