The (better) breakdown for why Berkshire Hathaway is dumping BYD, Plus BofA tells Detroit automakers to leave China -- China Boss News 6.21.24

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What happened

CNN Business reported that Warren Buffett's Berkshire Hathaway "sold another 1.35 million Hong Kong-listed shares of BYD" last week.

News staff said the latest "dumping" was Berkshire's "first major sale of BYD shares in ten months and the 14th since August 2022, when it started gradually reducing its stake in China's top EV maker."

Although news staff attributed the divestiture to trade tensions between China and the West over Xi Jinping's dumping of electric vehicles, that may not explain why one of the world's greatest investors is ridding himself of one of China's greatest companies.

Last week, the Department of Homeland Security added three additional Chinese companies to its list of blacklisted firms over their use of forced labor.

According to the New York Times, the new entries include a seafood processor revealed to be "employing laborers brought to eastern China from Xinjiang" by the Outlaw Ocean Project, a non-profit that produces investigative news about human rights, labor, and environmental concerns in the high seas, an aluminum processor, and a footwear factory.

More crucially, DHS officials told the Times that increases in the 'pace of additions to the list" will "continue" as the government gets up to speed on new forced labor laws which "absolutely required a ramp-up period."

Robert Silvers, an undersecretary at the Department of Homeland Security who chairs a committee overseeing the list, explained that the Uyghur Forced Labor Prevention Act (UFLPA), which was enacted on December 23, 2021, initially "came with no new funding for the department."

"We had no procedures, no staff, no rules of the road for doing this work. So we have dug deep and pulled resources away from other areas to surge toward this priority area," Silvers said.

The law is considered a broad ban on any product made in Xinjiang because it creates a "rebuttable presumption" that is nearly impossible to dispute due to China's opaqueness.

US companies pushed back against the law, and, for a brief moment, it seemed that "vast spending" to lobby against the legislation would weaken it.

But the UFLPA grew teeth and emerged as an overhaul of US-China trade policy.

The law, as enforced by US Customs and Border Protection, has already had an extraordinary impact on companies.

Why it matters

From Laogai to ‘Absolutely no mercy’

Slavery in China, like in other ancient civilizations, has a long and varied history.

Experts say in ancient times, war captives were forced to work by their captors, and many periods saw forms of social status where the lower class was subordinate to upper-class masters.

However, in the Communist era, under Mao, Chinese prisons were organized as vast factories to produce whatever the Great Helmsman determined China needed, and the institution of "reform through labor" took stubborn root in the extensive system of Laogai camps that permeated nation.

Prison labor was used for everything from building dams, roads, and apartment buildings to cultivating green tea, maintaining industrial engines, and deadly work in coal mines.

Succumbing to international pressure, in 2013, Beijing said that it had outlawed prison labor camps.

But, in 2019, a 6-year-old in the UK found a note written in English in a Christmas card she had purchased to give to schoolmates. The message read: "We are foreign prisoners in Shanghai Qingpu prison, China. Forced to work against our will. Please help us and notify a human rights organization."

That said, Beijing's 2017 ramping up of incarcerations in Xinjiang "after a surge of antigovernment and anti-Chinese violence" erupted in the capital, Urumqi, was a turning point in Chinese history.

The campaign was a brutal expression on an unprecedented scale of racist and Islamaphobic policies. A 2022 UN human rights report found that it "may have constituted 'crimes against humanity.'"

Nonetheless, Xi Jinping has doubled down on what he considers "a crucial national security issue" and the impetus for his "people's war" in the region.

In 2019, the New York Times released an enormous trove of leaked Chinese government documents containing several of Xi's previously unpublished speeches, in which he told local officials that the indigenous Uyghurs, a non-Han Muslim minority, would be shown "Absolutely no mercy."

Still, understanding why investors like Berkshire Hathaway would be concerned about an intensified US crackdown on forced labor in China requires a closer look at the Bingtuan ("兵团"), who sit with near total authority almost 2000 miles from Beijing.

This strange, hybrid entity, often referred to as a state-owned enterprise in the form of an army corps, controls China's Xinjiang Uyghur Autonomous Region.

More commonly known as the Xinjiang Production Construction Corps (XPCC), it was established by Mao in 1954 as a means to safeguard China's frontier lands and develop them.

According to Andrew S. Erickson, Associate Professor at the Naval War College and an Associate in Research at Harvard's Fairbank Center, although Mao created the XPCC, it was Deng Xiaoping who gave it new “paramilitary” life and the mandate for combating Islamic fundamentalism in the early '80s.

"Following Xinjiang leader Wang Enmao's dismissal in 1968 on charges for having used the XPCC as his own regional army, the corps assumed a greater economic role and was stripped of its military designation and absorbed by Xinjiang's provincial government in 1975. Deng Xiaoping restored the XPCC's military role in 1981 amid fears of economic stagnation, Soviet aggression, Islamic fundamentalism, and ethnic separatism."

