Enter the Dragon: How China is conquering Europe

Is Huawei a threat to our security? The case against it is compelling. But that’s not the half of it. Italy has joined the Chinese Belt & Road Initiative. The Dragon is now inside the city walls, writes Victor Hill.

5G and Five Eyes

The Americans think that we would be mad to allow Chinese tech giant Huawei (SHE: 002502) to get a foothold in the roll-out of the UK’s new fifth generation (5G) mobile phone network.

The issue is that the United Kingdom enjoys (if that is the right word) the most intimate relationship with the United States in so far as intelligence-sharing is concerned, along with the other English-speaking Five Eyes – Canada, Australia and New Zealand. Collectively, the Five Eyes is often described as the most comprehensive intelligence network in the world. The US, Australia and New Zealand have banned using Huawei’s equipment in 5G infrastructure – but, thus far, the UK has not.

Huawei, which is China’s largest private company, has been suspected for years of working unofficially for the intelligence apparatus of the Chinese government. But the most recent bout of jitters was triggered by the arrest of Meng Wanzhou in Vancouver, Canada, on 01 December pending extradition to the USA[i]. Ms Meng is both the CFO of Huawei and the daughter of its founder, Ren Zhengfei.

The US Department of Homeland Security is pursuing criminal charges against Huawei at the corporate level and against Ms Meng at the personal level. The charges include money laundering, stealing intellectual property and breaking the sanctions regime against Iran. Later, Ms Meng was charged with bank fraud, wire fraud, and conspiracy to commit fraud. Huawei has characterised the charges as “politically motivated”.

Although Ms Meng was released on bail, the extradition case is still dragging on through the courts of British Columbia. Her next court appearance at time of writing is scheduled for 06 May. In the meantime, the Chinese government has made several retaliatory gestures towards Canada. The subsequent arrest of former diplomat Michael Kovrig in Beijing and the detention of Canadian businessman Michael Spavor – plus the condemnation to death of a Canadian citizen convicted of drug trafficking – have propelled relations between the two countries to an all-time low. Chinese media have alleged that Ms Meng’s arrest is part of an attempt by the US to stifle Huawei and other Chinese tech companies in the context of the US-China trade war.

The US ambassador in Rome has already told the Italians that they can kiss goodbye to intelligence-sharing if Italy allows Huawei to build its new 5G telephony network. Huawei is gearing up to play an active role in the roll-out of a new 5G networks right across Europe.

If the UK were to bar Huawei from participating in 5G networks that might require users to switch to costlier rivals. But we will have to pay a high price for national security breaches. Actually, the UK government, enfeebled by Brexit, is playing a more subtle game…Vodafone (LON:VOD) has already suspended the installation of Huawei hardware in its core networks. BT (LON:BT) and its subsidiary EE have announced that they will remove Huawei devices from their 3G and 4G networks over the next two years.

The case against Huawei

In November last year a report by the Hoover Institution, a US think-tank, claimed that Chinese students studying in the USA are pressured to spy on their compatriots on American campuses. The report argued that China is exploiting America’s openness in order to advance its interests.

In December, the UK government accused China of waging an “unrelenting cyber-war” on Britain, the US and other western countries in an attempt to steal secrets from companies and government agencies. And, just before Christmas, Area 1 – a California-based cyber-security firm, passed information to the New York Times revealing that Chinese hackers have been stealing thousands of EU diplomatic cables for years.

In late January, US prosecutors unveiled 23 criminal cases against Huawei, accusing the company of violating sanctions against Iran and of stealing state secrets. In February this year Huawei was accused by US authorities of stealing proprietary technology from Akhan Semiconductor in the US after the FBI raided a Huawei laboratory in San Diego. Akhan had alleged that Huawei attempted to steal its diamond glass technology – apparently a hyper-durable glass used in circuit manufacture. Akhan accuses Huawei of shipping restricted samples to China and has filed charges with the US Department of Justice against the Chinese giant.

Also in February, Joe Kaeser, CEO of Siemens (ETR:SIE), warned that European investment companies should be wary of Chinese investment tactics amid growing concern about the steady seepage of European intellectual property to China. The German robotics firm Kuka was taken over by Medea, a Chinese electrical appliance manufacturer, for $5 billion in 2016 – but is now struggling. The suspicion is that all its proprietary technology has been repatriated to China.

On 18 February, a “sophisticated state actor” attacked the Australian parliament’s computer systems in what Australian PM Scott Morrison called a “malicious intrusion”. The Australian press reported that China was the main suspect.

