Expert Speak Raisina Debates
Published on Dec 27, 2018
China: Suddenly under pressure on many fronts

The Chinese dragon’s soaring global ambitions are being seriously challenged for the first time, and this is good for the world.

For decades, China has been doing more or less whatever it pleases, cocking a snook at all international fair practices, bullying weaker countries, while enslaving its own 1.4 billion people. With its massive economic and technological strength and its total disregard for (perhaps incomprehension of) all human values, it has been a giant threat to a just and equitable future of mankind.

The initial stages of China’s incredible economic growth were powered a great deal by history’s greatest loot of intellectual property (IP), much of it state-sponsored. Indeed, theft of intellectual property remains a core issue of contention between the West and China, and is one of the significant reasons for the US launching a trade war against the country.

With economic growth came imperial ambitions. China has been flouting all international laws in the South China Sea, invading other countries’ littorals, building artificial islands and militarising them. Its “string of pearls” strategy of establishing a zone of influence across the Indian Ocean, from the Chinese mainland to Port Sudan, encircling India, is already in action. Its Belt and Road Initiative (BRI) is using the same strategy across Asia into Eastern Europe.

But all is not well. The BRI has so far been unable to produce the sort of “client states” that President Xi Jinping, who has now made himself supreme leader for life, had envisioned. As international relations expert Harsh V. Pant has written: “Many of its large projects have turned into white elephants and even some of China’s closest partners are questioning its value. Corruption and incompetence have shaped responses to these projects as complaints are mounting and the leverage of smaller states is on the rise. Alternatives are now being offered by countries as diverse as the US, Japan, India, Australia and Europe, fuelling resentment against China’s exploitative approach.”

Beijing’s “debt trap” diplomacy was always the world’s worst-kept secret, and now it’s out in the open. The latest victim is Ecuador, where China built the Coca Codo Sinclair dam in the middle of the Amazon forest, which has turned out to be a disaster. It was geologically, ecologically and economically a completely illogical project, and is now non-functional. But Ecuador has run up a $19-billion debt with China, to pay which, it has pledged 80 per cent of its most valuable export—oil—to China at a discounted price (China then sells the same oil at a profit). Quite simply, China is bankrupting Ecuador.

Malaysia, after threatening to cancel the East Coast Rail Link project, has forced China to begin renegotiating (original cost: $19 billion). Another China-backed project in Malaysia, the Trans-Sabah Gas Pipeline, has been suspended since July. Myanmar has managed a reduction in the price of the Kyaukpyu deep-sea port from $7.2 billion to $1.3 billion.

As 2018 came to a close, China seemed more embattled than in decades. The US trade sanctions have been hurting. Manufacturers had already begun moving production facilities overseas because of the rising costs of labour, land, raw materials and taxes. The trend has accelerated after the US announced tariffs on many products exported from China in July. Foreign direct investment increased a mere 1.1 per cent year-on-year to $121.3 billion in January-November, while economic growth slowed to 6.5 per cent in the third quarter, the slowest in a decade, government data showed.

The World Bank has predicted a further slowdown of growth to 6.2 per cent in 2019 and 2020. It has also advised China to address the concerns expressed by the United States and other major trading partners over forced transfer of technology and openness to investment to de-escalate ongoing trade tensions.

On December 1, during the G-20 summit in Argentina, Xi Jinping promised to resolve the US’s “reasonable concerns” about IP practices in a statement after meeting President Donald Trump. The White House said the sides agreed to hold off on tariff action for at least 90 days as they negotiate to resolve specific issues. But it also said that further tariffs would be imposed if there was no deal to the satisfaction of the US.

On the same day, a few thousand miles north, Chinese telecom giant Huawei's vice-chairperson and chief financial officer Meng Wangzhou (and daughter of the company’s founder and heir apparent) was arrested in Canada at the request of the United States, which accuses the company of violation of US sanctions on Iran. At the time of writing (December 26), she was awaiting extradition to the US.

The core issue with Huawei is not Iran, but its close links with the Chinese military. The company, which, with $89 billion in revenues, ranked 72nd in the 2018 Fortune Global 500 list, and is the world’s second largest smartphone manufacturer, was founded by a former engineer in the People’s Liberation Army. Over the years, it has faced numerous charges of intellectual property theft and industrial espionage, and lawsuits from companies like Cisco, Motorola and T-Mobile. Under the Donald Trump regime, the company has more or less been called a national security threat.

Huawei has always denied that Beijing uses its gear for spying, but its credibility is low. In addition to the US, Japan, New Zealand and Australia have banned Huawei equipment. Norway may also follow suit.

(Meanwhile, quite astonishingly, after initially refusing to invite the company for 5G trials, India, on December 17, allowed it, and even complimented Huawei for developing the telecom sector in the country!)

China responded by arresting three Canadian diplomats in Beijing, and threatening Canada. But it was a weak response, given the fact that Huawei is one of China’s crown-jewel companies, but it could do nothing more than that—Canada was after all only acting according to its bilateral treaty with the US.

Indeed, three days later, on December 4, China announced a list of punishments against Chinese companies for intellectual property theft. There were a total of 38 different punishments to be applied to IP violations, starting with immediate effect.

“I think it’s potentially significant if they are implemented and result in a reduction in IP theft,” said Scott Kennedy, a China expert at the Centre for Strategic and International Studies (CSIS) in Washington, as quoted by the South China Morning Post. “We’ve been down this road with China many times on IP. The attention companies pay to IP theft has risen dramatically, and despite the great attention it’s getting, the violations have increased.”

