Tag: Business owners

Whoops! Just slipped right past me! …

From the Daily Beast, a wowser of a scoop – Berkeley’s $220M Mistake Exposed in Massive Deal With China
 
from the article – “U.C. Berkeley takes the matter of undue foreign government influence seriously,” he said.
 
That much is quite clear. Berkeley can clearly undercut the businessman in selling CCP the rope. Go Golden Bears!
 
And as with lots of scandals, the flaw may not be in the deal but in the avoidance of reporting. Again and again, whatever happened to avoiding the hint of impropriety?  Answer – when you lose civil society or public morality, all that is left is the finely parsed letter of the law.
 
 

Berkeley’s $220M Mistake Exposed in Massive Deal With China

 
OOPS!

U.C. Berkeley repeatedly neglected to disclose its deal with China to the U.S. government.

Yuichiro Kakutani

Updated May. 22, 2023 7:18AM ET Published May. 22, 2023 4:59AM ET 
 

U.C. Berkeley has failed to disclose to the U.S. government massive Chinese state funding for a highly sensitive $240 million joint tech venture in China that has been running for the last eight years.

The Californian university has not registered with the U.S. government that it received huge financial support from the city of Shenzhen for a tech project inside China, which also included partnerships with Chinese companies that have since been sanctioned by the U.S. or accused of complicity in human rights abuses.

The university has failed to declare a $220 million investment from the municipal government of Shenzhen to build a research campus in China. A Berkeley spokesperson told The Daily Beast that the university had yet to declare the investment—announced in 2018—because the campus is still under construction. However, a former Department of Education official who used to help manage the department’s foreign gifts and contracts disclosure program said that investment agreements must be disclosed within six months of signing, not when they are fully executed.

Berkeley admitted that it had also failed to disclose to the U.S. government a $19 million contract in 2016 with Tsinghua University, which is controlled by the Chinese government’s Ministry of Education.

The project’s Chinese backers promised lavish funding, state-of-the-art equipment, and smart Ph.D. students for Berkeley academics researching national security-sensitive technologies, according to contract documents exclusively obtained by The Daily Beast. After the project got underway, Berkeley researchers granted Chinese officials private tours of their cutting-edge U.S. semiconductor facilities and gave “priority commercialization rights” for intellectual properties (IP) they produced to Chinese government-backed funds.

A Berkeley spokesman said that Berkeley only pursued fundamental research through TBSI, meaning that all research projects were eventually publicly published and accessible to all; it did not conduct any proprietary research that exclusively benefited a Chinese entity.

Still, Berkeley’s ties to the Chinese government and sanctioned Chinese companies are sure to raise eyebrows in Washington, where U.S. policymakers are increasingly concerned about the outflow of U.S. technology to China, especially those with military applications.

Under the radar

The project is called the Tsinghua-Berkeley Shenzhen Institute (TBSI), a joint research initiative backed by Berkeley and Tsinghua University, a top science school often called “China’s MIT.” The institute’s website shows that dozens of Chinese companies, including Huawei and others sanctioned by the U.S. government, also supported the institute as industrial advisers.

Through TBSI, Berkeley built an unusually close partnership with the Chinese government. Berkeley’s then-vice-chancellor, Patrick Schlesinger, said in 2015 that the “active participation of the Shenzhen municipal government” is an “unusual feature” of TBSI that sets it apart from other U.S. universities, according to meeting minutes obtained by The Daily Beast.

And yet, Berkeley never disclosed a single cent of the financial support it received from Chinese sources to the federal government for TBSI, possibly not complying with a U.S. disclosure law that requires universities to report large donations from foreign sources.

“If the facts are as Berkeley’s documents seem to assert, this is exactly what universities must report,” Dan Currell, a former deputy under secretary at the Department of Education—who has also worked on policy related to foreign influence in U.S. universities—told The Daily Beast. He later added that “the school isn’t complying with a clearly applicable federal statute.”

Memorandum of Agreement between China and UC Berkeley.
Photo Illustration by Luis G. Rendon/The Daily Beast

To this day, TBSI remains one of the most fully realized examples of U.S.-China research collaboration. In the 2021 fiscal year, the institute hosted 586 students from across the world and pumped out more than 130 science and engineering articles. According to its website, at least 20 Berkeley academics participated in TBSI, working alongside dozens of Chinese and international colleagues. At its peak, the institute hosted 18 laboratories located within three research centers, each focused on a research area relevant to national security: data science and IT; environmental science and new energy production; and public health and precision medicine.

Since the early days of the institute, the Chinese government has occupied three out of 11 seats on the governing board, according to a 2015 Berkeley document. Shenzhen’s then-mayor, Xu Qin, attended the 2014 signing ceremony that launched the institute. Tsinghua University President Chen Jining, another attendee of the signing ceremony, explicitly positioned TBSI as a “university-government-industry partnership.” TBSI also has a Party committee, which in 2018 held a seminar to study a speech by Xi Jinping.

While both Berkeley and Tsinghua contributed faculties to TBSI, the Shenzhen government was responsible for the lion’s share of the program’s funding, promising to provide the “necessary financial support” for the institute, according to 2014 contracting documents obtained by The Daily Beast. In the documents, the government said it would cover a wide range of initial expenses, including “costs of equipment, settlement allowances for newly recruited [principal investigators], as well as the cost of all day-to-day operations (ie. salaries of staff, research subsidies, and student scholarships, etc.)”

As part of the promised financial support, the Shenzhen municipal government first promised in 2014 to pitch in $52 million to support the “initial phase of work” for TBSI, according to a 2015 Berkeley document. More than half of the funding was to finance the purchase of new equipment in China “in consultation with Berkeley faculty… effectively adding facilities and equipment to Berkeley’s research capacity.”

In 2018, the Shenzhen government drastically scaled up their monetary support for the project, agreeing to spend at least $220 million to build a massive research campus in Shenzhen with nearly 1.7 million square feet of classroom space and cutting-edge research facilities. Tsinghua University also chipped in $19 million to fund TBSI.

Berkeley has repeatedly failed to disclose any of the above donations to the Department of Education. According to Currell, U.S. law requires all annual foreign donations exceeding $250,000 to be reported to the department, which in turn publicizes the donations to the general public.