In early March the head of the FBI, Christopher Wray, speaking at the RSA cyber-security conference in San Francisco, warned that the threat from China was unprecedented and that special agents were dealing with accusations of economic espionage. In more than 50 cases, these all lead back to China. His comments came as Huawei opened a new cyber-security centre in Brussels. According to Huawei, customers will be able to verify the underlying source code of its devices at the new centre. Huawei opened a similar centre in Bonn, Germany last November.

There have been concerns surrounding Huawei since at least 2010 when the British government set up the Huawei cyber-security evaluation centre inside GCHQ to test hardware and software updates supplied by Huawei. In December, Defence Secretary Gavin Williamson declared that he had “grave and very deep concerns” about Huawei’s involvement in the roll-out of the 5G network in the UK. He even accused Beijing of acting “sometimes in a malign way”.

There are differing views within the western security establishment as to the severity of the threat. The National Cyber Security Centre (NCSC), the UK intelligence agency responsible for defending our digital infrastructure, was reported by the Daily Telegraph last month to have concluded that any risks posed by Huawei are “manageable”. This judgment was dismissed as naïve by the Royal United Services Institute (RUSI).

In a hearing in Seattle on 01 March, Huawei’s lawyers entered a plea of not guilty to US government charges that it engaged in a company-wide conspiracy to steal trade secrets from American competitor, T-Mobile (NADAQ:TMUS). In a previous lawsuit, Huawei admitted that two of its employees had “acted inappropriately in their zeal”. But the US government now alleges that the company offered bonuses to employees for stealing information from competitors.

In late January, Ren Zhengfei, Huawei’s CEO made a rare public appearance in which he denied that Huawei would ever be bullied by the Chinese government to hand over customer data.

Why 5G is a big deal

2019 will be the year that 5G takes off. This is the latest wireless technology that is expected to deliver connection speeds anything between 10 and 100 times faster than 4G – and with less latency – meaning delay – for data-heavy activities like gaming. For hardware manufacturers 5G cannot come fast enough. Unit sales of smartphones fell by three percent last year – the first fall ever.

Samsung (KRX: 005930) was the first handset manufacturer to exhibit a range of new models designed for 5G at the Mobile World Congress in Barcelona in late February. One of them boasts an ultrasonic fingerprint scanner. It also showcased a folding phone – the Samsung Galaxy fold – a 4-inch smartphone which can fold out into a 7.3-inch tablet computer. But Huawei was not to be outdone. It revealed its own foldable smartphone with 5G connectivity.

Whereas 4G was launched in the USA, 5G will go live simultaneously across the world. 5G will not just power smartphones but also driverless cars, remote robots, 3-D printing and the internet of things. For the realisation of 5G Apple (NASDAQ:AAPL) is working with Qualcomm (NASDAQ:QCOM) which builds the leading wireless connector. But Apple’s delay in launching a 5G device has not gone unnoticed.

Deloitte estimates that no more than one million 5G devices will be sold in 2019. But, according to Swedish telecoms firm Ericsson, there will be more than 22 billion devices connected to the internet of things by 2024 (including your fridge and your boiler – even your baby’s cot). All these gadgets will require complex authentication tools. That will offer extraordinary opportunities for hackers, whether criminals or unscrupulous state actors, to render harm. At the end of the day, we will have to work with vendors whom we trust – but even that will not guarantee total cyber-security.

La Bella Italia in the Dragon’s embrace

The memorandum of understanding to be signed between China’s President Xi and Italy’s Prime Minister Conte in Rome today (22 March) or tomorrow is of momentous significance. It has been some time in the making.

Before Christmas, Giovanni Tria, Italy’s Eurosceptic economy minister, in a keynote speech to the influential Boao Forum in Rome, praised China’s Belt and Road Initiative (BRI) investment programme. I much prefer the old name for the programme – The New Silk Road (which carries overtones of The Travels of Marco Polo), though in China the BRI is referred to as globalisation with Chinese characteristics. This is the same programme of infrastructure investment that China is financing across South Asia and Africa. “The BRI is a train that Italy cannot afford to miss”, said Signor Tria.

Both Brussels and Washington will be looking on with concern. Italy will be the first EU member to subscribe to the BRI unilaterally and therefore is undermining the EU’s preference to coordinate policy on Chinese investment. Washington fears that the deal will alleviate US pressure on China during the current US-China trade impasse.

Italy is home to the largest Chinese minority in Europe. Chinese companies have already purchased critical Italian assets including the power grid, high-tech manufacturers and even luxury brands. More than 600 Italian companies have received Chinese investment since 2000 amounting to nearly €14 billion. China is Italy’s eighth largest export market while Italy is China’s 19^th largest export market.

