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Generational Dynamics Web Log for 12-Jan-2019
12-Jan-19 World View -- China's economy destabilizes as Huawei introduces cheap smartphone

Web Log - January, 2019

12-Jan-19 World View -- China's economy destabilizes as Huawei introduces cheap smartphone

Poland arrests Huawei employee on spying allegations

by John J. Xenakis

This morning's key headlines from

Huawei plans to become world's biggest smartphone supplier as it introduce Huawei P Smart 2019

Huawei P Smart 2019
Huawei P Smart 2019

Huawei (WHA way) has surpassed Apple as the world's second-largest smartphone supplier, behind Samsung, but aims to become the largest with the introduction of a new low-cost smartphone, the "Huawei P Smart 2019," selling for around $200.

It includes a number of features that once would have appeared only in much more expensive smartphones, including a dual-camera array, face unlocking, fingerprint scanning and AI in the camera app to identify what you’re shooting. It uses the Huawei's powerful Kirin chipset, giving it more power and performance than even more expensive competitive devices. Its only disappointment, according to reviewers, is that the camera isn't as powerful as those on competitive phones.

As I've said in the past, I've spent a part of my career as a senior software engineer developing chip-level operating system software for embedded systems, so I know exactly how any chip or any electronic device can be turned into a tool for espionage. Furthermore, I can tell you that not only is it doable, it's not even particularly difficult for someone with the right skills.

This could not be detected by tests, because the chip would work normally until a backdoor is activated by receiving, say, a secret 1024-bit code. Then it will execute commands sent to it by Chinese engineers. Thus, the Chinese are then in control of any devices with Huawei chips, and it cannot be detected until it's too late. And since Huawei founder Ren Zhengfei was previously an officer and engineer in China's People's Liberation Army (PLA), there's little question that these steps have been taken.

China's biggest natural resources is its population of 1.4 billion. China sends them overseas to work or get educated, and controls them by the United Front Work Department (UFWD). China's officials even call them "secret weapons." China's fleet of fishing boats in the South China Sea and East China Sea have crews that have been trained by the military for espionage, and even to fight in battle.

This is how China works, and now China's Huawei is launching low-cost smartphones to be purchased by the millions around the world, and which can be controlled by China's military, at the right time.

As I've written in detail in the past, if Huawei really wants to convince Westerners that their products do not contain secret "backdoors," then they should invite American and Western engineers to work side-by-side with Chinese engineers in development centers in China, so that American engineers can examine all the internal code and scripts, just as Chinese workers work in development centers in America. Expert Reviews and IDC (11/2/2018) and Bloomberg

Related Articles:

Poland arrests Huawei employee on spying allegations

Poland's Internal Security Agency (ISA) has arrested two individuals. One is a Chinese national going by the name “Weijing W” or Stanislaw Wang, who works as a sales director for Huawei in Poland. The other is a Polish national, "Piotr D," a former high-ranking officer of Poland’s ISA. Both were charged with spying against Poland for China. ISA officers raided the homes of both suspects on Tuesday morning. They also seized documents and electronic data from the offices of Huawei and mobile phone operator Orange Polska, where Piotr D had worked recently.

This comes after the December arrest by the Canadian police, at the request of the United States, of Ms. Meng Wanzhou (Sabrina Meng), the chief financial officer (CFO) of China's Huawei Technologies, which was founded by her father Ren Zhengfei. According to reports, China has retaliated by arresting as many 13 Canadian citizens.

At the same time, many European countries are becoming more aggressive at prohibiting the use of Huawei technology, since it might have "backdoors" that permit espionage or control. This is increasingly becoming a more serious tit-for-tat escalation of actions that shows no sign of ending and may spiral into something much bigger.

Related Articles:

Chinese economic expert Xiang Songzuo warns that economy shows signs of crashing

In a speech given in early December by Professor Xiang Songzuo, Deputy Director and Senior Fellow of the Center for International Monetary Research at China’s Renmin University in Beijing, he said:

"You can look at the history: only the Wall Street Crash of 1929 can compare to the steep decline that the Chinese stock has experienced this year. Many stocks are down 80 or even 90 percent."

