Australia is the key to global intelligence

Australia is the key to global intelligence

Think of today as your ‘cheat sheet’ to this year.

And it’ll come as no surprise that China is at the centre of it.

Today, Jim covers the trade wars, Chinese data scams and coordinated global intelligence agencies.

Chinese economic woes directly impact our economic fortunes.

These were the subjects we ended 2018 with…but they will really unravel into 2019.

Perhaps the biggest story of them all, however, is the coordination of the Five Eyes (an intelligence alliance comprising Australia, Canada, New Zealand, the UK and the US).

It’s not something we hear much about in Australia. Yet Australia is a key member of the Five Eyes.

And the Five Eyes are working together to prevent Chinese-owned telecommunications company Huawei from gaining any significant government contracts.

You may just be hearing about this now.

But Australia was one of the first countries to ban Huawei’s involvement in the NBN back in 2012. Japan and New Zealand quickly followed our lead.

Subsequent Australian governments have put a full ban in place when it comes to now building the 5G network.

In 2016, Huawei was courting the Solomon Islands government, trying to convince it to allow the Chinese telco to lay an undersea cable between the Solomon Islands and Sydney.

Chinese presence in the Pacific is an issue for Australian security.

To avoid it, Australia signed a $137 million agreement with the Solomon Islands to lay 4,000 kilometres of cable in July 2018.

As Jim explains below, this won’t be the last time Huawei misses out on a Western government gig. The Chinese telco is actively being pushed out of government business.

2019 is going to be big.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

China falls victim to
the Five Eyes

Jim Rickards, Strategist

Jim Rickards

Intelligence agencies from the CIA to MI6 are practised in the arts of deception and denial. No one trusts anyone.

That tradecraft is useful when you’re outwitting the enemy. But how do you engage in honest exchanges of information with friends?

A solution to this conundrum is called the Five Eyes.

This term refers to the intelligence agencies of five close allies who share a language and cultural history, and have long cooperated in intelligence sharing.

The Five Eyes are the US, the UK, Australia, Canada and New Zealand.

While each of the Five Eyes has its own history and unique tools, they all evolved along the lines created by the UK’s MI6 international intelligence service.

Chinese telco kicked out of deals

This shared tradecraft includes officers who recruit and handle spies (called ‘secret agents’ or ‘case officers’), the use of front organisations (called ‘cut-outs’), the use of disguises, and a network of safe houses.

The 21st-century version includes spy satellites, listening devices and message traffic intercepts. Intelligence agencies worry about sharing information because it can reveal sources and methods, or it could fall into the hands of moles in the agencies with whom it is shared.

The Five Eyes have the highest level of trust and therefore share information and plans more freely.

The latest operation of the Five Eyes involves the destruction of Huawei, which is the world’s largest smartphone manufacturer and one of the largest companies in China.

Huawei has implanted bugs and backdoors in its smartphones to capture message traffic and relay it to Chinese intelligence.

Huawei is now making a play as a supplier to the most important 5G networks in the world.

Yet, the Five Eyes and their host governments are determined to stop Huawei in its tracks.

Huawei has been barred from making acquisitions of tech companies in the US, the UK, Australia, Canada and New Zealand, and is being banned from contracting on government telecoms systems.

Other allies, including Japan, are joining the effort to bar Huawei from all 5G networks.

Canada recently arrested the CFO of Huawei pursuant to a US arrest warrant — a good example of Five Eyes cooperation.

This attack on Huawei is just getting started.

Huawei is beginning to feel the scrutiny of the Five Eyes.

The clock is ticking on the China trade scam

These Chinese problems aren’t contained to being locked out of major global technology developments.

Last year’s trade war is now set up to become this year’s big dilemma. 

Wall Street and China can’t seem to grasp the fact that the US-China trade war is real and the clock is ticking on massive new tariffs.

The wishful thinking since last January is that the trade war is mostly for show, both sides are posturing, and a ‘deal’ will soon be worked out that allows Trump to claim victory without really changing very much from China’s perspective.

We’ve said all along that this misreads the situation.

The US is demanding real, verifiable changes regarding China’s theft of intellectual property, limits on US investment in China, and technology transfers from US companies that do manage to get in the door.

Nothing less is acceptable to Trump.

Less than two months until things unravel

After a year of tit-for-tat tariffs and fruitless negotiations, the two sides finally agreed on substantive negotiations on the hard issues.

The agreement was reached at the now-famous dinner in Buenos Aires on 1 December 2018, with President Trump and Chinese President Xi Jinping and their staffs in attendance.

The US has set 1 March 2019 as a deadline for a satisfactory conclusion to these negotiations.

So far, China has offered mostly meaningless concessions, including putting some tariffs back where they were before the trade war erupted (no net gain for the US) and modifying its ‘Made in China 2025’ initiative to dominate the technologies of the future (a purely cosmetic change).

Meanwhile, the US has kept up the pressure by the Canadian arrest of the CFO of Huawei, and making it clear that the 1 March deadline is hard and fast.

We have less than 60 days left before the deadline. Don’t expect much progress between now and then.

If enough progress is made, an extension might be agreed upon.

But for now, China is just going through the motions and Wall Street is sleepwalking off a cliff.

The world may discover on 1 March that tariffs are going up and the trade war is just getting started.

A crash is coming

The data from China is even worse than it looks.

We’ve been saying for over a year that Chinese growth figures are misleading and a debt-related market crash is just a matter of time.

Now, the data have confirmed this view, and even the Chinese government can’t cover up the decline any longer.

China is between a rock and a hard place.

If the government tries to sustain economic growth through debt, it just builds a bigger debt crisis down the road.

But if it tries to rein in credit growth, it slows the economy and risks popular discontent through higher unemployment, inflation and debt defaults.

A partial effort to reduce debt creation in 2017 has now come home to roost in the form of much slower growth.

China’s problems are worse than that because debt is so high that even more debt does not produce the expected growth.

China is trying to thread the needle with infrastructure investment, but even that doesn’t work because the infrastructure is unproductive (white elephants and ghost cities), while the debt is all too real.

What happens in China won’t stay in China; a slowdown there will produce a global slowdown as China reduces input purchases and the trade wars slow down Chinese exports.

The Chinese communist government fears popular unrest more than slow growth.

In 2019, it may get both.

All the best,

Jim Rickards Signature

Jim Rickards,
For The Daily Reckoning Australia