Italy, whose economy has been consistently sclerotic, has recently fallen back into recession and the national debt is rising again as a proportion of GDP. The Italians have come to see Chinese investment as a panacea for their ills – and they do not care what Monsieur Macron or Frau Merkel thinks, even if the European Commission has branded China a “strategic rival”. The EU’s External Action Service (the nearest thing that the EU has to an intelligence agency), according to some sources, believes that 250 Chinese spies operate in Brussels.

As for the Chinese, they want access to the major Italian ports (Genoa, Naples, Palermo, Taranto, Trieste) in order to expand their trading routes through the Mediterranean. Just as Cosco (HKG:5017), the Chinese shipping group, has acquired control of the port of Piraeus in Greece. Last year, Italy’s state-controlled shipbuilder Fincantieri (BIT:FCT) struck a deal to build Cruise ships for Chinese operators.

On 16 March the Financial Times reported that Italy was seeking a major loan from the Chinese-led Asian Infrastructure Investment Bank (AIIB). Most BRI infrastructure loans come from the China Development Bank or the Export-Import Bank of China – but all are ultimately under Chinese state control.

One view is that China is specifically targeting Europe’s soft underbelly at a moment of extreme weakness. As I explained in these pages five weeks ago, relations between Rome and Paris as well as Rome and Berlin are as bad as they have been in living memory. Italy’s populist government – a coalition between the idealistic Five Star Movement and the more traditionally right-wing Lega – is livid with the EU for having mangled its budget and for not doing more to resolve the ongoing migrant crisis (with boats arriving daily from lawless Libya).

But is China acting out of strength – or weakness?

China is not riding as high as she may seem. Exports have been falling precipitously. Chinese exports in February this year were over 20 percent lower than in February 2018. President Xi’s scheduled meeting with President Trump at Mar-a-Lago at the end of this month now seems less likely. Even if it goes ahead, it’s unlikely there will be the end-point signing ceremony that the Chinese devoutly want.

During the era of President Xi’s predecessor, Hu Jintao, it seemed that China was opening up. But President Xi has altered China’s trajectory, stifling economic reforms and thus slowing growth in order to tighten Communist Party control over all aspects of national life. One controversial tool of state control is the social credit system whereby Chinese citizens are attributed a score according to their compliance with Chinese Communist Party doctrine.

Moreover, China’s repression of the Uighur people of Xinxiang has not played out well in the Muslim world – Turkey’s President Erdoğan has been voluble (as ever). Marco Polo brought spaghetti back from Xinxiang – but most modern Italians have never heard of Xinxiang.

The Dragon and the Bear

The Russian government will soon disconnect the country completely from the internet temporarily in a kind of wargame for a modern cyber-war. I’ll explain shortly why the game-plan is to create separate non-interconnecting, and therefore controllable, internets. Some have dubbed this the splinternet. Russia is almost certainly in cahoots with China on this.

Implications

Since the Chinese took over Greece’s premier port, some commentators think the Greeks have stalled on EU condemnations of Chinese human rights violations. If Italy becomes dependent on Chinese capital then something similar could happen in a country where the media is tightly held.

Some Italians think that the sensible, disciplined Chinese will also be able to help with the migrant crisis. In fact Michele Giraci, state undersecretary for economic development (who is a Sinophile, having taught at Shanghai University) has written that China has much to teach Italy about the suppression of crime and illegal migration.

Maybe that is the key to where the southern flank of the eurozone, pauperised by the relentless grip of a German-driven single currency, is going.

If I were Herr Juncker, I’d take a decent glug of neat gin.

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Election fever!

Ukraine holds a presidential election on 31 March. The Israelis will elect the 21^st Knesset on 09 April. India goes to the polls between 11 April and 19 May. The Spanish vote for a new Cortes on 28 April. South Africans vote in a general election on 08 May. Australia votes for a new parliament before 18 May. The European Union (minus Britain – though anything is possible as I write) will elect a new European Parliament between 23 and 26 May. Denmark has a general election on 17 June. And Canada will have a critical general election on 21 October – one that Liberal PM Justin Trudeau was expected to win hands down until recently…How fast expectations change…And the United Kingdom could well get an election once the Mother of Parliaments finally spontaneously combusts…

Call me a political anorak – but I love elections. One meets such interesting people. MI readers will be hearing more from me on these great events over the course of 2019…

My column will next appear on 29 March 2019 – the day Brexit should have happened. I might even have something to say about that. Enjoy the last weekend of a world about to change forever.

[i]Ms Meng was actually in transit at Vancouver Airport, flying from China to Mexico. However, according to Wikipedia, Ms Meng and her husband own two multimillion dollar residences in Vancouver, and from 2001 to 2009 was a permanent resident of Canada. There is more to this than meets the eye.