In his speech, Xiang backed up his concerns with numerous facts and figures. Such speeches are normally dismissed, but in this case the speech has so alarmed Chinese officials that it was banned from the internet, though it was translated into English and posted outside of China before it was banned. Furthermore, a number of financial firms are taking Xiang's conclusions very seriously.

I've often said that, as many problems as the US economy has, China's economy is much worse because of real estate bubbles, ghost towns, shadow banks, and a hugely leveraged credit bubble that could crash at any time. While I can make a general statement like that, Xiang has backed up those concerns with specifics.

Many people believe that since China is a Communist dictatorship, they can't have a recession because the Chinese Communist Party (CCP) will control the economy enough to prevent it. It doesn't work that way. Like every Socialist economy, China's economy was headed for disaster until it was opened to free markets in the 1970-80s. In fact, every Socialist economy has either opened up to free markets to some extent, or ended in disaster and massive bloodshed. Today, only Venezuela and North Korea have refused to open up to free markets, and both of those are disasters, with bloodshed in the future.

China today is subject to the same market forces and the same generational forces as every other country. People fool themselves into believing that politicians can actually change things. In China, only the politics will be different, but the outcomes will be the same. China Change (28-Dec-2018) and National Interest and Naked Capitalism and Don Tai (29-Dec-2018)

Xiang's Headline statistic: At most 1.67% GDP rate of growth

The headline statistic in Xiang's speech is his claim that China's GDP rate of growth is at most 1.67%, or may even be negative. China's official National Bureau of Statistics claims that China’s rate of GDP growth is at 6.5%. This one statistic alone could explain why the CCP felt it necessary to censor Xiang's speech.

Nobody is surprised that China lies about statistics. Mao Zedong lied about agricultural statistics during the Great Leap Forward in 1958-59, with the result that tens of millions of Chinese died from starvation or were executed.

The problem is that you can lie about statistics only for a while, and then reality causes a financial crisis, which is what Xiang is predicting.

Since the CCP can pump money into any business at will, it would seem that any financial crisis can be prevented. The problem is that any business that can count on being bailed out has no motivation to become efficient, and so loses money.

Xiang says that this has happened with almost all Chinese businesses:

"Look at our profit structure. To put it plainly, China’s listed companies don’t really make money. Then who has taken the few profits made by China’s more than 3,000 listed companies? Two-thirds have been taken by the banking sector and real estate. The profits earned by 1,444 listed companies on the SME board and growth enterprise board are not even equal to one and half times the profit of the Industrial and Commercial Bank of China. How can this kind of stock market become a bull market?

When we buy stocks, we are buying the profits of the company, not hype and rumors. I recently read a report comparing the profits of China’s listed companies with those in the U.S. There are many U.S. public companies with tens of billions dollars in profits. How many Chinese tech and manufacturing companies are there that have accomplished this? There is only one, but it’s not listed, and you all know which one that is. [Xiang is referring to Huawei, the Chinese tech company.] What does this tell us?"

Xiang says that there are major risks in the economy, and major battles to be fought:

"China’s economic decline indicates that there is a major issue with the focus on expansion and growth: It has deviated from the fundamental and moved to speculation. ... What are our current financial risks? They are hidden, complex, acute, contagious, and malevolent. Structural imbalance are massive, and violations of law and regulations are rampant. ... We have rampant speculations everywhere, in too many aspects."

According to Xiang, "Basically China’s economy is all built on speculation, and everything is over leveraged." This is significant, because when a company is over-leveraged, then when there's an economic downturn it won't be able to meet its debt payments. If every company is like that, then when one company goes bankrupt, it will create a chain reaction that sends every company into bankruptcy.

This is the basis of Xiang's statement that China's stock market is facing a huge crash greater than America's 1929 crash.

