Alibaba spy probe shows Europe's FDI laws have teeth, plus Forced labor at Shandong seafood plant & Israel leans on Beijing to 'rein in' Hamas -- China Boss News 10.13.23
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What happened.
Alibaba’s European logistics hub in Liege was always controversial. Even before construction at the cargo airport was complete, local members of parliament were voicing their concerns.
In 2021, Samuel Cogolati, a member of the Green Ecolo party, told Politico: "We should realize that Alibaba is not just a simple private operator, but an agent of the Chinese Communist Party, under the orders of the regime, for instance in the repression of the Uyghur minority through its facial recognition software.”
“Chinese intelligence officers could have access to sensitive and secure areas of the airport … The future economic importance of Liège airport to China can't be underestimated. Alibaba will also have to obey the Chinese security apparatus in the event that it wishes to have access to the potentially sensitive commercial and personal data...,” Justice Minister Vincent Van Quickenborne had also said at a meeting of lawmakers.
But last week's news that Belgian intelligence is investigating China's tech champ for spying reveals how Europe’s new FDI screening laws are an increasing risk for Chinese firms.
According to the Financial Times, Belgian officials are looking at the potential for Alibaba’s electronic world trade platform, a “software used to streamline logistics procedures,” to remit financial intelligence to the Chinese state.
Security services have been monitoring Alibaba’s operations in Liege since 2021, but now there’s new authority and context, Van Quickenborne told FT.
“[T]he early negotiations with Alibaba were from a former century [and] times of naïveté have changed. A new law" requires Belgium to screen foreign investments in critical infrastructure, he said.
Why it matters
EU’s new FDI screening rules enter with a bang
In March 2019, the EU Member States and the European Commission (EC) drew up "a cooperation regime" that would address security concerns related to “industrial espionage, technology transfer, a lack of reciprocity in investment opportunities and state-controlled enterprises taking over national champions,” experts say.
As national security falls under the responsibility of each Member State, the EU cannot legislate precise requirements, but it can make recommendations that Member States often follow, although there may be variances in interpretation and enforcement. But the EU is within its jurisdiction to coordinate policies affecting trade between member states, and that is what it has done with the 2019 EU FDI Screening Regulation.
Belgium passed its national foreign direct investment screening legislation in July 2023 under the Member States' and Commission's "common framework," which “is intended to protect national security interests by controlling investment in strategic undertakings” at both local and EU levels.
The new law created the Belgian Interfederal Screening Commission (ISC) for the express purpose of protecting Belgium's critical infrastructure and “sectors crucial to Belgium's public order, national security and strategic interests."
Authorized with expanded powers, the ISC can look at investments across a wide range of industries, including defense, energy, cybersecurity, electronic communications, digital infrastructure, sensitive technologies and critical minerals, sensitive information and personal data, private security, media, and vital infrastructure, physical and virtual.
As of today, twenty-one of the twenty-seven EU Member States have set up FDI screening mechanisms similar to Belgium’s, up from fifteen in 2020.
That could spell trouble not only for Alibaba, but also for other behemoths of Chinese industry, like state-owned shipping, container transport, and port terminal operating company COSCO, who has controlling and minority stakes in ports throughout Europe, LOGINK, the Chinese government's cargo data network, and Lenovo, a Chinese state-controlled global computer giant that partners with local governments for procurement.
COSCO, LOGINK, and Lenovo
COSCO
According to the European Parliament Research Service (EPRS), the "main players" developing China's economic interests in European ports are two Chinese state companies – COSCO Shipping, and China Merchants PortHoldings, a port terminal operator - and Hutchison Port Holdings, a private Hong Kong-based company which is the “second largest port terminal operator in the world.”
But COSCO stands out for its coast-to-coast presence in the more important European container terminals of Greece, Germany, the Netherlands, Belgium, and Spain. It owns a majority stake in Greece's port of Piraeus which has been controversial for both EU security and commercial reasons.
Some of COSCO’s investments in European ports may not fall within the scope of local FDI screening mechanisms, as ”[c]oncern over Chinese domination of terminals is unlikely to focus on the number of terminals but the degree of individual control, according to a recent report by Alphaliner, a shipping industry group.
Even so, many Member States' rules are new or under review for possible amendment, and, as such, their precise scope remains a mystery causing a great deal of uncertainty for foreign investors, especially those with Chinese state-backed holdings in sectors related to national security.
COSCO is very much aware that risks to its investments are increasing. Last year, the company was forced to take a smaller stake in the Hamburg container terminal Tollerort due to significant pushback from members of Germany's coalition government, and controversy continues to surface.
Politico reported last May that the deal was once again “thrown into doubt . . . when it emerged that German security authorities had declared the facility as ‘critical infrastructure,’ meaning the acquisition could have faced heightened restrictions."
Germany adopted a revision of its Foreign Trade and Payments Act that aligned its investment screening with the EU's policies in 2020.
LOGINK
LOGINK is a not-for-profit developed by China’s Ministry of Transportation in 2007. It “draws on a mix of public databases and information input by more than 450,000 users in China and at dozens of giant ports world-wide, including across the Belt and Road initiative, China’s trillion-dollar international infrastructure project," according to a 2021 Wall Street Journal report.