Bigger than Xinjiang

But much of the updated information we have on XPCC's activities comes from human rights activists and legal scholars at Helena Kennedy Center for International Justice, Sheffield Hallam University in the UK.

In 2022, the Center released a report documenting the XPCC's extraordinary assets and global reach in the 21st century.

Even upon a cursory glance of Until Nothing is Left - China's Settler Corporation and its Human Rights Violations in the Uyghur Region, one can grasp the magnitude of the issue for China, global business, and for the Uyghurs - over a million of whom are detained in prison camps while their families endure heavy surveillance, draconian restrictions, and cruel population control policies.

As a colonial government, the XPCC

• manages a sixth of the region's total land, and a quarter of its arable land

• governs one-sixth of the region's population

• operates 14 military divisions and 185 regiments, which in practice effectively perform the functions of county- and town-level governments

• has estimated direct and indirect corporate holdings that could amount more than 862,000 entities worldwide (according to Sayari)

• holds a 50% or more stake in at least 2,873 companies (according to C4ADS)

• concentrates much of its corporate holdings in agriculture and construction

• has expanded its holdings to energy, mining, chemicals, oil and gas extraction, logistics, apparel, electronics, wine, food processing, insurance, tourism, and many other sectors

• produces approximately 33% of the Uyghur Region's cotton (amounting to about 8% of the world's cotton) and a third of the world's tomatoes used for paste, and contributes significantly to the apparel, electronics, and pharmaceuticals sectors, for both domestic and international consumption

• produces goods that reach far into global supply chains and operates construction projects in the XUAR as well as throughout China, Central Asia, the Middle East, and Africa

As you can see, the XPCC is deeply engaged in world trade. By virtue of its economic success and its policing of a "problem" minority, it has also become very potent in Chinese politics. It has no equivalent, either in other parts of the world or in China.

Although many today think of China in the 21st century as a mercantilist state - in the case of the XPCC - there are also striking corporatist elements.

The XPCC carries out Xi's "Absolutely no mercy" policy, but this researcher also believes that the Bingtuan's insatiable commercial expansionism drives such initiatives.

If you accept this view, it's easier to understand the staying power of China’s forced labor programs despite the diplomatic and economic headaches they cause for Beijing.

But back to the crux of why Western firms, like Berkshire Hathaway, see the writing on the wall: They cannot possibly comply with the West's forced labor bans and continue to operate in China.

Why? Because the Bingtuan (and Beijing) won't allow it.

Over the past few years, China has retaliated against foreign forced labor legislation by passing its own measures to punish firms that comply with it.

It now has an "Unreliable Entity List" that bans companies from doing business with Chinese firms and a Blocking Statute that mandates harmed parties "report any foreign government's restrictions they experience within thirty days" and gives them standing to sue for recompense in court.

The accelerated enforcement of the UFLPA significantly increases the risks for any business worldwide that invests or operates both in China and the US.

As a case in point, BBC reported earlier this month that the US Senate Finance Committee has broadened its investigation into German automaker BMW "after the car maker was found to have imported vehicles to America that contained banned Chinese parts."

However, private due diligence investigations into the XPCC long preceded that.

In 2022, the year Berkshire Hathaway began to sell off its stake in BYD, strategic consultancy firm Horizon Advisory "investigated the Xinjiang aluminum sector and reported how – alongside the textile, apparel, agriculture, and solar energy sectors in the region – this sector is at high-risk of forced labor exposure," according to trade lawyers at Cromwell Sullivan, an elite Wall Street law firm.

"The report found that the eight major aluminum companies operating in Xinjiang – one of which, Xinjiang East Hope Nonferrous Metals, is already on the Forced Labor Enforcement Task Force's (FLETF) UFLPA Entity List – are exposed to indicators associated with forced labor. In addition, the report emphasizes how forced labor at such an upstream node can have implications across a multitude of other sectors' supply chains, including the automotive, aerospace, rail, information technology, electronics, and polysilicon industries,” they wrote on the firm’s international trade law blog. Bold emphasis added.

Earlier this year, human rights organizations and labor activists called out BYD and other global carmakers, including General Motors, Tesla, Toyota, and Volkswagen, for "failing to minimize the risk of Uyghur forced labor being used in their aluminum supply chains."

And, on June 6th, the House Committee on Homeland Security and the House Select Committee on the Chinese Communist Party sent several letters to the Department of Homeland Security, which, according to their press statement, "revealed shocking new evidence implicating major Chinese battery manufacturers, Gotion and CATL, in Chinese Communist Party state-sponsored slave labor and the ongoing Uyghur genocide."

Slave labor and genocide. Now, those are some hard-to-rebut subsidies that Chinese EV makers and their investors would not want to debate.

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