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Three Examples of China Using Its One Belt, One Road Network Initiative To Project An Increase In Military Power Are In Sri Lanka, Pakistan And Djibouti

ArmchairTechInvestor, May 20, 2018, by Brad Peery

Book Under Development-Simon and Schuster: China vs. U.S. 2018, A Police State vs. A Democracy
Book on Amazon.com: Trump’s Political Agenda and Achievements

www.ArmchairTechInvestor.com,
www.ArmchairPolitician.US

*One can profess that China’s One Belt, One Road (OBOR) trade network, covering over 60 countries, is for humanitarian purposes and will assist the countries on the network in improving their economic opportunities. The network connects with about 65 percent of the world’s population and over 30% of its GDP. China’s role is to finance infrastructure development in the countries. China goes into the countries and provides high interest loans that many of the countries can’t afford. If they default, China can then take over the facilities, and establish a permanent presence within those countries. This can also have the effect of the country not being able to arrange outside financing, making them even more reliant on China.

With regard to loans having been made by China, If repayments are not made, the country begins a long-term period where their foreign policy choices will be constrained. Sri Lanka is an example of what can occur. A new government in Sri Lanka had a desire to develop closer relations with India and the U.S. They were constrained by a previous debt for equity swap with China that resulted in China getting a 99-year lease on a very strategically important port at Hambantota, Sri Lanka. The loan that was made was not a financially sound investment and resulted in Sri Lanka defaulting on the loan, with tragic consequences to the country.
* China’s Belt and Road Initiative is Being Blamed for Sri Lanka’s Hambantota Port Problems. But the Real Story is Rather Different.
Silk Road Briefing, April 23, 2018

**Large government-backed loans to foreign countries come with social and political strings attached. The Washington Post reports that China’s ZTE Corporation “sold technology and provided training to monitor mobile phones and Internet activity.” Today, Chinese tech giant Huawei is partnering with the government of Kenya to construct “safe cities” that leverage thousands of surveillance cameras feeding data into a public security cloud “to keep an eye on what is going on generally” according to the company’s promotional materials. Not all elements of China’s domestic surveillance regime are exportable, but as the “New Digital Silk Road” takes shape, the public and online spaces of countries along it will become less free.
**China’s vast foreign investment program comes at a sharp cost to human rights and good governance, Foreign Policy, By Richard Fontaine and Daniel Kliman, May 16, 2018

***According to the Washington Post’s, By Bill Gertz, “China is constructing its second overseas military base in Pakistan as part of a push for greater power projection capabilities along strategic sea routes. The facility will be built at Jiwani, a port close to the Iranian border on the Gulf of Oman, according to two people familiar with deal.”

Djibouti is a different situation. China already has a base there and has plans to expand that base into a regional military supply port.

Some Pentagon officials regard the Djibouti base, and the future second base at Jiwani, as part of efforts to control oil shipping in and out of the Persian Gulf and the Red Sea. Both Chinese bases are located near strategic chokepoints-Djibouti near the Bab el Mandeb on the Red Sea and Jiwani close to the Strait of Hormuz on the Persian Gulf.

“Djibouti’s government will embrace greater Chinese involvement in the nation’s ports and sees no reasons for U.S. concern that its strategic interests may be threatened”, Finance Minister Ilyas Dawaleh said.

Djibouti is located on a global shipping crossroads that links the Red Sea and Suez Canal, Djibouti has become increasingly important to regional and world powers. Djibouti is almost the size of the state of Massachusetts. The largest U.S. military base in Africa is situated there and China’s first such overseas facility, which was inaugurated in August 2017, is also in the Doraleh area.

The Horn of Africa country is embroiled in a dispute with DP World Ltd. over the running of the Doraleh Container Terminal and has struck a deal to boost cargo trade with a company working with Chinese state-owned enterprises. It would be “ridiculous” to imagine that China could restrict or deny U.S. access to Doraleh as a result of the deal, Dawaleh said in a phone interview.

“Djibouti’s development needs all its friends and strategic partners,” he said. “At the same time, no one can dictate to us who we should deal with.”

