In China’s communist-run political system, lines of control and influence between Beijing and privately operated enterprises are murky – when those lines exist at all. Some Chinese companies are owned directly by the government, but all owe a level of fealty to the government. A few weeks ago, the Chinese news media disclosed that Jack Ma, a Chinese Internet entrepreneur worth $39bn, is a Communist Party member. The revelation isn’t scandalous because it reflects the reality of the Chinese hybrid system: There’s no place for business owners and executives to hide in an authoritarian state. So they might as well join the party and accrue the benefits.
That’s all background for a spectacular legal confrontation now brewing between China and the US over Huawei, China’s telecom giant. On December 1, Canadian authorities fulfilled a US government request to arrest Huawei’s chief financial officer amid allegations the company violated US trade sanctions against Iran.
The pressure point runs much deeper than whatever US-originated equipment Huawei may have sold to Iran. Huawei is described as the world’s largest supplier of cellular tower electronics and other telecommunications equipment. The firm is on the cutting edge, developing and selling 5G (fifth generation) mobile phone service technology around the world. All fine – global competition is welcome. Except almost everything related to telecommunications technology has potential military usefulness, including for espionage.
Huawei says it’s a privately owned company that doesn’t answer to the government, doesn’t engage in espionage and complies with all applicable law. But who really calls the shots at Huawei? The company’s founder, Ren Zhengfei, is a former Chinese army officer. He left the People’s Liberation Army in the early 1980s, the era in which Premier Deng Xiaoping decided to embrace free-market reforms while retaining one-party rule. Ren’s daughter, Meng Wanzhou, is the Huawei executive who was arrested in Vancouver.
The US government is deeply suspicious of Huawei and its connections to the Chinese government. A 2012 congressional report concluded that Huawei couldn’t prove its independence from government control. The report determined that Huawei and another firm, ZTE, provided “a wealth of opportunities for Chinese intelligence agencies to insert malicious hardware or software implants into critical telecommunications components and systems.” Even if company executives refused to help their government commit nefarious acts, the report noted, all it would take is recruiting a few technicians to do the dirty work. Chinese law appears to require co-operation with any request under the guise of state security.
The arrest may complicate the Trump administration’s trade negotiations with China, given that Chinese authorities are angry about the treatment of such a high-profile executive. But this collision of interests will turn out to be a good test of Chinese intentions. Trade is one facet of a complex relationship. Both sides will be better off if President Donald Trump can negotiate a deal with Chinese President Xi Jinping without getting distracted by a criminal case that will proceed on the merits.
As for companies like Huawei, the Chinese government has a choice. It can encourage companies in sensitive industries to open themselves to outside scrutiny and investment. It also can insist that companies like Huawei respect the law – US sanctions against Iran included. Or China can allow companies like Huawei to stay in the shadows, untrusted by the United States and other Western governments. There are plenty of other telecom companies willing to sell sensitive equipment and play by the rules.
