China: What You Don’t Know You Don’t Know…

Am I crazy, or did 2019 just start like 9 hours ago?

One and a bit months down and 10 and a bit to go in the New Year, and to celebrate the newfound energy in the market after a record setting January the nervous nellies start February off with a thud.

So, why is that?

Well, maybe it's because they were part of the record-setting selling panic just last month – the type of sad diagnosis so often delivered in the rear view mirror.

The better news is that the last two weeks have both seen continued outflows from ETF's and mutual funds from the investor audience. 

Cash is king my friends and fear is elevated once again. 

(No really, that’s very good news!)

But folks won’t see it as fear.

They’ll call it “Prudence.”

Yes indeed, it always feels prudent to sell at lows especially when many waited until "the coast was clear" from the previous "big panic" in early 2016, which very likely coincided with the highs back in January 2018.

It’s a buy high, sell low cycle that ends in depression, dear Prudence.

Unplug your emotions and break up with her. She’s no good for you.

Back to Stats

It seems we’re not going to get a trade deal done by "the deadline."

The US and China are like two gladiators in the coliseum; both already bleeding from battle but determined to take it to the end.  

Now, most folks don't recognize this about Trump but, love him or hate him, he’s never been in a position where risk actually cost him something that was ultimately painful. 

That can be a good thing when you’re going toe-to-toe with China's Communist Leader. 

Neither of these men will pay a personal price.

But one has a much larger risk than the other.  And while there could be hell to pay here in the short-term if emotions get out of control again - and they might – I’m of the opinion that someone will whisper in Trump's ear that an extension of delays on tariffs would be a sign of good will to keep the pressure on negotiations.  

Make no mistake: We do need to set new standards for the future as it relates to dealings with China because if we don't they will take the unfair advantage from us that they can.

Now, I know that might not sound politically correct, but away from spotlights it becomes clear that the gloves where off in this fight a long time ago:

Whose IP Is It…?

No one is happy about the tariffs the US placed on Chinese goods because the price we pay hurts the US economy in the near-term.

But it also hurts the Chinese economy, as they have a communist regime subject to the very real risks of social unrest they can ill afford in the fastest growing nursing home on the planet.

Here’s the key though: There hasn’t been a huge outcry against the tariffs by US business executives.

Maybe tariffs have gained tacit support because CEOs know that the tariffs are about more than just unfair trade practices.

A more significant issue to be solved by the battle is the growing evidence that China is systematically stealing US intellectual property (IP).

That’s happening because China isn’t playing by the same rules as the US, and that’s a problem; one big enough to slap tariffs on Chinese goods and risk recession in both their country and ours.

It’s not new. It’s just not been dealt with by previous US leaders. And as all companies become “tech” companies it’s a problem that the US government, businesses, and universities now appear to be willing to outwardly acknowledge.

Dr Ed Yardeni and his team note a few clear incidents of the spying allegations the US government has recently brought against the Chinese.

Folks, this ain't pretty:

T-Mobile

The US government is accusing Huawei of stealing IP over many years, and the Chinese telecom company is denying the charges.

The federal suit refers back to a 2014 lawsuit brought by T-Mobile, which had hired Huawei to manufacture cell phones. T-Mobile claimed Huawei employees stole the IP behind a T-Mobile testing robot called ‘Tappy’ which performed quality-control tests on cell phones.

Huawei employees “asked detailed questions about the robot and repeatedly sought information about proprietary technology,” a 1/16 WSJ article reported, citing the T-Mobile lawsuit.”

The article continued: “In one alleged instance, two Huawei employees slipped a third one into a testing lab to take unauthorized photos of the robot. One employee also tried to hide the finger-like tip of ‘Tappy’ behind a computer monitor so that it would be out of view of a security camera, and then tried to sneak the tip out of the lab in his laptop-computer bag, according to the lawsuit.”

That employee later admitted that "he took the component because Huawei’s research and development office believed the information would improve its own robot, the lawsuit said.”

Huawei countered that ‘Tappy’ wasn’t secret. Video of the robot was on YouTube, and details of its design were published in numerous patents." [A] jury in 2017 awarded T-Mobile $4.8 million after it found Huawei breached its contract with the network operator.

The federal indictment also suggests that Huawei employees in China pushed their US counterparts to steal information about ‘Tappy’.  “A program…awarded monthly bonuses to employees who stole the most valuable information from rivals and posted it on an internal website."

These charges are in addition to the high-profile, US case against Huawei’s finance Chief Meng Wanzhou, daughter of Huawei’s founder.

She’s being accused of violating US sanctions against Iran by lying to banks about ties between Huawei and a company that did business in Iran, a 12/11 WSJ article states. Meng is required to remain near her home in Canada while a Canadian court decides whether to extradite her to the US.

Micron Technology

The US Justice Department alleges that United Microelectronics (UMC, a Taiwan semiconductor foundry), Fujian Jinhua Integrated Circuit (a state-owned Chinese company), and three Taiwan nationals stole talent and trade secrets from Micron Technology. It follows a lawsuit Micron brought in a Chinese court.

A former Micron employee in Taiwan moved to UMC and recruited two others who were to bring Micron’s trade secrets with them, according to a federal indictment cited in a 11/1 WSJ article. The alleged ringleader arranged for UMC to partner with Jinhua, where he then went to work to develop the same technology.

The article continued: “Among the files alleged to have been pilfered from Micron are hundreds of pages of documents and large Microsoft Excel spreadsheets containing precise design specifications for the architecture of various dynamic random access memory, or DRAM, products. Micron is the only U.S.-based company to manufacture DRAM devices, and the value of the stolen IP was at least $400 million and as high as $8.75 billion, according to the indictment.”

General Electric

In October, a Chinese intelligence officer was charged with conspiring to steal trade secrets from GE Aviation and other companies. Yanjun Xu allegedly concealed his position as a deputy division director in a department of the Ministry of State Security, China’s intelligence agency.

Instead, he claimed he was affiliated with Jiangsu Science & Technology Promotion Association.

According to the 10/10 WSJ report, “Prosecutors allege that he worked from 2013 through this year with others associated with the ministry and several Chinese universities to obtain sensitive and proprietary information from U.S. aviation and aerospace companies. They say he worked in part by recruiting U.S. employees to travel to China for what was characterized as an exchange of ideas.”

Xu allegedly helped an official at a Chinese aeronautics university target an engineer at GE Aviation, in an effort to get information about a material GE uses in aviation engines, composite materials used in manufacturing fan blades and encasements, and other technology. GE said the impact on the company was minimal, and no sensitive information relating to military programs was targeted or obtained.

Federal prosecutors also charged 10 Chinese intelligence officers—also believed to be part of China’s Ministry of State Security—and other individuals with attempting to hack into US aviation companies, in a 10/31 WSJ report. They allegedly were aiming to hack into companies that built parts for the turbofan engine.

“This case is not an isolated incident. It is part of an overall economic policy of developing China at American expense,” said John Demers, the head of the Justice Department’s national-security division, according to the WSJ article.

Keep in mind - it's like the cock roach story we all know and love: The one you see, hides the 50 you don't see.

There reportedly have been cyber-attacks on telecom service providers as well. Those attacks are considered extremely problematic because telecom systems provide service to so many other companies that then may be vulnerable as well.

The Navy, NASA and Others

Federal prosecutors charged Zhu Hua and Zhang Jianguo in hacking attacks against the US Navy, NASA, the Energy Department and dozens of companies, a Reuters report from 12/20 stated.

Sources told Reuters that “the hackers breached the networks of Hewlett Packard Enterprise and IBM then used the access to hack into their clients’ computers. IBM said it had no evidence that sensitive data had been compromised. HPE said it could not comment.”

“No country poses a broader, more severe long-term threat to our nation’s economy and cyber infrastructure than China,” FBI Director Chris Wray said in the Reuters article. “China’s goal, simply put, is to replace the U.S. as the world’s leading superpower, and they’re using illegal methods to get there.”

Leaning on Students Too…

Ji Chaoqun, a Chinese electrical engineering student in Chicago, sent an email to a Chinese intelligence official that contained “background reports on eight US-based individuals who Beijing could target for potential recruitment as spies, according to a federal criminal complaint,” a 2/1 CNN report shows. The eight targets were naturalized US citizens - originally from Taiwan or China. Seven had worked for or retired from US defines contractors, and all of them worked in science and technology.

Ji was arrested and pled not guilty. “Beijing is leaning on expatriate Chinese scientists, business people and students like Ji—one of roughly 350,000 from China who study in the US every year—to gain access to anything and everything at American universities and companies that's of interest to Beijing, according to current and former US intelligence officials, lawmakers and several experts,” the article stated.

On the topics - Senator Mark Warner told CNN: “In China, only the government can grant someone permission to leave the country to study or work in the United States and we have seen the Chinese government use their power over their citizens to, in some cases, encourage those citizens to commit acts of scientific or industrial espionage to the benefit of the Chinese government.”

Now, there is always the other side of this story. And I’m keen to give equal voice to it.

But the media is focusing on Trump as the aggressor without providing the broader context that’s motivating these negotiations.

So, the next time you get upset about short-term concerns over tariffs and the purpose there; let’s make certain we all recognize the long-term reason for same: China is certainly not using a common rule book.