U.S. Africa Command General Thomas Waldhauser warned that a Chinese takeover of Doraleh could have “significant” consequences if there were restrictions on the U.S.’s ability to use the facility.
***Beijing is using commercial bridgeheads to give its warships staying power in the Indian Ocean. Foreign Affairs, By Keith Johnson and Dan De Luce, April 17, 2018

ArmchairTechInvestor Opinion
China may be providing benefits to some of the countries on their OBOR network. Others are likely to be unable to meet their debt payments to China, and China will extract a substantial price for such defaults. Many of these defaults will result in China essentially owing the assets in the partner country.

Estimates put China’s total Belt and Road-related construction and investment at more than $340 billion from 2014 to 2017. The total project cost is estimated to be from $4 trillion to $8 trillion dollars, so it appears that as much as 8% of the total cost of the project has already been made by China. The size of the project represents an enormous financial commitment, even for China.

China’s plans call for the Jiwani base in Pakistan to be a joint naval and air facility for Chinese forces, located a short distance up the coast from the Chinese-built commercial port facility at Gwadar. Both Gwadar and Jiwani are part of Pakistan’s western Baluchistan province. There is social unrest in that province, and China has a commitment from Pakistan to provide a 15,000 person military guard to protect the Gwadar Port area. It is reported that most of the people living in the area are Chinese.

China is a tough negotiator and will extract a significant price, if there is a default on their debt. As happened in Sri Lanka, this can include the conversion of their debt to equity in a project, with China essentially owning the project.

China Has Semiconductor Fund Plans Underway To Try And Beat The U.S. In The Future Race For Semiconductor Technology Superiority

ArmchairTechInvestor, May 6, 2018, by Brad Peery

Book Under Development-Simon and Schuster: China vs. U.S. 2018, A Police State vs. A Democracy
Book on Amazon.com: Trump’s Political Agenda and Achievements

www.ArmchairTechInvestor.com,
www.ArmchairPolitician.US
ArmchairTechInvestor@gmail.com

In 2013, Chinese government officials invaded the Beijing and Shanghai offices of Qualcomm. After a 15-month investigation, regulators saddled the company with a $975 million fine. In addition to the fine, Qualcomm:
• Was branded a monopoly;
• Was forced to reduce prices;
• Had to move more of its technical manufacturing to China;
• And, help boost the technological abilities of Chinese companies.
By 2018, a growing number of American companies “have complained that China has pressured them into sharing their technology in similar ways”.

The U.S. is finally standing up to an aggressive China by confronting large Chinese companies that are trying to enter the U.S. market, and could threaten U.S. security. Qualcomm, a worldwide leader in semiconductor technology, was threatened by an unfriendly takeover by Broadcom, a Singapore-based company. The U.S. blocked the acquisition on national security grounds. There were several concerns. The acquisition of Qualcomm could have reduced U.S. superiority in semiconductors. It could also have reduced the U.S. lead in next generation 5G broadband networks. Qualcomm has a large business in China, and China has threatened to block Qualcomm has made an offer to acquire NXP Semiconductors, an important part of its growth strategy. The acquisition has been stalled by an antitrust review. In early May, 2018, “Chinese officials said that Qualcomm will have to make more concessions to compensate for the market power it would enjoy after completing the deal, without providing details.”

China has used the national security threat issue as a way to protect Chinese companies. China is still considered to be an emerging country under the World Trade Organization rules, showing how antiquated is the WTO.
*Qualcomm May Be Collateral Damage in a U.S.-China Trade War
New York Times, By Ana Swanson and Alexandra Stevenson, April 18, 2018

**China announced plans to significantly improve the competitiveness of Its state and Chinese semiconductor companies when it launched a $21.8 billion semiconductor development fund in 2014. A U.S. Trade Representative’s report on March 22, 2018 declared the 2014 fund as an effort by government agencies and state-owned companies to meet Chinese national strategic objectives.

China has also announced a new fund that could total about $47.4 billion. Important semiconductor industry sectors it will support are likely to include microprocessors and graphic processors. The objective is to reduce China’s dependence on foreign semiconductor products from companies such as Qualcomm, IBM and Nvidia.
**China Plans Fund to Boost Semiconductors, Wall Street Journal, By Yoko Kubota, May 5, 2015

China’s Goal Is To Dominate The Internet. They Are Using Their Very Large Home Markets, And Unfair Trade Practices, To Achieve That Goal

ArmchairTechInvestor, April 23, 2018, by Brad Peery

Book Under Development-Simon and Schuster: China vs. U.S. 2018 (Scheduled publishing date: September 1, 2018)
Book on Amazon.com: Trump’s Political Agenda and Achievements

www.ArmchairTechInvestor.com,
www.ArmchairPolitician.US
ArmchairTechInvestor@gmail.com

ZTE and Huawei are two Chinese companies that pose a threat to the U.S.’s broadband communications networks. ZTE has become the fourth largest cellphone supplier in the U.S. The UK banned the use of ZTE equipment because of concerns that China could force the company to infiltrate the UK’s broadband communications infrastructure.