China's Five phases of consumption

According to Xiang, in the four decades following economic reform, China has undergone five phases of consumption:

According to Xiang:

"But these five waves have essentially all come to an end. Car sales have dropped sharply and real estate spending is also substantially decreasing, so we are facing serious problems. This is the crux of the six stabilities called for by the Politburo [stable employment, stable finance, stable foreign trade, stable foreign investment, stable investment and stable expectations], or as some internet users have joked, the six “tender kisses” [ , kiss, is a homophone for , stability]."

Xiang says that China made a historic mistake by relying on consumption:

"Look at these numbers. That China faces a long-term economic downturn is not a problem by itself. But you may have noticed that the consumption and the service sectors now make up 78.5 percent of GDP. Going by the government’s logic, this should be a good thing, since it means the economic transition to a consumption economy has been successful: we used to rely on investment and export, now we rely on consumption and the service sector. This sounds reasonable, but think about it: in a country like China, as investment slows dramatically, how can we maintain economic stability by solely relying on consumption?"

Xiang says that consumption and services comprise 78.5% of GDP, which is good news to some extent, but it's far eclipsed by negative implications of low investment.

Major misjudgments about China's economy

Xiang says that in the past year, China has made major misjudgments about the economy.

The first misjudgment was vastly underestimating the negative effects of the US-China trade war on China:

"First, the trade war between China and the U.S.. Did we make some inaccurate assessment? Did we underestimate the severity of the situation? Let’s recall some slogans from the mainstream media at the beginning of the year:

  • "In the trade war between U.S. and China, the Americans are lifting rocks only to smash them on their own feet"
  • "China is sure to win."
  • "China will win the trade war without a doubt, be the battles big or small.”

What’s behind this kind of thinking? To this day, we keep suffering from a cognitive dissonance between our understanding of the Sino-U.S. trade war and the international reality. This calls for deep reflection."

The second misjudgment has caused private businesses to lose confidence in the national leadership, with the result that investment by private business owners has falled substantially. According to Xiang, this has occurred because the Chinese media have been suggesting that the economic reforms of the past 40 years will be reversed, and there will be a return to full-scale Socialism:

"Since the beginning of the year, though, all kinds of ideological statements have been thrown around: statements like

  • “private property will be eliminated,”
  • “private ownership will eventually be abolished if not now,”
  • “it’s time for the private enterprises to fade away,” or
  • “all private companies should be turned over to their workers.”

Then there was this high-profile study of Marx and the Communist Manifesto. Remember that line in the Communist Manifesto? Abolition of private property. What kind of signal do you think this sends to private entrepreneurs?"

With regard to the trade war, Xiang says that it's really a clash of value systems, with no solution in sight:

"In addition to this, there are three major external challenges. The first is the trade war, which is in fact no longer a trade war but rather a clash between two opposed value systems. It can be said with certainty that the Sino-U.S. relationship has come to a crossroads right now and faces significant historic challenges. What are we to do? To be honest, I don’t think we have really found much of a solution.

You are aware that Huawei’s CFO Meng Wanzhou was recently detained in Vancouver. In the past two days, mainstream media such as BBC and CNN have been reporting on how the U.S. is going at Huawei on all fronts. What this tells us is that this issue is not simply about trade or economics."

Unless the date is postponed, China and the US have until March 1 to reach agreement on a huge list of trade and trade secret protection issues, before the US substantially increases tariffs on Chinese imports.

What this almost certainly means is that the can will be kicked down the road. This could mean that the March 1 date will be postponed, or it could mean that president Trump will simply increase the pressure on China by increasing tariffs by a small amount.

Related Articles

(Comments: For reader comments, questions and discussion, see the 12-Jan-19 World View -- China's economy destabilizes as Huawei introduces cheap smartphone thread of the Generational Dynamics forum. Comments may be posted anonymously.) (12-Jan-2019) Permanent Link
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