A Berkeley spokesman acknowledged that it failed to report to the U.S. government the $19 million contract with Tsinghua University, but said the rules at the time were less clear.

“Like many universities across the country, UC Berkeley did not have a reporting process in place… in 2016, thus the initial sponsored research agreement was not reported. In 2018, due to national security concerns with China and countries of interest, the Department of Education’s reporting process was recertified and all universities were required to start reporting,” he said.

The $19 million—which was spread over five years from 2016—was thus never reported.

He said Berkeley also failed to report a renewal of the TBSI agreement in January 2022, an omission that he blamed on “an issue in the query pulling the data.” The spokesman said Berkeley corrected the error on Feb. 14, 2023, five days after The Daily Beast first reached out for comment for this story.

On the $220-million investment from the Chinese municipal government, the spokesman initially said: “UC Berkeley does not have any ownership of property at Tsinghua, therefore, is not required to report investments made in, or for, the Tsinghua University campus.” He later admitted that “the provision of a facility and/or equipment could qualify as an in-kind contribution and thus require disclosure.”

Still, Berkeley has not declared the foreign investment because the campus is still under construction, according to the spokesman.

However, according to a 2019 Department of Education guidance, universities must report foreign contracts “at the time that the institution ‘enters into’” them. Currell, the former official, noted that the universities must in practice disclose the foreign investments within six months of the research partnership being signed, not when it is implemented.

“Under the rule, whenever they signed the contract is when they had a reporting obligation within six months,” Currell said.


Perks
The Chinese government funding directly benefited Berkeley faculty members, according to a 2015 Berkeley document obtained by The Daily Beast. The government funding benefited them as researchers, as they used the construction of the new campus as an opportunity to “procure equipment that is not presently available at Berkeley, thus extending [their] research capabilities.” It also benefited them as private individuals, as faculty members earned “consulting fees” for working as research advisors.

After the donations from the Chinese state, TBSI and Berkeley researchers gave access to their government patrons.

Throughout the late 2010s, Berkeley officials frequently gave exclusive tours of the Marvell nanofabrication laboratory, a cutting-edge facility used for semiconductor research, to Chinese delegations connected to TBSI. According to a press release, the Chinese visitors “hoped to learn information” from the lab to “build a better lab abroad”—they did not explicitly say their knowledge would be deployed back in China.

These Chinese delegations to the lab went beyond normal academic exchanges between researchers. Multiple senior Chinese officials, including the vice mayor of Shenzhen and the party secretary of Shenzhen, visited the lab, surveying one of the most advanced semiconductor fabrication facilities in the United States.

There is no evidence that Berkeley or its staff broke U.S. export-control laws by organizing private tours to help Chinese individuals build their own cutting-edge semiconductor labs. However, Robert Shaw, an export-control expert at the Middlebury Institute, said the trip would have had to be organized with the utmost care to ensure that China does not get access to controlled U.S. technology.

“That’s a tough thing, a facility tour like that,” Shaw said. “That’s something that has to be organized very carefully. They need to be extremely careful about what’s visible in there [to the visitors].”

The Chinese government also gained access to some IPs created through research at Berkeley. Shenzhen Waranty Asset Management, a state-owned enterprise controlled by the Chinese government, served as an industrial sponsor for the $19 million grant from Tsinghua University, according to Berkeley’s spokesman. In exchange for the financial support, a Waranty-owned angel investment fund received “priority commercialization rights” for intellectual properties produced by TBSI, according to its LinkedIn page.

The Berkeley spokesman explained that Waranty as the industrial sponsor got “first right to negotiate a license to IP arising under the sponsored research agreement,” an arrangement that he said was the same as those given to other industrial sponsors at American universities. The spokesman said that Waranty did not exercise their licensing rights and the three inventions that came out of the sponsored research were “dedicated to the public.”

The Berkeley spokesman emphasized to The Daily Beast that all TBSI-related research projects were “fundamental research that is openly and publicly published for the benefit of the entire scientific community,” rather than proprietary research that exclusively benefited Chinese entities. He also added that the university does not license IPs to foreign entities that are under sanctions or export control by the U.S. government.

“U.C. Berkeley takes the matter of undue foreign government influence seriously,” he said.

Tsinghua Uni prez shakes hand with a Berkeley dean.
Photo Illustration by Luis G. Rendon/The Daily Beast/Berkeley Press Release

 
Shaw said that while it is possible for TBSI to work with Chinese government-backed funds in a legally above-board way, the language about priority commercialization rights is a “red flag in an export-control compliance sense.”

“That sort of language sounds like the purpose of the research is IP generation versus the sharing of knowledge globally in an academic context,” he said.

In addition to its funding from the Chinese government, TBSI also courted support from dozens of Chinese companies. Executives from 21 Chinese companies sat on TBSI’s industrial advisory board, supporting the “creation of joint laboratories, collaborative research projects and visiting industry fellows” at TBSI and enjoying access to Berkeley researchers.

Companies later sanctioned or put under export control by the U.S. government—including telecom giants Huawei and ZTE and the drone company DJI—sat on the industrial advisory board; so too did Chinese firms accused of complicity in human rights abuses, such as internet company Tencent and automobile firm BYD.

Some of these companies that participated in TBSI benefited from Berkeley’s innovation. Take for example Shenzhen Waveguider, a Chinese biotech company that built a joint laboratory with TBSI. Waveguider Chairman and CEO Yu Dongfang reportedly said that by leveraging Berkeley’s “best-in-the-world” biosensor technology, Waveguider was able to achieve multiple innovations in the field of diabetes medicine through its partnership with TBSI.

Berkeley’s comments regarding its Chinese corporate sponsors have also been inconsistent. A Berkeley spokesman initially told The Daily Beast that no Berkeley faculty members ever participated in TBSI’s big data research laboratory. The statement contradicted Berkeley’s own websites, which listed three Berkeley academics as participants in the lab. (The spokesman later acknowledged that one of the researchers conducted some work with the big data research lab, but said that the other two left the project in its early stages.)