(Just the month before, Beijing had said that US allegations of a state-backed campaign of IP and technology theft were based on hearsay and ignores reality. This came after the US Trade Representative’s office accused Beijing of continuing to sponsor cyber-attacks on American companies that were both intensifying and growing in sophistication.)

The punishments include being banned from issuing bonds or other financing tools, and participating in government procurement. Companies found guilty would also be restricted from accessing government financial support, foreign trade, registering companies, auctioning land or trading properties.

In addition, violators will be recorded on a list, and financial institutions will refer to that when lending or granting access to foreign exchange. Names will be posted on a government website.

Since then, there has been silence on that front. There is no news of any Chinese company being investigated.

The fact is that much of the IP theft crimes that are committed by China— Chinese hackers burrowing into networks of corporates and governments across the world—is the handiwork of the People’s Liberation Army (PLA) and Chinese intelligence agencies.

A good example is Unit 61398, housed in a non-descript twelve-story building on Danong Road in Shanghai, an area that tourists do not visit. It’s all massage parlours and noodle joints and a building one would not notice unless one spotted the high security around it.

Unit 61398 is formally the 2nd Bureau of the PLA’s General Staff Department’s 3rd Department, and it exists almost nowhere in the Chinese organisational charts. A years-long investigation by US intelligence agencies and private cybersecurity companies revealed the extent to which Unit 61398 had penetrated the US government and America’s biggest corporations. China denied everything. But by then, Chinese hackers had managed to get inside the database of the US government’s Office of Personnel Management and stolen the entire life records of 22 million Americans, who had ever applied for government jobs, had worked in the government, or were applying. This including all details of five million Americans who needed background checks for “secret” or “top secret” security clearance.

But back to the December 2018 timeline. On December 19, the US struck again. President Trump signed a law imposing a visa ban on Chinese officials who deny Americans access to Tibet. As expected, this enraged China. While the Chinese foreign ministry warned of consequences, the National People’s Congress (NPC) issued a statement that the US act was against the basic norms of international relations and a gross interference in China’s domestic affairs. It said that China will take “forceful measures to resolutely safeguard its own interests”.

As everyone knows, most foreigners who seek to enter Tibet are routinely rejected, and those who do get in are forced to stay on strictly controlled official tours, where the true situation of the Tibetan people are hidden from them. And China has never been open to any discussion on Tibet.

This sudden sneaky attack from left field was an international embarrassment for China.

The US was now working on the basis of an ancient Chinese strategy. As a long-time China observer pointed out to me: “China believes in having multiple pressure points alive against any country. Even if the issue is just X, it will have A to V issues unresolved against you, as negotiating points. This is actually enunciated in its 3,000-year-old strategy texts. Trump is only following China’s own strategy, with Huawei and Tibet.”

On December 21, the European Union expanded its challenge against China at the World Trade Organisation (WTO) over laws that it says force the transfer of technology. The European Commission said it was broadening and deepening the scope of its WTO action against China. The new complaint said that the Chinese laws imposed requirements on foreign companies operating in China, contravening a commitment not to do so made when Beijing joined the WTO.

“The so-called performance requirements force or induce European companies to transfer technology to their joint ventures with Chinese partners in exchange for the necessary administrative approvals by the Chinese authorities,” the Commission said.

The European Union says this goes against WTO rules to treat national and foreign companies equally and unduly restricts the rights of European Union companies, such as in relation to patents.

Obviously, the threats were working. Just two days later, Beijing announced it was accelerating its lawmaking process to consider draft legislation to protect the intellectual property rights of foreign investors, encourage voluntary transfers of technology but prohibit forced technology transfers by administrative means. A new draft of the foreign investment law was submitted to the Standing Committee of the National People’s Congress for its first review. It stipulates that all government support policies will also apply to foreign-funded firms, who will get an equal opportunity to take part in the government procurement. The draft has a clause on protecting intellectual property rights.

Although the government will still have the right to expropriate the property of foreign investors under special circumstances, the new draft law requires that the process must be done through legal procedures and include “fair and reasonable” compensation.

Scott Kennedy of CSIS tweeted: “More needed than simple rule changes. Reducing coercive tech transfer would require banning & penalizing informal demands and threats, heavily constraining industrial policy that directs & constrains investment.”

On Christmas Day, Beijing sought to further demonstrate its willingness to open up its markets with the publication of its first unified “negative list” of the business sectors that are off limits to foreign, and in some cases domestic, investors. “The promulgation of the negative list nationwide means that China has set up a unified, fair and rule-based system for market access,” said Xu Shanchang, director of the National Development and Reform Commission’s economics system reform department. “From now on, other government agencies and local governments are barred from making rules about market entry.”

Clearly, China is on the backfoot right now. In October, it tried to placate Trump by granting his daughter and senior advisor Ivanka Trump initial approval for 16 new trademarks covering a wide range of products including nursing homes, handbags, shoes, wedding dresses and jewellery. But that does not seem to have worked. (It is of course quite another matter whether it is ethical for a Presidential advisor, who works on foreign policy, to apply for trademarks in a country with which her country is involved in a trade war.)

The speed with which China has been issuing assurances and taking action—or appearing to take action—is indicative of the pressure Xi Jinping feels he is under. The free world—an old-fashioned phrase, but wholly appropriate when used in opposition with China—must keep up that pressure till there are tangible results.

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Sandipan Deb

Sandipan Deb

Sandipan Deb is a former Editor of The Financial Express and Founder-Editor of Open and Swarajya magazines.

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