China essentially requires Chinese companies that wish to do business in China to pledge allegiance to China. This can result in those companies being used to spy on countries where they do business. This is the equivalent of the U.S. requiring Apple to spy on behalf of the U.S. government, which they would not do. The reverse is true, in that Apple is being required to support Chinese government objectives that amount to Internet usage censorship, such as by requiring the removal of Apple Internet applications, as a cost of doing business in China.

The technological war with China has begun. It remains to be seen whether U.S. companies can do business in China without giving away their technology. China has pledged that proprietary company technology will be protected, but such words are easily annunciated.

In the case of access to the U.S. information technology markets. companies such as ZTE and Huawei are finally being restricted because of the business they do in the U.S. that could provide a threat to U.S. security, and open the U.S. up to Chinese surveillance.

China has a vision to become an Internet and tech power. It has pledged more state support for companies caught up in the trade fight with the U.S. A step China has already taken to dominate the Internet is to allow only three Chinese companies to directly access the Internet. Any foreign company that wants to access the Internet must do it through one of those three companies. This is a step along the way toward China’s ambition to dominate the Internet.

One of the main issues between the U.S. and China is the claim that China is stealing the intellectual property of U.S. companies. This is typically done through forcing U.S. companies that want to do business in China to form joint ventures with Chinese companies. One of the companies that has resisted this restriction was Tesla, when it decided to build an electric vehicle plant in Shanghai. It will be required to pay a 25% import tax on all vehicles sold in China. This is the kind of treatment that justifies Trump putting 25% tariffs on U.S. imports of Chinese products, such as steel.

As of April, 2017, the U.S. was drawing up a $100 billion sanctions bill against China, because of the alledged stealing by Chinese companies of the intellectual property of U.S. companies doing business in China.

The U.S. has imposed sanctions on ZTE, a large Chinese smartphone company, that restrict it for seven years from using semiconductor processors manufactured by Qualcomm, or the Android platform manufactured by Alphabet (Google).

Semiconductors are a “core” area where China lags behind the U.S. and that China wants to achieve Technological breakthroughs. The U.S. has blocked Broadcom, a Singapore company that has recently moved to the U.S., from pursuing an unfriendly takeover of Qualcomm. Broadcom could have discontinued Qualcomm’s 5G chip development program, opening the market to a Chinese company. This would create security risks for the U.S., including defense communications.

Mr Xi, the new Chinese President for life, has pushed Chinese companies to collaborate with the military, particularly in information technology, including quantum computing, artificial intelligence, and other advanced technology fields.
Xi Outlines Vision for Furure as Tech Power, Wall Street Journal, by Josh Chin, April 23, 2018

ArmchairTechInvestor Opinion
China has a very large domestic market that is enticing foreign companies to meet Chinese edicts that may disadvantage the foreign companies home countries in competing with China economically and militarily.

The new dynasty of President Xi needs to be viewed as at least a 20-year focused effort by China to dominate certain information technology and other technology driven industries, such as electric vehicles. That focus, plus the One Belt, One Road Trade network, involving 60 countries, will provide an increasing challenge to the current global technologic, economic and military dominance by the U.S.

Trump Is Considering Joining The TransPacific Partnership (Now TPP-11). Will This Be Possible And Advantageous?

ArmchairTechInvestor, April 22, 2018, by Brad Peery

Book Under Development-Simon and Schuster: China vs. U.S. (Scheduled publishing date: September 1, 2018)
Book on Amazon.com: Trump’s Political Agenda and Achievements

www.ArmchairTechInvestor.com,
www.ArmchairPolitician.US
ArmchairTechInvestor@gmail.com

President Trump’s trip to Asia in early November, 2017, was supposed to be about the possible de-nuclearization of the Korean Peninsula. However, an important element of the trip was to make it clear that Trump wants to follow-up on the U.S. withdrawal from the TPP by arranging bilateral trade agreements with the countries in Asia. Had the U.S. done this 15 years ago with China, instead of relying on the World Trade Organization to police the compliance of countries with its edicts, including China, the trade situation with China might be quite different today.

