China and the World

A captive market

Huawei CFO released on bail in case that casts shadow over trade talks

Meng-Wanzhou-w

Meng: Huawei’s future boss

The two defining themes in Sino-US relations over the last 12 months – trade war and tech rivalry – have combined in a furious finish to the year.

They came together on the first day of December in the arrest of Huawei’s chief financial officer and vice chair Meng Wanzhou in Canada at the request of the US authorities, which are seeking her extradition on the grounds that she allegedly hid ties with a company called Skycom that did business in Iran.

If so, that would put Huawei in contravention of Washington’s sanctions policy (because it uses American technology in its routers and other products). Meng might face a lengthy prison sentence if found guilty. For extra spice Meng is the daughter of Huawei’s founder Ren Zhengfei, a former engineer in the Chinese military, and the situation is triply awkward because she was grabbed on the same day that President Trump and President Xi were talking in Buenos Aires about finding a way to resolve their trade dispute. The meeting had resulted in a truce (of sorts) in which the Americans held back on an increase in tariffs next January in exchange for a promise from the Chinese to buy more of their goods and address a list of complaints on unfair trade practices.

But Meng’s detention immediately raised suspicions from the Chinese that it was a ruse in the wider dispute and that the Trump administration was negotiating in bad faith.

The full picture is unclear: US national security adviser John Bolton claimed that he had been forewarned of the arrest, but Larry Kudlow, an economic adviser to the White House, said that Trump didn’t know about the extradition request before his dinner with Xi. On the other hand, the Financial Times has reported that Xi was already being informed of Meng’s situation before he sat down with Trump in Buenos Aires.

Then Robert Lighthizer, the US trade representative, made the case that Meng’s detention was a “criminal justice matter” with no relationship to the trade talks. “It is totally separate from anything that I work on,’’ he explained in a television interview this weekend, before acknowledging that he could “understand from the Chinese perspective how they would see it that way”.

The American sanctions on Iran were only reinstated last month. It came after Trump tore up an international nuclear deal agreed in 2015 by the Obama administration. But Meng’s arrest hasn’t come completely out of the blue. Reuters reported in April that American investigators had been probing Huawei for more than two years and it was revealed at Meng’s bail hearing this week that a federal judge had issued a warrant for her arrest in August. She was said to be avoiding travel to the US on a precautionary basis.

However, the high-profile swoop was an unexpected twist in an uncomfortable year for negotiators on both sides of the tariff row. Although Trump trumpets his personal chemistry with the Chinese leader, he is proving an awkward adversary for Xi, who presents himself as a strongman at home. Xi’s instincts in the trade dispute have been to play for time, something seen again in the deal for a 90-day delay on the tariff hikes scheduled to start in January. And while Trump seems almost to delight in the confrontation, even titling himself as the ‘Tariff Man’, the Chinese have been trying to take the steam out of the row. They have responded with tariffs of their own but they haven’t yet upped the ante by adding additional duties or threatening direct retaliation against the operations of US companies in China.

The same caution has been reflected in China’s state media, which has been notably restrained in reacting to American policy. Even with Meng’s arrest, the initial response was more of frustration than fury. An editorial in the China Daily complained that the way she was handled, especially her handcuffing by Canadian officers, who chained her up with ankle braces as well, gave the impression of a “show trial” and the People’s Daily came closest to losing its cool when it described the detention as a despicable hooligan act. But there wasn’t much fire and brimstone from the rest of the media and spokespersons from the Commerce Ministry and the Foreign Ministry both tried to separate the news of the arrest from the talks to resolve the trade dispute.

On Sunday the American ambassador was summoned for what local media described as a “solemn protest” from officialdom. “The actions of the US have seriously violated the legitimate rights and interests of Chinese citizens and are extremely bad in nature,” vice foreign minister Le Yucheng warned.

Meng’s case caps a difficult year for Huawei with the ‘Five Eyes’ countries – an alliance of intelligence officials from the US, Canada, UK, New Zealand and Australia – saying they will block the Shenzhen-based giant from supplying the 5G networks that are going to underpin a range of next-generation industries. Japan announced on Monday that it is going to exclude Huawei from public procurement projects as well. Although it’s not clear that the embargo has been orchestrated across the group, the Chinese will regard it as part of the wider effort to prevent their best firms from prospering overseas. (Increasingly the tech world is being divided into countries where Huawei can do business, and those where it cannot.)

Indeed some will see the hostility towards Huawei as a signal that all the talk about a new ‘Cold War’ from men like Mike Pence, the American vice president, isn’t just rhetoric (see WiC406).

It will also deepen Beijing’s determination to achieve self-sufficiency in semiconductors and other core technologies, something we first highlighted almost three years ago in WiC317. How else to avoid a repeat of the humiliation of ZTE, one of Huawei’s main competitors, which was saved from collapse earlier this year when Trump waived a technology ban in another case related to sanctions on Iran?

Huawei uses American components too, which also makes it vulnerable: firms from the US still make up about a third of its 90 or so core suppliers. The Financial Times reports that Huawei buys the memory chips for its smartphones from Micron, for instance, and that Intel supplies the processors for its personal computers. Huawei relies on companies like Broadcom, Xilinx and Texas Instruments for key components for its 5G networking business. A ‘denial order’ from Washington that stops it from ordering these parts would detonate like a “small nuclear weapon” across the sector, an unnamed telecoms executive told the newspaper. Huawei would be unable to build smartphones or 4G/5G stations, the FT was told.

Huawei has started to design some of its own semiconductors through its HiSilicon subsidiary but it also depends on the Taiwanese foundry TMSC to make them (see WiC407).

In the meantime Chinese trade negotiators are still talking to their American counterparts, with the Ministry of Commerce reporting on Tuesday that the two sides had exchanged views on the timetable and road map of future talks. On Wednesday the Chinese authorities said tariffs on US cars would be reduced and that more American crops would be purchased in a new concession to US negotiators.

In fact the Chinese have turned more of their fire on the Canadians, with the foreign ministry threatening “serious consequences” unless the Meng case is resolved quickly. In what has been seen as a retaliatory move, China confirmed this week that two Canadian citizens have been detained for activities that “endanger the nation’s state security”.

Canada’s Prime Minister Justin Trudeau responded that his government had no role in the decision to arrest Meng and that Canada was simply meeting the terms of its extradition treaty with the United States.

The finer points of a debate about the independence of the judiciary will be lost on the Chinese press, with Xinhua describing Canada’s behaviour as “lawless, unreasonable and callous” and the People’s Daily warning “America’s trusty sidekick” that it would pay a “heavy price” if Meng remained in custody.

On Tuesday Meng was released on bail of $7.5 million and she now awaits possible extradition at one of her homes in Vancouver. But Trump’s critics in China could be forgiven a little of their scepticism about the handling of the case after he seemed to torpedo efforts to keep it separate from the tariff row. “If I think it’s good for what will be certainly the largest trade deal ever made… I would certainly intervene if I thought it was necessary,” he told Reuters the day that Meng left detention. “Well, it’s possible that a lot of different things could happen. It’s also possible it will be a part of negotiations. But we’ll speak to the justice department,” he added, when asked if she could be released.

Meanwhile as Meng waits to see what happens next, Huawei’s Europe chief was already in concession mode. On Thursday Vincent Peng promised to do “anything” to convince the world his firm could be trusted to build 5G networks, including “restructure the organisation, rebuild the products”.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.