For the time being, Berkeley appears intent on continuing the TBSI, albeit on a narrower scale; in 2022, Berkeley administrators announced a “phase II” for the institute, committing to support the partnership for another five years.

However, some Berkeley officials may be having second thoughts about its relationship with China. In 2018, Berkeley submitted a complaint to the U.S. Trade of Representatives, saying that Beijing’s tech regulations unduly restrict the university’s ability to license IPs in China.

And even as far back as in 2015, a member of the U.C. Board of Regents expressed reservations about Berkeley’s participation in TBSI.

“Who would decide what research directions to take or what ethical rights they should follow?” Regent Hadi Makarechian said in 2015 at a board meeting about TBSI. “Because we hear all that stuff that in China, they do all this research that’s not ethical.”
 
 

Crash out (2)

update at November 13, 2019 to Crash out –

Crash out may not happen.  We will find out in January.  But the wounding of the British economy is happening as we type, and this piece in Foreign Policy – Chinese Firms Can’t Avoid Being Party Tools – is a good example of how and why Brexit is great for business … in China.

If you can’t get Foreign Policy, let me summarize.  British Steel, an old-line British manufacturer, is being sold to Jingye Group, ostensibly a private steel-maker in China.  This should save thousands of jobs in Britain and help towns in northern England devastated by privatization (!) and changes in the market for British Steel.

This deal is promoted as a private transaction, since Jingye is not owned directly by the government.  But no matter.

As we have discussed many times, there is no such thing as a private company in China, particularly now that CCP has decided that all companies must have a CCP cell within top management and all – all – internal information, patents, contracts, revenues, orders, suppliers, employee information – must be available to the government upon request. See IP Theft in China – No More Worries.   Once a business is beyond the mom-and-pop stage, there is no such thing as a private business as we understand the term.

From the article –

In China, the power of the CCP is an underlying reality in every sector—not a goal for the party so much as an assumption about the state of the world. The CCP simply must lead and thus, all measures that defend and further entrench the position of the party are permissible.

That has produced a state of affairs where no organization is beyond the orbit of the CCP.

The author reminds us of two illustrative events – the first hypothetical – thre absurdity, if it had occurred in China, of Apple defying the FBI in 2015 over encryption of an iPhone; the second, all too real – the Sanlu milk formula scandal in 2008, right before the Olympics in Beijing –

Take the Sanlu milk scandal, in which at least half a dozen babies died as a result of tainted formula, and tens of thousands became sick. The company’s board belatedly decided to issue a full product recall in the face of overwhelming evidence that its product was damaging infants. The board was supposedly legally autonomous, but its decision was overruled by the Shijiazhuang city government as political considerations took precedence over public health. Baidu, China’s internet giant, was reportedly part of the cover-up that followed, all while catastrophic damage to Chinese infants occurred. The scandal only came to light because of actors entirely outside China. Sanlu’s New Zealander partners at the dairy multinational Fonterra, after extensive deliberation, eventually reported concerns themselves to the central government via their country’s ambassador in Beijing.

What marks out the British Steel acquisition is not the pyrotechnics but the mundanity of the deal. Each time a CCP entity acquires a company in this way, the U.K. becomes slightly more entangled in the party-state’s networks. Such entrenchment makes pushback harder should a reckoning ever come. Other countries, such as Australia, are holding a national conversation about their involvement with the Chinese party-state. The U.K., distracted and divided by Brexit, is in no position to do so.

 

All you need is the background music to the movie Jaws.

original and prior update here.

Crash-out

Or D-Day – Disaster Day – minus 7

The original D-Day was salvation for Britain and Europe – even, in its way, for Germany.  This one seems less promising.

Not much to say anymore.   Cue the violins and watch the China moves.

Update at April 28 – Aside from the current delay in the crash-out – From Brexit to Belt and Road by Keith Johnson in FP – Britain’s turn to China for salvation

Read Ives Smith at Naked Capitalism – https://www.nakedcapitalism.com/2019/03/brexit-opening-the-seals.html

She opens with

And I saw in the right hand of him that sat on the throne a book written within and on the backside, sealed with seven seals.

And I saw a strong angel proclaiming with a loud voice, Who is worthy to open the book, and to loose the seals thereof?

– Revelations 5:1-2

I didn’t know, but this is where the Four Horsemen come from.  And it is the apocalypse.

Right following the Brexit vote in 2016, I thought Britain had voted itself out of being a major world economy.  Now it appears we will see if that was right.  China, of course, will be sympathetic to a now developing country that needs assistance. 

This can only be shuang yin – win-win for China.  Or maybe win-win-win.   Help the Chinese economy, better entre to the EU, more confounding of US policy. 

Shuang Yin Win-Win

 

Macroaggressions

From America Online – Several billionaires have recently criticized the wealth tax proposal of presidential candidate Sen. Elizabeth Warren (D-MA). And fellow lawmaker Rep. Alexandria Ocasio-Cortez (D-NY) has come to her aid.   AOC: ‘Y’all, the billionaires are asking for a safe space’

But perhaps the billionaires threatened with having to pay taxes almost like the rest of us have learned how to do political threats from their experience with China. 

China can threaten the NBA based on a single vague tweet from an otherwise obscure NBA general manager.  A China so afraid of a tweet is a China willing to transform a nonaggression into a macroaggression, and needs special care and handling from the world.  Perhaps CCP doesn’t get sufficient love from its family at home. 

China is clearly looking for a safe space in the world.  The Chinese mentality is that China is constantly under attack from the barbarians, whether it is xiongnu in the north two thousand years ago or the western barbarians whose sinister plans to destroy CCP and China were exposed in 2013 by Mr. Xi in Document No. 9. 

And maybe China has learned from the NBA – the best defense is a good offense. 

So China has created a safe space for itself by threatening multinational corporations everywhere, and by caving to the tantrum the multinationals have temporarily created a safe space in which to do business until the next unfortunate lower level employee tweet, or some corporate employee’s kid in Kansas draws a map in school showing Taiwan as an independent country. 

Now the companies and their owners are seeking a safe space from the horror of paying more in taxes in the US. 