*An advantage of an agreement such as TPP includes preferential terms for member countries that can reduce tariffs from what they might be otherwise. The TPP group of countries represents 16% of global GDP. However, countries other than the U.S. would be only 35% of TPP, and the U.S. would be 65%. Japan is 16% of the GDP of the original 12 countries. And, Mexico and Canada, with whom the U.S. is negotiating a Nafta agreement, together are 9% of the GDP. The other 8 countries total only 10% of the GDP of the original 12 countries.

Not being a member of TPP could be negative for U.S. farming interests. For example, in July, 2017, Japan imposed a 50% tariff on U.S. frozen beef. Australia’s tariff cost is 27.5% because of their membership in TPP. Japan has also signed an agreement with the European Union to import their farm products. It is working on a similar agreement with Canada, whose pork producers are taking market share from the U.S.

**There are many barriers to the U.S. rejoining the TPP. The other eleven countries have already reached an Agreement, forming TPP-11. Once 6 countries ratify the agreement, it will become active. That could occur about first quarter, 2019. Until the Agreement is ratified, the U.S. will not be able to join it. 20 provisions in the original agreement, some of which were important to the U.S. were eliminated. These would need to be restored, and other concessions given to the U.S. to make this a better deal that the original agreement. To add additional benefits for the U.S. and get all 11 countries to agree to add the U.S. as a new member could be very difficult.

While the U.S. is emphasizing its policy of negotiating bilateral trade agreements, China is doing just the opposite. It has developed a trade agreement, called the Regional Comprehensive Economic Partnership with 16 countries making up 39% of global GDP. China is the main trade competitor of the U.S. on the global stage. It has an ambitious project called the One Belt, One Road Network that will connect 60 countries to China economically, as joint investors, and perhaps also politically and as defense partners. These types of activities can result in relationships that go far beyond trade and can involve joint investment, political and military relationships.
*Trump’s Pacific Trade Tear, Wall Street Journal Editorial, November 11, 2017
**Re-Entry to Trade Deal Won’t Be Cheap, Wall Street Journal, by Bob Davis, April 16, 2018

ArmchairTechInvestor Opinion

It may turn out the renegotiating Nafta with Mexico and Canada will work out to the benefit of the U.S. mainly by requiring and verifying certain levels of U.S. content in automobiles imported into the U.S. It is much less certain that this will be the case for the U.S. withdrawal from the TPP. There is no evidence yet that any of the countries will be willing to negotiate bi-lateral agreements with the U.S. There are benefits in developing relationships with countries in Asia, beyond just the trade aspect of those relationships. Having the TPP as one element of a relationship with a country can be very beneficial overall.

If the U.S. wants to be a player in Asia, it will need to be viewed as a reliable longterm partner. Being a democracy that can change policy, as administrations change, does not bode well for forging lasting partnerships. That is the main issue for the U.S. in developing lasting foreign policy relationships, including trade relationships. It is no wonder that results occur such as how disadvantaged the U.S. is in its trading relationship with China. They know who they are, and where they are going, and can therefore take a very longterm view in executing their plans.

The U.S. withdrew from the Trans Pacific Trade Partnership (TPP) The TPP was the 12-nation trade deal that included the United States, Japan, Mexico, Canada, Australia, New Zealand, Vietnam, Peru, Chile, Malaysia, Singapore, and Brunei. It was never ratified by Congress. Trump’s America First theme, and the cancellation of the TPP has led many in Asia to view the U.S. as anti-trade, and China as pro-trade. However, the U.S. has negotiations underway with many of these countries, plus the Nafta trade agreement with Canada and Mexico. The main uncertainty is whether the U.S. can negotiate a bi-lateral agreement with Japan, which prefers to have the U.S. join the TPP.