“More recently it has linked with Belt and Road ports and cargo-data systems in Europe and the Middle East,” news staff then noted.
Michael Wessel, a commissioner on Congress’ U.S.-China Economic and Security Review Commission, told WSJ that “Logink’s window into global trade ‘could give the data holder a treasure trove of intelligence of national security and economic interest.’”
“It should be a much higher concern than it has been,” he said.
Like Alibaba’s cargo airport data collection, LOGINK’s potential to be used by the Chinese state for strategic gains may unsettle local officials. There’s hasn’t been a lot of public attention given to the risks to date, but the European Commission says it is "aware of the evolution and worldwide promotion of LOGINK,” and is monitoring the situation.
Lenovo
Personal computing giant Lenovo has been described by security analysts as “a Chinese threat that’s hiding in plain sight” and “the one that got away” from CFIUS - the US body charged with FDI screening.
It was founded by members of the Chinese Academy of Sciences (CAS), which is “a national think tank” committed to “us[ing] its resources to meet the objectives of the Communist government” with “connections to Chinese military, nuclear, and cyberespionage programs,” according to James Marks, a former US military intelligence analyst specializing in China.
“The Chinese government remains the largest shareholder of Lenovo. It has successfully pursued a low-cost, high volume model. Today, Lenovo is the worldwide market leader in personal computer sales, with 65 million sold throughout the world over the past year. In the United States, no manufacturer’s sales have grown more quickly than Lenovo’s. The company boasts of serving over 900 U.S. state and local government agencies,” he wrote in 2019.
Earlier this month, Daniel Kochis, senior policy analyst in European Affairs at the Margaret Thatcher Center for Freedom, reported that EU and NATO member Romania recently agreed to allow Lenovo’s participation in its 5G network, despite a local law that forbids participants controlled by a foreign government without an independent legal system.
The Supreme Council for National Defense (CSAT) justified the decision on the basis that “entities are owned by Lenovo Group Limited, ‘which operates as a limited liability company organized under the laws from Hong Kong’” and that “the legal system of the Hong Kong Special Administrative Region is based on the rule of law and the independence of the judiciary under the principle of ‘one country, two systems.’”
Kochis blasted the decision for creating a “critical gap” in NATO security.
“This is wildly off base. The Hong Kong of 2023 is not Hong Kong in 1983 or even 2013. Beijing has tightened its grip over the special region over the past few years, including its implementation of the Hong Kong National Security Law in 2020, which completely blows a hole in CSAT’s argument,” he said.
Lenovo’s participation in Romania’s wireless network had just concluded the approval phase, but CSAT may yet withdraw its permission on the basis of new information coupled with EU and US pressure.
This Week’s China News
The Big Story in China Business
UYGHURS FORCED TO WORK IN SEAFOOD PLANT OUTSIDE XINJIANG: Pultzer-prize winning journalist Ian Urbina, director of journalism nonprofit the Outlaw Ocean Project, released a report in the New Yorker on his investigation into China's transfers of "minorities from Xinjiang to work in industries around the country" including seafood factories that supply the U.S. and Europe.
Under the Uyghur Forced Labor Prevention Act (UFLPA), the US bans all goods produced in Xinjiang under a "rebuttable presumption" that the goods are made by forced labor. The law was easy to pass in 2021 - Congress approved it 428-1 - and the Senate was unanimous.
The U.S. government is, however, aware that Uyghurs are shipped to work against their will in factories across China. A report 2020-2021 report by the U.S. Department of Labor, for example, describes Uyghurs being "transferred out of Xinjiang" to work in glove, hair product, polysilicon, textiles, and thread/yarn, to factories" in other - mainly eastern - parts of China.
New UFLPA and sanctions risks: To deal with the forced labor transfers outside Xinjiang, the US has opted for a targeted "entity" approach that adds specific Xinjiang-based firms in certain industries to a blacklist. However as more investigations, like Urbina's, come to light, sanctioning individual firms may become unwieldy, like it was in Xinjiang, where there were, simply, too many products and businesses involved in slave labor.
Widening the UFLPA to include other regions of China, however, is likely to encounter a lot of pushback as it forces the decoupling issue on a larger span of companies who want to do business with Chinese firms.
It could also open the floodgates by raising awkward questions about other Chinese industries as, according to Urbina, China has been "transferring Uyghurs to work outside the region" as part of the government's "Xinjiang Aid" program for two decades.
And that is the core risk for foreign firms from countries with laws against forced labor - the likelihood of supply chains so tainted, it defies attempts to address culpable parties individually.
“Between 2014 and 2019, according to government statistics, Chinese authorities annually relocated more than ten per cent of Xinjiang’s population—or over two and a half million people—through labor transfers; some twenty-five thousand people a year were sent out of the region. The effect has been enormous: between 2017 and 2019, according to the Chinese government, birth rates in Xinjiang declined by almost half,” Urbina said.
In other China business news
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