China: Bad Timing

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November 14, 2019: Hong Kong protests are continuing at least until late November when the results of the November 24th District elections are known. These elections may be canceled because of the escalating violence. China is losing patience but does not have many options. Protestors accuse China of bringing in Chinese soldiers wearing Hong Kong police uniforms. This was detected when many protestors reported hearing police speaking with a northern Chinese accent and moving differently than the Hong Kong police. If these are Chinese reinforcement they are probably not soldiers but members of the para-military PAP (Peoples Armed Police). Additional PAP units have been moved to the border between Hong Kong and China weeks ago and it was assumed the PAP would eventually be sent in. Doing it clandestinely, pretending to be Hong Kong police, is a typical PAP move. If nothing else this gives the Hong Kong police some rest as the police have been working 12 hour shifts for weeks at a time, and this is wearing down the police physically and mentally. Police morale is not good.

The demonstrators are beginning to disrupt mass transportation networks, which are a key element of the Hong Kong economy because it is the only way for many people to get to work. This has not turned the locals against the protestors but instead increased popular resolve to resist Chinese pressure until China compromised. Logically this is the best move. China does not see it that way because to back down in Hong Kong might encourage other cities and regions to make demands.

China is willing to be patient and simply keep confronting the protestors until the protests fade. The alternative, using more force, is risky because it increases the probability of shutting down the Hong Kong economy. This would be a financial disaster for China, especially since the national economy continues to slow and the trade war with the United States remains unresolved. After decades of complacent and compliant American trade officials, the U.S. has finally cracked down on Chinese cheating and IP (Intellectual Property) theft. China would like to deal with the American demands more forcefully but China is vulnerable economically and diplomatically. The United States wasn’t the only victim of predatory Chinese trading practices but most nations will not risk economic retaliation from China. Yet these nations support the Americans because if the U.S. wins it means better terms for the many other victims of Chinese abuse. Hong Kong is a key element here because of its unique role as an access point to Western financial networks. China wants to eventually move those financial capabilities to other Chinese cities but that is not easy. Hong Kong earned the trust of Western financial institutions via decades of honest and productive relationships. Mainland Chinese financial institutions are not trustworthy to the rest of the world while Hong Kong is. Put another way, for China, Hong Kong to too valuable to lose. The prolonged protests are a media disaster for China and there is no way to speed up suppressing the protests without risking disaster.

China has been punishing Hong Kong politicians, who are selected, as much as possible, for loyalty to the CCP (Chinese Communist Party) and not forbidden items like democracy or autonomy. At least seven members of the Hong Kong Assembly have been punished for questionable loyalty. China is finding out how few fans it has in Hong Kong. For two decades China has been trying to cultivate a large number of prominent Hong Kong business and professional personalities as CCP loyalists. It appears that this effort was not as successful as China thought before the protests began. China always assumed a crisis like this would eventually develop and now it has, at the worst possible time.

China has used its usual threatening tactics against foreign critics of the Hong Kong situation. This has backfired by generating more anti-China attitudes from foreign media and public officials. This includes university students, whose leftist inclinations could usually be converted to a pro-China attitude despite Chinese bad behavior. Not this time. The Hong Kong students have convinced a lot of their foreign peers that the Chinese government is a threat that can no longer be ignored. The word is being spread by many foreign students fleeing Hong Kong because the police are now invading university campuses and treating everyone like a threat.

Economic Woes

It’s no surprise that the economy continues to weaken in 2019. What makes it worse is that is the third year of stubborn decline. It was hoped that after having such a bad year in 2018 things would start to turn around. The economy has not cooperated. China hoped to maintain GDP growth of at least six percent while at the same time continuing to safely reduce (“deleverage) the huge number of bad loans local governments and corrupt banks have taken on over the last decade. The economic decline in 2018 could be measured in many aspects of economic activity (production, orders for raw materials, finished goods or construction and so on) and sentiments (of people running the economy and consumers). Chinese stock markets were down over 30 percent by the end of 2018 and for the first time in three years, profits of industrial firms took a dive. These trends have continued into 2019, made worse by the trade war and economic fears over the fate of Hong Kong. Even the Chinese consumer is growing more cautious. Retail sales are down overall, despite increased use of online sales via Alibaba (the Chinese Amazon). Chinese have been hearing the rumors or witnessing the realities of economic problems (corruption, bad loans, foreign firms leaving, labor unrest, unreliable economic statistics and so on) and have noted the government has no quick fix, or maybe no fix at all.

November 13, 2019: For the first time since September the U.S. Navy has conducted a FONOP near China as an American cruiser passed through the Taiwan Strait (the waters between Taiwan and the Chinese mainland). Since July 2018 the U.S. Navy has carried out Taiwan Strait FONOPs nearly every month. Until the 2018 FONOP such trips through the Taiwan Strait (which American warships do regularly) were not publicized, something the U.S. had been doing since 2007. The renewal of publicizing these movements annoys China which responded by having their own warships following American warships passing through the Taiwan Strait and increasing Chinese naval ship patrols around Taiwan.

November 9, 2019: American officials are openly criticizing China for backing off on its enforcement of sanctions on North Korea. The U.S. and other nations threatened by North Korea have observed and documented growing smuggling of forbidden items in and out of North Korea. China continues to deny it has anything to do with this.

November 8, 2019: In Hong Kong, a student died when police fired tear gas shells near him causing him to lose his balance and fall from a building roof. This has been the second such death since the demonstrations began in June. Police have not used lethal violence but the heavy use of tear gas has caused many accidents because of people, not always demonstrators, suddenly being disoriented. This has caused many injuries. Police have arrested about 3,300 people so far and the anti-government protests continue, determined to secure more autonomy for Hong Kong.

November 7, 2019: The U.S. and China agreed to scale back their tariff war and continue negotiations. The Americans are still at war with China economically, not militarily. The Americans, and many other Chinese trading partners, have been accumulating grievances because of Chinese economic crimes and rampant (and ongoing) espionage efforts. China steals patent protected property as well as trade secrets (unpatented knowledge that was created at great expense.) China is currently caught between the aftereffects of economic misbehavior inside China and American demands to reform and restitution. The U.S. has imposed tariffs and other trade penalties on China and the Chinese leadership is feeling the heat and unable, so far, to come up with an adequate defense. The two nations agreed to the tariff rollback because it was mutually beneficial and a goodwill gesture by the Americans. The “war” is still active.

November 6, 2019: UN Sanctions investigators accused North Korea of using Marine China, a Hong Kong based blockchain firm, to launder North Korean money (bitcoin) to make possible laundering of money, usually cryptocurrency, stolen by North Korean hackers. These thefts amounted to about $2 billion dollars in the last year. Marine China enabled North Korea to convert stolen bitcoin to cash via at least 5,000 small transactions. The small transactions were believed more difficult for investigators to spot and trace back to North Korea. That did not work.

November 4, 2019: In Thailand, at an ASEAN (Association of Southeast Asian Nations) meeting the U.S. accused China of using intimidation to conquer and take control of the South China Sea. Most ASEAN members agree with this assessment but China responded by demanding that outsiders (like the United States) do not interfere with a local issue. China has put a lot of economic and diplomatic pressure on ASEAN members to either back China or not openly oppose Chinese efforts to take possession of the South China Sea.

October 31, 2019: Because of the violence between Iran and Saudi Arabia China is no longer as pro-Iran as it used to be. This is all about oil imports. China is the largest importer of oil in the world and remained an ally of Iran despite American sanctions on Iran. Then Iran attacked Saudi oil facilities in September that interrupted shipments to Asian customers. This also sent oil prices up momentarily. China eventually retaliated by canceling a $5 billion natural gas development deal that Iran was depending on. Iran offended China and had to pay. Some American businesses got the same harsh retribution when they tolerated support for the Hong Kong protestors. Iran has put a priority on restoring good relations with China but the Chinese are not making it easy. Iran will have to do something novel to win back Chinese support.

October 30, 2019: In neighboring Mongolia, police arrested about 800 Chinese for overstaying their 30 day visas. Police deported 95 percent of these via violators by train. The expelled Chinese were also banned from visiting Mongolia for three years. The other five percent were arrested for involvement in various Internet-based crimes. All 800 Chinese were believed involved in criminal activities but most were low-level operatives not worth prosecuting in Mongolia. Now all are known to Chinese police who have been dealing with similar incidents of Chinese gangs recruiting Chinese in large numbers for Internet-based criminal activities that are easier to get away with outside of China. For example, Philippines police recently arrested over 700 Chinese, most of them in the country illegally, and charged them with participating in a large Internet-based crime operation. A decade ago the Philippines became a hotspot for computer hacking groups, and for nearly a decade the computer crime gangs were able to survive by bribing the right officials. Only when the cybercrime involved Islamic terrorism did the bribes not always work. Then the government legalized online gambling operations in 2016, although Filipinos are forbidden to play. There was also an effort to eliminate a lot of the bribery that often caused things like online gambling to become more of a problem than an economic benefit. This time around the Filipino police have been able to act and corruption and criminal activity associated with it is more likely to result in lots of arrests and prosecutions. Many of these recent arrests were the result of information provided by the American FBI, which had been investigating international computer and phone fraud and the hackers behind it. China has also provided information about Internet-based criminals preying on individuals and businesses in China. The Chinese government is believed to have alerted the Mongolian government to the illegal activities of the 800 Chinese recently arrested.

October 29, 2019: China has been ignoring North Korean violations of sanctions when it comes to North Koreans working in China illegally. At least 2,000 North Koreans have been identified as participating in this program. These workers get 30 day visitor visas in China and do not bother to go back to North Korea and get the visa renewed every 30 days. These North Korean workers, who turn over most of their pay to the North Korean government, are not being expelled as was the policy until a few months ago.