China’s Growth Rate Is Slowing As China Consolidates Its Communist Party and State Operations

ArmchairTechInvestor, March 27, 2018, by Brad Peery

Book on Amazon.com: Trump’s Political Agenda and Achievements
Book Under Development-Simon and Schuster: China vs. U.S. (Scheduled publishing date: September 1, 2018)

www.ArmchairTechInvestor.com,
www.ArmchairPolitician.US
ArmchairTechInvestor@gmail.com

China is targeting a growth rate of 6.5% in 2018, following an increase of 6.9% in 2017. As part of the changes that have occurred since President Xi became China’s leader for life, the government is reigning in risky lending practices, revamping the state’s bloated state sector, and has also espoused attracting foreign investment. This latter objective does not seem to be likely, in view of how China treats foreign companies that want to develop their operations in China. Trade tensions with the U.S. are also an issue. President Trump has proposed working with China to reduce the trade imbalance with the U.S. by $100 billion, over 25% of the U.S. trade deficit with China. This might be accomplished over several yeas, and could be an alternative to a trade war.

On a separate front, India has become the large country with the highest growth rate, replacing China. Both countries have about the same size populations, but India has lagged China in developing its economy. India’s economic growth problems have improved. In the last quarter of 2017, India’s economy grew by 7.2%. In the first half of 2017, Mr. Modi voided most of the currency in circulation and put in a nationwide goods and services tax, causing uncertainty and consternation that took the economy below a 6% growth rate. The reforms implemented by Mr. Modi were aimed at stemming corruption and aiding cashless transactions. The banks in India are struggling and a $32 billion capital infusion was implemented in October 2017. Areas of the economy are growing but exporters are struggling
*Beijing Sees Growth of 6.5% This Year, Wall Street Journal, by Lingling Wei and Chun Hong Wong, March 5, 2018
**India’s Growth Zooms to Global Lead, Wall Street Journal, by Anant Vliay Kala, March 1, 2018

China’s Restrictions Substantially Disadvantage Competitive U.S. Tech Company Access To The China Market

ArmchairTechInvestor, March 22, 2018, by Brad Peery

Book on Amazon.com: Trump’s Political Agenda and Achievements
Book Under Development-Simon and Schuster subsidiary: China vs. U.S. (Scheduled publishing date: September 1, 2018)

www.ArmchairTechInvestor.com,
www.ArmchairPolitician.US
ArmchairTechInvestor@gmail.com

U.S. tech companies are severely restricted in accessing the China market. The restrictions vary by sector, but the most onerous restrictions are on providing Internet access to their databases and search services to their customers.

Alphabet (Google)
Google is blocked in China, and unlike Apple, it has not been able to limit the download of apps sufficiently to be able to enter the Chinese Internet search market.
*Why Google Quit China—and Why It’s Heading Back, The Atlantic, by Kavin Waddell, January 19, 2016

Amazon
*Online Internet retailers in China are not allowed to sell directly to their customers. This requires Amazon to go through a complicated process that severely limits its capabilities in China, compared with the big three allowed Chinese company Internet providers.

Amazon has warned, “Our Chinese and Indian businesses and operations may be unable to continue to operate if we or our affiliates are unable to access sufficient funding, or if China enforces contractual relationships with respect to the management and control of such businesses.” The company added that if its international activities were found to be in violation of any existing or future laws in China or India. Or, if interpretations of those laws and regulations were to change, it would lead to fines, license revocation and or a complete shutdown of operations.

In China, the Amazon website is operated by local companies owned by Chinese nationals in order to meet ownership and licensing requirements.
*Amazon Warns of Ending India and China Operations Due to Complicated Laws, International Business Times. By Jerin Mathew, November 3, 2014

Apple
*Apple did well in the December quarter of 2017, increasing revenues by 11% in the Asia-Pacific region, but is losing market share in the huge smartphone markets in China, India and other Asian countries. Taking significant market share is Xiaomi, which has inexpensive and feature rich smartphones that compete with Apple’s top of the line X. The X sells for about $1,000.

Xiaomi, often called the Apple of Asia, has a smartphone, the Redmi Note 4. In China, that sells for about $200 and competes with the Apple X. Xiaomi’s cellphone market share was 19% in 2017, compared to 3% in 2015. Apple’s market share in China was about 8% in 2017, down from 13% in 2015.

The typical smartphone in India, for example, sells for about $200, and is not subsidized by the wireless carrier, as in the U.S. These smartphones may have batteries that are sensitive to power fluctuations, and often have features, such as cameras, that are unique to the Indian market.
**Asian Rivals Put Apple Under Pressure, