New Cold War With China Possible

New Cold War With China Possible

Australia and China’s relationship seems pretty chummy on the surface.

We’ve spent almost two decades sending our red rocks up through the South China Sea to China’s ports.

In return, the Chinese send a small portion of their people here to study and work.

Some of these students are from wealthy families. Some are from the new middle class, with parents who sacrificed everything for their kids to get an education in the West.

Then, we gladly accept the 1.4 million Chinese tourists and the $10 billion they spend in our economy each year.

We will sell them our houses and our stakes in our agricultural and commodities companies.

Basically, we are happy to take their yuan, no matter how undervalued it is.

What it appears we won’t do is allow Chinese companies to contribute to our infrastructure.

And it’s not for a lack of trying, either.

In 2012, Chinese telco Huawei set up its first-ever international office in Australia. The base was created so Huawei could win a chunk of our NBN business.

However, acting on the advice of our intelligence agencies, then Prime Minister Julia Gillard refused. Gillard told the media that Huawei will be banned from involvement in ‘critical infrastructure’.

That’s in spite of the fact that Huawei could probably have built it cheaper than any other competitor.

That was six years ago.

Since then, our revolving door of politicians upheld the ban. Plus, Japan, New Zealand and the US have all banned Huawei from being involved in government infrastructure in that time.

And now, we find the tech giant back in the headlines once more. The arrest of the company’s chief financial officer, Meng Wanzhou, in early December was an opportunistic political power play.

However, I suspect the real reason for the arrest is yet to be revealed.

As Jim points out below, just how deep do the ties between Huawei and the Chinese government run?

This isn’t the end of the story, either.

This could very well be the catalyst for the trade war to become something much worse.

That could mean less yuan coming into Australia.

Read on for all the details.

Kind regards,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

New Cold War
With China Possible

Jim Rickards

On Saturday, 1 December, at the end of the G-20 meeting in Buenos Aires, US President Donald Trump and his team of trade and finance advisers had dinner with Chinese President Xi Jinping and his team.

The purpose was to discuss the ongoing trade war between China and the US.

Trump’s team had presented the Chinese team with 142 specific trade demands. The two sides went over the demands one by one during the course of their two-hour dinner.

When they were done, both sides announced a 90-day ‘truce’ in the trade wars.

China agreed to negotiate in good faith on the demands and the US agreed to delay the imposition of tariffs scheduled to go into effect on 1 January 2019, lasting until 1 March 2019, to give the negotiations time to proceed.

This was not a final deal, but it did allow markets to breathe a sigh of relief.

The initial response of the stock market was a rally.

Then Canada went and arrested the chief financial officer of a very powerful Chinese company.

Canada and the US work together

Only hours after the Trump-Xi announcements, Canada arrested Meng Wanzhou, the CFO of Huawei, in Vancouver, British Columbia.

The arrest was at the request of the United States, which had issued an arrest warrant for Meng last August on numerous charges, including money laundering, espionage, and selling telecommunications equipment to Iran in violation of US sanctions.

Meng was arrested during a stopover in Vancouver on a flight from China to Mexico.

She was avoiding US territory but was apparently unaware of the US arrest warrant and the degree of cooperation between Canada and the US on criminal matters and extradition.

Huawei is the largest telecommunications equipment manufacturer in the world and one of the largest tech companies in China. Meng is the daughter of Huawei founder Ren Zhengfei.

The arrest of Meng threw global markets into turmoil.

Political pawn or genuine threat?

One week later on Sunday, 9 December, Canada was asking that Meng remain in jail pending the outcome of a hearing on whether she should be extradited to the US to face a criminal trial.

Meng’s lawyers were arguing that she should be granted bail and was not a flight risk because she owned property in Vancouver.

She also argued that her health would be adversely affected by further incarceration. The Canadian court took these claims under advisement and planned to rule soon on the bail and extradition.

The Huawei arrest was more than a shock to markets.

It was also a shock to the US-China trade war negotiations. Both sides pledged to keep the negotiations on track, but China was publicly outraged by the arrest.

China told the Canadian ambassador that there would be ‘severe consequences’ if Canada did not immediately release Meng.

China’s Vice Foreign Affairs Minister, Le Yucheng, told the US ambassador to China that ‘the actions of the US seriously violated the lawful and legitimate rights of the Chinese citizen, and by their nature were extremely nasty’. Le also said, ‘China will respond further depending on US actions.

The Meng arrest is significant in its own right, but is even more significant when taken in the full context of US-China relations and the possibility of a new Cold War.

Plot twist to trade war truce

Huawei is not only China’s largest telecommunications firm; it is a leader in the rollout of 5G technology for mobile phones. Huawei is alleged to have deep ties to the communist Chinese government and the People’s Liberation Army (PLA).

Huawei founder Ren Zhengfei started his career as a military technologist at the People’s Liberation Army research institute.

US intelligence estimates that Huawei is de facto controlled by PLA, and has engineered trapdoors and other devices in Huawei equipment that allow Huawei to spy on customer message traffic and to capture private data.

The US has already refused to allow Huawei to make acquisitions of US companies and has banned Huawei from sales of equipment to the US government.

The US has also urged its intelligence partners in the ‘Five Eyes’ (the UK, Canada, Australia and New Zealand) to do likewise.

Huawei’s business is suffering worldwide just as the 5G tech implementation begins.

The next steps in the case are still pending. The British Columbia court needs to decide on bail and possible extradition.

If Canada extradites Meng to the US, she will almost certainly face a trial on criminal charges unless a plea deal can be worked out. In a worst-case scenario, Meng will spend years in a US prison.

At best, the case will inflict major damage on US-China relations and the prospect for peace in the trade wars.

The cold war begins in April 2019

In the meantime, the 90-day ‘truce’ that Trump and Xi negotiated in Buenos Aires is still officially in force.

The Chinese could offer token concessions and use the 90-day window to cook up new happy talk.

Their hope will be that after 90 days of negotiations and some minor concessions, the US will be reluctant to break the peace or impose the additional tariffs.

The 90-day period will also give the Chinese lobbyists time to gin up opposition to tariffs from US agricultural importers.

This is an important political constituency for Trump as we move closer to the 2020 presidential election season. Trump needs support from agricultural states like Missouri, Iowa and Wisconsin to win his second term as president.

It seems the Chinese understand US politics better than most Americans.

The Chinese are also notorious for saying one thing and doing another.

They will gladly sign an agreement that calls for reductions in the theft of intellectual property and then turn around and keep up the thefts (perhaps with a more covert method).

The Chinese have consistently broken their word when it comes to trade, beginning with their admission to the World Trade Organisation in 2001. They will do it again once they tie the US’s hands on tariffs.

The good news for the US is that the Chinese tricks are fairly well-known by now.

Trump’s most trusted and powerful adviser on trade is ambassador Robert Lighthizer, who was at the dinner. Lighthizer sees the Chinese for what they are, and knows the litany of broken promises and lies better than the Chinese leadership.

If substantive improvements with adequate verification cannot be agreed upon with the Chinese by 1 April 2019, Lighthizer is ready to immediately raise tariffs on China.

President Trump agrees with Lighthizer and will not hesitate to raise the tariffs.

At that point, the trade wars will be back with a vengeance.

All the best,

Jim Rickards Signature

Jim Rickards,
For The Daily Reckoning Australia