October 28, 2019: China has been willing to help the socialist government of Venezuela but is handicapped by the effectiveness of American sanctions. China is being offered access to inexpensive Venezuelan oil in return for help in suppressing the opposition and repairing the wrecked oil infrastructure. Getting that oil to China has become increasingly difficult because, as a result of more and more American sanctions. In September this lack of access to tankers halted nearly all Chinese oil imports from Venezuela. China has come up with ways to evade the sanctions but even with that it is now only getting about 300,000 BPD (barrels per day) and this is untreated and less useful Venezuelan crude. This stuff must be blended with lighter petrochemicals to be useful and China has arranged for its Venezuelan oil to get blended in Indonesia before delivery to China.

China is the largest creditor of Venezuela and working on restoring production, if only because their loans are being repaid with Venezuelan oil. China could afford to bail the Venezuelan government out but won’t because, unlike the Russians and Iranians, the Chinese have a more practical approach to such situations. In other words, as long as the socialist government is running the country, economic rescue is not likely. China is hoping Cuban and Russian advisors will persuade the Venezuelan leader Nicolas Maduro to undertake needed economic reforms. That has proved difficult as Maduro is more interested in the mechanics of how he can get himself, his family and his assets out of the country to exile in Russia. The Cuban and Russian advisors do not see the situation as that desperate but for the moment they have to work with Maduro. China is helping by supplying Maduro with surveillance equipment and communications gear that can work even when the electricity supply is missing (which it often is in Venezuela).

Even fixing the broken Venezuelan oil industry is beyond Chinese capabilities because too much of it is dependent on the United States. That’s because Venezuelan oil, while abundant, is of the lowest quality. It is more expensive to refine and requires special refineries to handle the job. Since the Americans were the largest and closest, oil importer in the Western Hemisphere, and it was possible to build specialized refineries for Venezuelan oil in the U.S., much key Venezuelan oil infrastructure is in the United States. Since Maduro has seized a lot of American assets recently, U.S. courts have allowed the owners of those seized assets to go after Venezuelan government property in the United States for compensation. This process has been underway for several years and Venezuela has run out of appeals and options. The Chinese are still in Venezuela as a “friend of Venezuela” not a socialist government supporter. Everyone else (Russians, Iranians and Cubans) are there for ideological, as well as financial reasons. The Chinese have been frank with the local leaders and are still there but there are limits to how much of the Venezuelan oil industry they can repair or even maintain. The Chinese cannot replace the U.S. based refineries or the American companies that are still operating some Venezuelan oil rigs. These Americans are likely to be gone soon and the Chinese don’t have the resources to replace them. There are also American sanctions on Venezuelan oil exports which limits who Venezuela can sell to. But given the extra cost of refining Venezuelan crude, there are few customers willing to buy the stuff, even at the deep discounts being offered.

As the Venezuelan GDP declines, more of what cash it has goes to keeping the socialist rulers in power while making life more miserable for most Venezuelans. No one is willing to bail this government out, even though Venezuela has the largest oil reserves in the world. There is no easy fix for the mess two decades of socialist rule has created in Venezuela. Russia and Iran, two Venezuelan allies, are willing but broke.

October 18, 2019: China is having more problems with its ally Pakistan. The FATF (Financial Action Task Force) told Pakistan that it does not appear to be making enough effort to block Pakistan based terrorist groups from using the international banking system to finance their violence. However, Pakistan had made some progress, at least enough to keep them off the FATF blacklist. Pakistan was put back on the grey list in June 2019. Pakistan had been warned in early 2018 that unless they reduced the illegal financing activity coming out of Pakistan the FATF would put Pakistan back on the “gray list” and this time it would be more likely to make it to the blacklist and that would mean Pakistan would have some financial problems because of international banking restriction. FATF pointed out that in 2018 there were 8,707 STRs (Suspicious Transaction Reports) generated by Pakistan versus 5,548 in 2017. For 2019 Pakistan appears to be generating even more STRs. Pakistan had been on the gray list from 2012 to 2015 and that was bad for businesses that import or export or need to get loans or sell bonds. After 2015 Pakistan was still on the FATF list but not designated as dangerous. Being on the gray portion of the list makes it more expensive to do business and is very bad for the reputation of Pakistan and Pakistanis. China played a major role in keeping Pakistan off the gray list in early 2018 but the odds were against Pakistan staying off the list because it has long been an open secret that Pakistani support for its own pet Islamic terrorists included making it easier for Islamic terrorists, in general, to do business in Pakistan. The United States has been gathering evidence to justify the FATF to put Pakistan back on the gray list (along with Ethiopia, Yemen, Iraq, Syria, Serbia, Sri Lanka, Trinidad and Tobago, Vanuatu and Tunisia). FATF meets every three months to consider new evidence to get nations on, or off, the list. The next review is in February 2020 and the Americans continue gathering evidence. The U.S. now considers Pakistan a problem in the war against terrorism and not a reliable partner. India and Afghanistan share that view as do a growing number of UN members.

 

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