CCP has a safe space.  The billionaires have a temporary safe space in China, and now seek a safe space from AOC in the US.  The US Congress – at least the Senate – has a safe space behind the orange haired baboon.

What would be a safe space for the rest of us, concerned not only about taxes but free expression?

Attached, a list – soon to be outdated – of multinationals which don’t remember first they came for the socialists.  From Lucas Niewenhuis at Supchina, All the International brands that have apologized to China.

The definitive list of international companies that have issued apologies to maintain their market access in China in recent years. Plus, a record of the even more widespread phenomenon of self-censorship for the Chinese market.

Read the whole list.  Fun and shame, at the same time.

PS – Remember that China creates a safe space for multinationals only temporarily.  Foreigners can be had in more sophisticated ways than blocking markets.  I wrote about this in IP Theft – No More Worries and Steve Dickinson at ChinaLawBlog follows up his prior posts with this below.  Anything encoded by a foreign company – patent information, employee information, market information, customers, clients, revenues – will be available – without asking – to CCP.  

China’s New Cryptography Law: Still No Place to Hide

….

So in the end, inviting foreign providers and users of cryptography is just a trap for the unwary. Once data crosses the Chinese border on a network, 100% of that data will be 100% available to the Chinese government and the CCP. Cryptography may work well to prevent access by the public, but all this data will be an open book to the PRC government.

This then raises major issues for U.S. and other country entities that are relying on end to end encryption in China as an exception to U.S. export control rules. Under China’s new system, end to end encryption will no longer exist in China and for this reason this exemption from U.S. export controls will no longer be effective. As the U.S. expands the scope of technology subject to export controls, the risks for foreign companies will become progressively more significant.

No place for a multinational to hide – at least in China. Safe space is always in the eyes of the aggrieved. 

News: IP theft – no more worries

Just a brief note –  the FBI has more than 1,100 China IP theft  cases pending against Chinese entities or individuals.  Not a typo – 1,100.

 For American companies not doing business in China – we should not say, no exposure to China – the FBI investigations may still be something of a bulwark against theft.  Although, one notes, most of the investigations and arrests are in arrears of the crime.

And back nearly a year ago, Mr. Xi promulgated a new IP theft policy which threatened Chinese businesses that steal.  The policy was announced within hours of a Xi-Trump meeting last December, and comprised a coordinated efforts across 38 Chinese government agencies with 38 different punishments.  The insincerity of this announcement, coming immediately upon the leaders’ meeting, was palpable.  If you want to believe, you may.  I wrote about this at the time in Everything new is old again. 

But with a new Chinese government policy, IP theft in China is no more.

Now comes the latest entry in China’s bid to become the first panopticon state – the cybersecurity law that permits government access to all information, IP or otherwise, stored on any server available to any foreign business operating in China.  China Law Blog has details – China’s New Cybersecurity System – There is NO Place to Hide.  From the blog post –

This result then leads to the key issue. Confidential information housed on any server located in China is subject to being viewed and copied by China’s Ministry of Public Security and that information then becomes open to access by the entire PRC government system. But the PRC government is the shareholder of the State Owned Entities (SOEs) which are the key industries in China. The PRC government also essentially controls the key private companies in China such as Huawei and ZTE and more recently Alibaba and Tencent and many others. See China is sending government officials into companies like Alibaba and Geely and China to place government officials inside 100 private companies, including Alibaba. The PRC government also either owns or controls China’s entire arms industry.

Simply put, the data the Ministry of Public Security obtains from foreign companies will be available to the key competitors of foreign businesses, to the Chinese government controlled and private R&D system, and to the Chinese arms industry and military.

The takeaway on this is that the fear of IP theft in China is no more.  What used to be considered theft, done by stealth, is now a legal process.  As Steve Dickinson from China Law Blog says, welcome to the new normal.   And anyway, remember – information wants to be free.

Shuang Yin Win-Win

Another update at July 24, 2019 – Boris Johnson became Prime Minister today.  From the South China Morning Post –


Boris Johnson, Britain’s prime minister-designate, said his government would be very “pro-China”, in an interview with a Hong Kong-based Chinese-language broadcaster shortly before he was chosen to succeed Theresa May on Tuesday…

Speaking to Phoenix TV, Johnson backed Chinese President Xi Jinping’s infrastructure-based Belt and Road Initiative and said his government would maintain an open market for Chinese investors in Britain.

Crash out is now scheduled for October 31 – Halloween in the US, when goblins arrive. 

Update at June, 2019 – the March, 2019 crash-out has been delayed, but that does not apply to earnest Britain-China cooperation – Sino-UK dialogue yields dozens of outcomes.

The 10th China-UK Economic and Financial Dialogue has just concluded in London.  China will help Britain in its soon-to-be developing country status by offering openings in financial and banking services, among many other programs to help British companies.  From the short article –

Christopher Bovis, a professor of international business law at the University of Hull, said this round of dialogue signified the importance of the future of Sino-UK trade relations, with an emphasis on large infrastructure projects and financial services.

“Both economic sectors will benefit enormously from Chinese investment in the UK, and China is expected to reciprocate with more market access to its evolving economy,” he said.

Funny, I didn’t hear much support from Britain for Hong Kong protesters in the recent extradition law conflict.

 ——–

______

Shuang Yin  Win-Win    February, 2019

Now that a crash-out Brexit seems all but assured, where will Britain turn for trade deals?  The kind of relationship that the British government wanted – like that of Canada or Norway with the EU – takes years to negotiate, under favorable circumstances.  There has been discussion for more than ten years that the special relationship between the US and Britain – forged from the mid-19th century and cemented between President Roosevelt and Prime Minister Churchill in World War II – is no longer so compelling.  The EU without Britain is still a huge and attractive market for US trade in both directions.

As of March 29, 2019 – in a bit more than a month – there will be hundreds of treaties and agreements to negotiate, suddenly, quickly, and in great detail.  Some agreements will probably get done – ability of British truck drivers to deliver goods through the Chunnel into EU turf, and ability of airplanes to take off from Heathrow bound for destinations in Europe using parts and crew that, without certification by the EU, would be not allowed.

