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China-Trump heavyweight cyber rumble

Posted by: Brian Dennehy
Membership level: Free
 
Surprisingly for us, the most widely watched teleconference last year was the one which had a heavy emphasis on the risk of cyber war, which could have a devastating impact on your investments. In recent months there have been some fascinating developments, which we cover in this update, which is also relevant to our recent (positive) coverage of the opportunities in China.
 
Almost a year ago a Sunday Times headline proclaimed:
 
“Serious cyber attack is a matter of when, not if”
(Ciaran Martin, CEO of National Cyber Security Centre)
 
It isn’t just about cyber attacks, but also large scale cyber, or systems, failures. It is not always easy to know the difference, and the roles of States and private companies are increasingly obscured.
 
Cyber security is a huge issue, and the gloves are coming off in the battle between the US and China.
 
Back in 2010, the U.K. government set up the “Huawei Cyber Security Evaluation” group, staffed by 35 analysts, all overseen by GCHQ. The objective was to monitor the actions of huge Chinese company Huawei, the world’s biggest supplier of telecoms equipment, and from a Chinese perspective it has “long been a source of national pride… not unlike how Apple is viewed in America”.
 
(Probably coincidentally, this was a year after the world’s first cyber war in 2009, when the US and Israel destroyed parts of the Iranian nuclear infrastructure using a virus called Stuxnet - on which do see the revealing film “Zero Days”, highly recommended.)
 
This action by the UK in 2010 clearly shows that issues about Huawei had been rumbling for years, mostly not in the headlines. Then Meng Wanzhou, the daughter of the billionaire founder of Huawei, was arrested in Canada on 1st December 2018. This was at the request of the US, on suspicion of violating Iran trade sanctions.
 
She is more than the daughter of the founder. Meng also occupies a top position at this multi-billion dollar business, where the 46-year-old is Chief Financial Officer (CFO) and deputy Chairwoman. According to the South China Morning Post:
 
“Meng may not have been well-known to the outside world, but in China she represents the crème de la crème of the country’s booming tech industry, the well-educated heir apparent to a vast tech empire.”
 
Was the timing deliberate? At the moment it took place there was a Trump-Xi dinner at the G20 meeting, intended to calm the potential for escalating trade wars.
 
It remains a mystery who knew what and when, both Xi and Trump. Though it is known that Xi is close to Meng’s father, Ren Zhengfei, and that the arrest warrant was issued way back in August.
 
There was no immediate outcry from China (the arrest happened on a Saturday and only on the following Wednesday did this come out). Then, predictably, Chinese officials threatened the US with "grave consequences" over the arrest. Instead of taking overt action against the US they had a swipe at Canada.
 
The Chinese authorities arrested two Canadians, and a third, previously sentenced to 15 years, abruptly had this changed to the death sentence. The implication seemed clear. China was not prepared to go directly after the US – Meng had now become a pawn in the trade war, intentionally or otherwise.
 
It is just possible that the arrest suited Xi’s purposes, no one is above the law etc?  Not as daft an idea as you might think in the context of the potential successor to one of China’s most successful businesses with a global reach.
 
For example, Forbes did some maths recently. In their 2011 “Billionaires List” there were 115 in mainland China. 72 have had “unnatural deaths”. According to China Daily “15 were murdered, 17 committed suicide, 7 died from accidents, and 19 died from illness”. Not forgetting the 14 that were executed!
 
A Chinese billionaire dies every 40 days, Forbes calculated.
 
To paraphrase the Cole Porter classic, Frank Sinatra might sing “Who wants to be a Chinese billionaire? I Don’t!”
 
From a US perspective, the trade war is more about technology than physical trade. There has been a sense that China was cheating, (and is still cheating, more next week) and that in key areas China has not just moved ahead but is reaching out to the world via that technology. Huawei is just one example of that.
 
For example, Huawei has given China a lead in supplying equipment to enable the development and introduction of 5G, a huge advance in mobile communications. (More detail next week).
 
The US is “pushing allied countries to ban Huawei from building their 5G networks, citing concerns over security”. The security card is an easy one to play – but perhaps more important is simply that the US is falling behind in this key area. While other countries buckle under pressure from the US, the UK is holding a very firm line, and still plans to use Huawei.
 
In the words of Jamie Doward in The Guardian:
 
“The extraordinary level to which the UK has gone to accommodate a company regularly accused of spying for a foreign state says much about where the shifting balance of power now lies in the world”
 
At a time when UK broadband technology is slipping down the global league table, and the UK is planning to engage more with the wider world post-Brexit, Chinese solutions are more effective and cheaper.
 
Three big takeaways for investors. The US does not like technological competition from China – so you know China must be succeeding! See our previous blog on Chinese tech, maths and engineering graduates. Secondly, this turf war will continue for many years, and might have some unexpected impacts. Thirdly, a direct hit from a cyber-attack at some point remains highly likely – more on that next week, as the implications for investors are considerable.
 
FURTHER READING
Topic: Market commentary


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