Generational Dynamics World View

[John J. Xenakis]

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

This morning's key headlines from GenerationalDynamics.com

• Huawei plans to become world's biggest smartphone supplier as it introduce Huawei P Smart 2019
  
• Poland arrests Huawei employee on spying allegations
  
• Chinese economic expert Xiang Songzuo warns that economy shows signs of crashing
  
• Xiang's Headline statistic: At most 1.67% GDP rate of growth
  
• China's Five phases of consumption
  
• Major misjudgments about China's economy
  

****
**** Huawei plans to become world's biggest smartphone supplier as it introduce 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. It's 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:

• China hackers collect data on hundreds of millions of Americans and Westerners (21-Dec-2018)
  
  
• University of N. Florida and Pentagon cut ties with China's Confucius Institutes (30-Sep-2018)
  
  
• New book documents extensive Chinese infiltration into Australia's organizations (26-Feb-2018)
  
  
• Concerns grow over China's covert infiltration into New Zealand's government (16-Feb-2018)
  

****
**** 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:

• China jails Canadian journalist Michael Kovrig in apparent retaliation for Canada arrest of Meng Wanzhou (12-Dec-2018)
  
  
• Canada arrests the chief financial officer of China powerhouse Huawei (07-Dec-2018)
  
  
• Mike Pence's China 'containment' speech signals more contentious US-China relations (26-Oct-2018)
  

****
**** 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:

<QUOTE>"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."<END QUOTE>

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:

<QUOTE>"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?"<END QUOTE>

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

<QUOTE>"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."<END QUOTE>

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:

• Solve the food problem.
  
• The “New Big Three” - short for refrigerator, color TV, and
  washing machine.
  
• Consumption of information
  
• automobiles
  
• real estate

According to Xiang:

<QUOTE>"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]."<END QUOTE>

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

<QUOTE>"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?"<END QUOTE>

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:

<QUOTE>"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."<END QUOTE>

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:

<QUOTE>"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?"<END QUOTE>

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

<QUOTE>"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."<END QUOTE>

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 can will be kicked down the road,
or it could mean that president Trump will simply increase the
pressure on China by increasing tariffs by a small amount.

Related Articles

• China defends million-prisoner 'reeducation camps' and Sinicization of Islam in Xinjiang (14-Oct-2018)
  
  
• China says that its economy is "sound and stable" (06-Dec-2006)
  
  
• China Prime Minister warns country becoming unstable (24-Jan-2006)
  

KEYS: Generational Dynamics, China,
Huawei Technologies, Ren Zhengfei, People's Liberation Army, PLA,
Meng Wanzhou, Sabrina Meng, United Front Work Department, UFWD,
Poland, Internal Security Agency, ISA,
Weijing W, Stanislaw Wang, Piotr D,
Xiang Songzuo, Renmin University

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John J. Xenakis
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