But where can Britain turn for trade deals, quickly, without years of complicated negotiations?  What large trading partner is willing to set aside the details of complex agreements when mercantile interests, not to mention future geopolitical support, are at stake?  What large trading partner can act quickly, based on personal leadership from a president or prime minister or general secretary?

In October, 2015, a few months before the Brexit vote, Xi Jinping visited the UK, and  demonstrated his prescience –

“The UK has stated that it will be the Western country that is most open to China,” Xi told Reuters ahead of his first visit to the country as president.

“This is a visionary and strategic choice that fully meets Britain’s own long-term interest.”

UK Prime Minister David Cameron, speaking on CCTV, China’s state broadcaster, said the visit would mark a “golden era” in the two countries’ relationship.


Among items looted from the Summer Palace in 1860 – a blue and gold cloisonné “chimera”—a mythic animal with a lion’s body and dragon’s head.  The Garden of Perfect Brightness – Visualizing Cultures, MIT    Could the chimera’s lion’s head be compatible with the British Lion?  


Source: Tracy Ducasse, creative commons license

Politically, China has always been willing to play a long game for economic access, political favor, and “special relationships.”   But in 2015, I don’t think Mr. Xi was expecting such a quick return on the investment in his state visit.

Even in 2015, Britain said little about China’s incursions into the South China Sea.  A bit unusual for the country that used to rule the waves, and administered Hong Kong, Malaya, Singapore, Fiji, the Solomon Islands, and many more.  Britain has said little or nothing about Chinese cyberthreats or IP theft.  Britain was one of the first countries to join the Chinese counterpart to the IMF, the Asian Infastructure Investment Bank. 

In tourism, entertainment, and education, England has become a premier destination for Chinese. A 2015 story from CNN – London has become a favorite destination for young couples to take wedding photos and Chinese viewers are captivated in the millions by shows like “Sherlock Holmes” and “Downton Abbey” … Affluent Chinese parents are sending their children to British schools after some of the most notable names in British education have established campuses in China.

Since 2012, I have written quite a few recommendations for Chinese students to study for a master’s degree in England, at Nottingham, Sheffield, Birmingham, and Manchester.  Only one for a student wishing to study in the US.

China in England to date

China has a one-third interest in England’s first nuclear power plant in three decades, has substantial investments in the Heathrow and Manchester airports, two premier league soccer clubs, and in London’s tallest building.   The UK has been the top EU destination for foreign investment, and is China’s second largest trade partner in Europe.  Huawei is a top supplier to British Telecom, with apparently few qualms on the British side.  Huawei has told British lawmakers that it wants five years to correct identified problems that it denies having in any case.  Ok.   In May, 2016,  London was granted the right to do RMB trade closings  and Chinese government bonds can now be issued in London.   The RMB is now included in the IMF basket of currencies used for calculation of special drawing rights, which can be freely traded for currencies of member countries.  Some big Chinese banks, like China Construction Bank and the Bank of China, have adopted London as their European financial center, although that could easily change.  The nuclear plant deal at Hinkley Point will give two state owned Chinese companies a one-third stake in ownership, with Chinese involvement expected in two future nuclear plants, including a Chinese-designed reactor. 

China in England going forward

Better for China, and worse for negotiators in Britain, is that China will still want strong relations with the EU and will no longer see England as the easy backdoor to the rest of Europe.  In particular, British based banks and investment firms will be representing only Britain, not the rest of Europe.  With regard to the RMB clearinghouse function, Britain will provide access to a market of 65 million people rather than the EU 500 million people.

As the UK economy deteriorates, so will the value of Chinese investments in England, but so will the ability of Britain to strike hard bargains anywhere.  British companies in China have been optimistic about the fallout from Brexit.  But to the extent their concerns are with IP theft or cyberthreats, internet access, or unequal trade practices, they should not expect much support coming from London.  Britain will become a less expensive country in which to invest, British goods will become cheaper in China, but British companies selling in China will find a tougher road.  The British companies are not known for doing well in heavily competitive markets like China.  Supporters of democracy and free speech in Hong Kong should not expect any more moral support from Britain.

Britain will need trade deals quickly, China will not, and in such a balance England should expect to give a little more on political support for Chinese foreign policies and trade policies, despite the early reticence of Mrs. May to Chinese deals.  China will see a weak Britain, the former colonialist, opium supplier and burner of the Summer Palace (yuanmingyuan, Garden of Perfect Brightness) in 1860.  There will be artifacts from the looting of the Summer Palace that China will want returned, but there will be more important concessions demanded.  China will want Britain as a partner in establishing China as the global standard-setter in media relations, internet availability, business practices, finance, and foreign trade.  China might be able to get a good part of that agenda.

win-win

For China, the timing is perfect.  The US will need to consider carefully its special relationship with a Britain that has Huawei internet tools and supports Chinese trade and financial practices.  With Europe worried about the nearer threat from the east, in Russia, China may be able to strike better deals in the remaining EU as well. 

Even without a firm trade deal, China will be ready to help Britain as much as it is to China’s benefit.  Britain, after all, will be another developing economy in need of assistance, and win-win is always the Chinese mantra in such deals.  A win for China in England, perhaps a win for China in the EU, perhaps a win for China in the UN and other international forums.  In 2019 – 70 years after the creation of “new China” – we may see a new Britain as well. 

Brief Note on the Trade Shootout

It is no surprise to anyone familiar with Chinese thinking on foreign policy or negotiating practice that China is  balking at changing its laws to reflect what the American negotiators apparently thought had been previously agreed. From the Reuters article –

 In each of the seven chapters of the draft trade deal, China had deleted its commitments to change laws to resolve core complaints that caused the United States to launch a trade war: Theft of U.S. intellectual property and trade secrets; forced technology transfers; competition policy; access to financial services; and currency manipulation.

One can marvel at American stupidity, if that is what is involved; or simply invoke the negotiating principle that no items are agreed to until all items are agreed to. One can call it Chinese perfidy, but that would simply imply that the Americans are so uninformed about Chinese negotiating tactics that they should not be in the same room with their counterparties at all.  To paraphrase Harold Washington on politics, trade negotiations ain’t beanbag.

