China: Huawei, Retaliation, and Iran Sanctions

Published on May 20, 2019
SGH Insight
** A decision appears to have been made to strictly control the export of important materials such as rare earth minerals to the United States, one of the key areas of leverage Beijing does maintain over the United States and technology firms.

Market Validation
(Associated Press 5/29/19)

Global stocks plunge after China hints it could unleash a 'powerful' trade war weapon by limiting US rare-earth supply

State-aligned newspapers warned China is prepared to cut off supplies of rare-earth metals.

"We advise the US side not to underestimate the Chinese side's ability to safeguard its development rights and interests," one editorial read. "Don't say we didn't warn you!"

Investors' flight to bonds pushed the 10-year US Treasury yield to a 19-month low.

World markets slumped on Wednesday as traders braced for further escalation in the US-China trade war. State-aligned Chinese newspapers warned the Asian nation is prepared to cut off America's supply of rare-earth metals, spurring investors to ditch stocks for bonds.

"Will rare earths become a counter weapon for China to hit back against the pressure the United States has put on for no reason at all?" wrote the editorial board of the People's Daily, according to Reuters. "The answer is no mystery."

The newspaper noted America's "uncomfortable" dependence on so-called rare earths, a group of 17 chemical elements used in a wide range of electronic devices including smartphones, car batteries, and missile-defence systems. The US relied on China for than 80% of its rare-earth imports between 2014 and 2017, and ramped up purchases by 17% to $160 million last year, according to Bloomberg.

China’s Premier Li Keqiang presided over a meeting last Friday to formulate China’s response to President Trump’s announcement earlier in the week of a restriction on mobile technology sales to the United States by foreign government-controlled entities — a measure in no uncertain terms directly targeted at Huawei and other Chinese firms.

Beijing’s response to the US ban will take two tracks; first, to mitigate as much as possible the impact of Trump’s actions on Huawei and the economy writ large, and second, to formulate and embark on retaliatory measures as deemed appropriate against the United States.

** On the retaliatory front, from what we understand the leadership in Beijing has given a green light to punishing US companies that are profitably doing business in China but who have “lied” in accusing the Chinese government of having a hand in the forcible transfer of technology as a cost of doing business in China.

** Furthermore, a decision appears to have been made to strictly control the export of important materials such as rare earth minerals to the United States, one of the key areas of leverage Beijing does maintain over the United States and technology firms.

** In the meantime, Chinese officials tout the resilience of Huawei, pointing to a crisis prevention mechanism and contingency plans that are claimed to have been initiated ten years ago in response to a broadside on Huawei back in 2005. They point to the company’s alleged current stockpiles of at least one year’s worth of key components, and a five-year plan now to replace US suppliers with entirely domestic firms.

** Tensions last week were also heated on the geopolitical and foreign policy fronts, where Iran’s President Hassan Rouhani took the initiative of directly calling China’s President Xi Jinping on Thursday, May 16, in advance of his foreign minister Mohammad Javad Zarif’s visit to Beijing.

** In the call, the embattled Rouhani pointedly conveyed a message that came jointly from Supreme Leader Ali Khamenei on the need to push back on pressure from the United States, address escalating tensions in the Gulf, and enhance the role of US-China relations.

** The next day, Friday, China’s State Councilor and Foreign Minister Wang Yi hosted Zarif at the Diaoyutai state guest house, where Wang assured his Iranian counterpart that Beijing would continue to “resolutely oppose the unilateral sanctions and long-arm jurisdiction” of the United States over economic and trade relations with Iran.

** And even as Zarif complained of the lack of support from the EU in countering pressure from the US, Wang promised that China will maintain normal relations with Iran, and continue to import Iranian oil despite the Trump Administration’s stated efforts to cut Iran’s crude oil exports down to zero.

** On Saturday, following the meeting with Zarif, US Secretary of State Mike Pompeo initiated a call to Wang Yi to discuss Iran, as well as US-China relations more broadly. Chinese sources characterize the call as the bluntest conversation between the two countries’ foreign ministers since Trump entered the White House in 2017.

** In the call, Wang is said to have expressed China’s position on trade negotiations, the ban on Huawei, and the Trump-Xi summit in “an unprecedented tough tone,” repeating the message from Vice-Premier Liu He that any trade agreement can only be made if it is on an “equal and mutually beneficial” basis.

** Wang is also said to have taken to task the US crackdown on Huawei as a politically motivated act, and relayed that the US would need to change its course as soon as possible if the two sides are to avoid even further damage to bilateral ties.

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