So let’s get past the propaganda and posturing. This below is what no negotiating is going to change.  It is at the heart of some American thinking on the trade battle.

This is from Dan Harris at China Law Blog, the best China business advisory online – Doing Business Overseas? Have you Checked Your Trademarks?

From time to time when we write something here with which a reader      disagrees, we get a comment or an email accusing us of scare-mongering…. If I can scare a few more companies into not losing their trademarks I will have achieved my goal.

… stealing a brand name is a lot easier (and usually a lot more profitable) than stealing a product design. Our international IP lawyers deal with probably three trademark theft cases for every one design case.

…

Why does any of this matter?

It matters because if someone beats you to registering “your” trademark and you are having products made with that trademark on it, the person or company who owns “your” trademark can stop you from manufacturing your product or exporting the product with the trademark on it. The The trademark owner can also register its mark with its own country’s customs authorities and then have customs seize the trademarked product at the port, preventing your shipment from leaving the country in which it was made. This is a particularly nasty surprise in those cases where the foreign buyer has already paid for the product.

Who is going to register your trademarks? It is typically someone you know, like someone tied to your factory, one of your competitors or even a disgruntled employee. One of our China lawyers loves to talk about what happened a few years ago when he gave a series of lectures in China on how to protect your brand and product when manufacturing in China. After the talks, he went to dinner with a group of foreign company production managers who talked of how they had for years been urging the foreign companies for whom they worked to register their trademark. The foreign companies consistently refused, claiming such registrations were a waste of money. These production managers then told our China lawyer the following:

We are going to form our own trading company. We will register all the   important trademarks of our employers in China in the name of that trading company. When we get fired, we will register “their” marks with China customs and completely shut down their Chinese operations. It will serve them right for being so stupid and lazy.

Now just for the record, the laws in many countries would not allow these employees to get away with this, but the mere fact they were plotting this ought to scare many of you. In my view, your bigger threats to register your brand name where you manufacture is someone tied in with your manufacturer (they do this so they can stop you from going to someone else) and your competitors (they do this so they can stop you).

Note though that these operation managers did not say they were going to steal their employer’s product design…. But this small expense might give them considerable power over their former bosses.

Is a law or regulation negotiated at the central government level going to put a stop to what is legal, if unethical, in China?  No agreement in law or regulation will stop this sort of practice, if for no other reason than China is big and law and regulation are heavily decentralized.  Forget Mr. Xi’s language about rule of law and forget the pronouncements from the new Foreign Investment Law and forget the new National Supervision Commission combining government and CCP regulation of conduct.

There is one, and only one, issue in the trade shootout, and that is IP theft, whether theft by cyber or by hand.  By this point in 2019, after decades of dealing with Chinese companies, everything else is attributable to American naivete and some assumptions about beanbag. 

The culture of lying and deception in business should be well understood by now.  As I always say, this means no disrespect to those Chinese business owners who manage to conduct business honorably, whether one uses Confucian or western standards of conduct.  The Silver Rule is fundamentally no different than the Golden Rule – treat others as you would want to be treated.  Sunzi and San shi liu ji are about deceiving an enemy.  Business partners in the west are not usually thought of as enemies.

As I wrote in No Way Out from the Middle Kingdom –

Think about it this way – is there another major American trading partner where one need fear being kidnapped over a real or imagined payment dispute?  Is there another American major trading partner for which the best trade advisories scream, danger, danger, danger?

Caveat emptor, especially in China.   Perhaps an urgent note to our dear leader and his negotiators would be useful. 

My First Protest

February, 2015 

We are in Jingzhou, Qing’s home town in Hubei Province. 

We went out with Ben for a walk, and the Jingzhou district government compound is less than a block away.  The district is an urban subdivision, akin to a ward in Chicago, though much bigger than a ward.

The district compound is a series of small buildings, like a small university campus, some offices, some residences.  Leafy, low key, surrounded by the usual wall with three entrances, or gates.  Buildings look old, a bit decrepit, although probably built in the early 1980s. Qing says this area was pretty and clean and orderly when she was growing up.

Now, it is different. 

Everything in Jingzhou is dirty, bad construction site dirty, all the time, everywhere.  Leaves on trees and bushes are covered with a film of greasy dirt.  You can see the green under the dirt, but it is not leafy green.  Some unfamiliar green.  What was built in 1985 has suffered from 40 years of no maintenance, at all. All of Jingzhou suffers from the tragedy of the commons problem – no one is the owner of public space, including buildings, so no one  takes care. But the district is the hub of local government.

Never let it be said that everything in China is better now than it was before.

At the district main entrance about 30 or 40 men and a few women were protesting. I asked Qing to get some details, and we talked to the leaders for a few minutes. They were protesting not being paid – for a year – on a construction project that has been taken over by the government.   The original developers of a wholesale shopping mall fled, the government took the project over, and promised to pay workers.   They are apparently owed several million yuan –  maybe ten million yuan – for themselves, their employees, and suppliers.  It was now close to New Year’s, workers were going home, and they needed their promised wages. They had a cloth sign that blocked the exit for district government employees to leave in their cars.   They had been there for several days, they told us.

Main entrance, Jingzhou District headquarters, after clearance

About 4:30 in the afternoon, the police showed up, two personnel vans, a few cars, some police in riot helmets with the pull down plastic visors and heavy vests with heavy guns, some not.   About thirty policemen to match the protesters.   Police stood around their cars, waited for a few minutes.

The leader walked up separately.  Chengguan is the term for the non-uniformed thugs employed – or let us say, arranged – by the government to break up protests, beat up old women and men, and occasionally murder protesters.   The leader was a thug in anybody’s book.  Big, fleshy, jowly. Scowl. No uniform, just a pullover shirt and a light jacket.  Right out of casting, but this was not rehearsal.  Qing and Ben and I were standing right around the protesters and the police – this entire event was unfolding in the driveway in the picture, between the building entrance and the street, about 30 feet of sidewalk and parkway.  We were taking pictures. The thug threatened Qing, didn’t know what to do with me. 

Qing told the thug that if he wanted trouble, that was ok.  She said she was American.  She was not in a mood for cooperating.  Police wanted us to go away, but we were slow.  Qing said that my presence might have calmed the police a bit in their later action against the workers.   The thug shook his head first, as if telling his subordinates he had decided not to proceed as planned.  He then nodded, the police moved in, tore down the sign, pushed the protesters out of the way, to either side of the driveway.   They broke the protesters up into small groups, and surrounded them against the walls of the entrance. Pretty well organized, like they had done this before.  Very clear that any resistance would be met with overwhelming violence.

The protesters did not react much, at least not much compared with being physically shoved out of the way. The concept was to separate the protesters, and then the police formed a line on both sides of the driveway, so the government officials in their cars could leave on time at 4:30.  

Some people standing around, watching, but most passers-by just kept passing by.  Either not news or not news they want to be a part of.

About half a dozen cars left the compound, moved into traffic.  The police hung around for about 20 minutes, gathered, got back in the vans, left.  No arrests this time, no bloodshed.  The protest was finished for the day. Qing said that the thug was not chengguan, but a representative of the central government security force, a somewhat secretive unit that exists in each city.   I did not know about them.   But the central government has a security presence even in the cities.   I have a couple of pictures, nothing juicy.   I will go back tomorrow, see if the protesters are there again.

My first protest in China.  Things you can learn by going out for a walk.  I knew that it was common for migrant workers to work for six months or a year and then not get paid, and there is little recourse. The blue roof shacks you see on all construction sites are the housing for the farmers who do the work, on projects big and small, and they live on the site, and usually get a little money for food, but they agree to get paid when the contractor or the developer gets paid, and so they work and exist on scraps for a year, waiting for the big payout at the end.  Often, the big payout never comes.  If the workers get half, or 25%, of what they are owed, that will be a good outcome. 

The CCP says that China is in the beginning stages of socialism.  I guess that is true. The worker’s paradise is not here, just yet.

Huawei – Taking a Fall, Hoping for a Call

Pardon the soccer reference.  But to my mind, that is the Huawei move.  But Huawei has the support of the fans, at least in China, and they are vocal.

Don Clarke, professor of law at George Washington University, has penned this response to the declaration of the Zhong Lun law firm in Beijing, in support of Huawei as an innocent private company caught in a nasty trade spat.  According to the declaration, no company in China is ever required to comply with demands from the central government to install spyware or backdoors in any communication equipment.   Clarke points out that this is misleading and inaccurate.  Chinese law says nothing about what provincial and local governments might demand from a company, and in any case, law is not a constraint. 

“There’s a whole variety of pressures that the government can bring to bear on a company or individual, and they are not at all limited to criminal prosecution Clarke says.  “China is a Leninist state that does not recognize any limits to government power.”

From Clarke’s China Collection  blog –

Last May, two attorneys from the Zhong Lun law firm submitted a declaration to the FCC in support of Huawei’s position that it could not be compelled by the Chinese authorities to install backdoors, eavesdropping facilities, or other spyware in telecommunications equipment it manufactured or sold. I finally had the time to look at the declaration in detail. I don’t find it convincing. I have written up a pretty full analysis (over 10 single-spaced pages) and posted it here on SSRN. Enjoy.

Incidentally, my colleague Jacques deLisle of the University of Pennsylvania Law School also submitted a statement of his views, which largely support Huawei’s position. (I hope I have not characterized his statement unfairly.) Needless to say, I don’t agree, but the paper here is an analysis of the arguments of the Zhong Lun submission, not Jacques’. Those who are interested can read Jacques’ statement for themselves.

 Even we non-lawyers can read.  I wrote about this previously in Lie Down with Dogs, Get Up with Fleas

 Don Clarke’s analysis –

The Zhong Lun Declaration on the Obligations of Huawei and Other Chinese Companies Under Chinese Law (March 17, 2019)

Added March 22:  Steve Dickinson at China Law Blog on the new foreign investment law, which has been touted as an improvement in business conditions and a response to forced technology transfer – https://www.chinalawblog.com/2019/03/chinas-new-foreign-investment-law-and-forced-technology-transfer-same-as-it-ever-was.html      Steve’s conclusion – 

Article 22 of China’s new Foreign Investment Law is not relevant to the issue of forced technology transfer. On that front absolutely nothing has changed and nobody should expect it to either.

Added May 25: Christopher Balding and Donald Clarke on Who Owns Huawei?  Huawei claims to be employee-owned.  But their shares are not ownership, but contract rights in a profit-sharing plan.  To the extent ownership is vested in a trade union, Chinese law does not grant ownership rights to employees if the company or trade union go bust.  It appears that ultimately Huawei could be state-owned, since all trade unions are part of the state.

Huawei responds

Don Clarke’s rebuttal.  Huawei makes no case for employee-ownership and does not refute any facts in the Balding-Clarke paper. 

A Note on the Middle Income Trap

In the last couple of years, a number of China political observers have commented on the dangers to China of the middle income trap.  The fear is that the Chinese economy will fall into the trap. Since economic growth is the remaining claim to legitimacy for CCP, a substantial slowdown from real growth rates of 6 to 15 per cent per year, which obtained in the last forty years, will be disturbing to the harmony that keeps CCP in power. 

In what follows I am not making direct claims for or against the middle income trap in China, only describing the concept. 

What does the middle income trap mean? 

Most models of national development posit a growth track that demands –

– increased savings, so savings can be used for investment;

– an abundant low wage population;

– transfer of low wage, low productivity workers into higher productivity jobs in factories;

– promotion of exports; and

– a progression to higher levels of productivity, eventually approaching the GDP per person levels of the most developed countries. 

Only a few countries – notably, the Asian Tigers – Singapore, South Korea, Taiwan, Hong Kong – have made that transition.  More countries have begun the transition and after a couple of decades, found themselves stuck – unable to significantly increase GDP per person.  That list is longer – Mexico, Philippines, Malaysia, Indonesia, Turkey. The World Bank has identified 37 countries that are prisoners of the middle income trap.  These countries have achieved middle-income country status, but seem unable to pass that barrier, or trap. 

It is important to note that the middle income trap does not mean people are starving, or in poor health.  It does not mean that economies are failing, only that GDP/person is failing to grow much.  National economies are stuck, not declining.   But notably, economic performance is the remaining claim to legitimacy for CCP, now that Marxism-Leninism is discredited (except for Mr. Xi) and nationalism is a dangerous ally.  If nothing else, the middle income trap may be just reversion to the mean of GDP growth.  But that alone is scary for a government whose claim to legitimacy is growth. 

Reasons for the middle income trap include the need to transition institutional arrangements, from those that worked well when the country was emerging from poverty to those needed for higher quality growth – one can imagine changes in rules about finance, banking, savings, property ownership, transfers of ownership, control of bribery and corruption.  With increasing sophistication of work come demands for increasing sophistication of education – workers in finance need different training than workers on factory assembly lines.   Also, changes in cultural features – attitudes to education, health care, family connectedness.   Acemoglu and Robinson in Why Nations Fail boil most of the necessary changes down to institutional change – rules, regulations, laws, customs built in to culture. 

Is there evidence for the middle income trap in China?  Here are some things that keep Chinese macroeconomists up at night.

 Scott Rozelle, education and health researcher in rural China, defines part of the problem, not mentioned in glowing reviews of Chinese economic power.  In decades of research across many Chinese provinces, he finds that iron deficiency anemia was present in 40% of students in fourth and fifth grade in at least four rural provinces; in Guizhou and other southern provinces, 50% of children suffered from at least one type of intestinal parasite; and nearsightedly was common in schoolchildren, but went unaddressed in many rural areas.   Health care and education in rural areas is now significantly better than twenty years ago, but problems persist for much of the rural population.   The health problems are definitely treatable; but they persist, nevertheless.   Rozelle has found that 15% to 20% of rural kids do not do not complete middle high school.  That is a fearful statistic for future growth.   Many of those same kids are affected by poor quality or poisonous drinking water, or rice laden with heavy metals, or air that is even more poisonous.  China has been a leader in flashy environmental projects – wind, solar, dam construction.  Not so much in the unflashy, dirty job of cleaning air, water, land, or ensuring food quality.  Spending on those items will make no contribution to exports or factory technology or even short term health.  For local officials, what’s the point?

For those rural kids, China now has much less ability to build on exports to fuel internal growth.  The rural school children who don’t go to high school are not going to swing investment deals in London, and other countries in Asia and Africa are now lower cost producers of commodity and low-end  products.  That part of the growth path is now less available in China for the 800,000,000 or so who are not middle class and living in Beijing or Shanghai or Hangzhou.  How will they flourish?

That is one side of the problem.  Another side is the ability of superior Chinese scientists and engineers to continue with indigenous innovation.   In one sense, this is not a problem – what is not invented can be stolen, as in the past.  But innovation is no longer an individual working in his garage, but coordinated lab work and bench work and computer work, and collaboration with people outside China is vital.  The Great Firewall, in all its manifestations, inhibits that.  On a project basis, that may not be much of a problem.  In addition to theft, direct internet access to western journals and scientific reports in readily available within scientific and engineering schools and labs.  The firewall, which is eminently adjustable locally, does not affect them.  On another level, however, those same scientists and engineers can find themselves unable to participate in the events of the world in which they have an interest – conferences and symposia and simply news of family and friends outside China.  Sometimes, these sophisticated workers find the daily restrictions and requirements – writing paeans to Xi Jinping Thought, as is a current requirement –  to be just too stupid, and they leave.  They don’t want their kids to write such paeans, either.

When we look at the macroeconomic picture of China is all its glory and warts, we come down to the Acemoglu and Robinson prescription – institutional change.  The change required is not small.  It is systemic, and at the heart of the Chinese model for the last forty years – financial repression and investment in infrastructure and real estate.  Interest on savings in banks was held low, so loans to SOE and other factories and real estate developers could be held low as well.  The hukou kept peasants out of cities, keeping social overhead capital for poor people – primary and secondary education, health care, low income housing, pensions – mostly out of government budgets.  But changing the model means changing the relative shares of income in the economy – poor people and farmers and ordinary savers need to get a larger share of total income, and lots of vested interests in government and SOE and banks need to get a smaller share.  The reluctance to share in China is no less than it is on Wall Street, hence the political conundrum.  Social spending in China on education and health care and pensions needs to go up significantly, as China ages and education needs are greater and pensions, long a source of misspent and stolen funds and poor accounting, become a bigger factor in people’s lives. 

Truthfully, when reform began in 1978, China did need every piece of infrastructure that it could build – trains, planes, airports, ports, expressways, housing, factories, offices.  Now, what was needed is built, and far more.  The return to GDP from more construction is less and less.  That contributor to GDP growth is no more.  But building more stuff is the only lever that officials have right now to goose short term GDP. 

Finally, the world is no longer cooperating with China.  For forty years, in the US and Europe, policy makers were willing to accept some job losses in return for low priced consumer goods.  Now, in 2019, governments are less willing to trade jobs and technology for low priced shirts and televisions.   That is one threat facing China.  Another is the economic construct of a secular stagnation, a  general slowdown in all the advanced economies attributable to ageing populations (which don’t buy as much), greater income disparities (since the wealthy don’t simply buy more food or shirts or televisions), greater savings in advanced economies (due to risks of recession or simple job loss), and even greater flexibility in wages and prices, which we normally think of as a good economic outcome (flexibility can increase savings and decrease spending because incomes can now fall as well as rise).  In general, there is more savings than the world can profitably use, and investment levels remain anemic.  This is certainly not good for China exports or profitable Chinese infrastructure investments overseas. 

There is no guarantee that GDP/person will fail to grow in China.  But the threat is there, as evidenced by the paper by Barry Eichengreen, Donghyun Park, Kwanho Shin in 2013 – Growth Slowdowns Redux: New Evidence on the Middle-Income Trap.  Their conclusion – We also find that slowdowns are less likely in countries where the population has a relatively high level of secondary and tertiary education and where high-technology products account for a relatively large share of exports, consistent with our earlier emphasis of the importance of moving up the technology ladder in order to avoid the middle-income trap.

That is what CCP theoreticians and macroeconomists are thinking about.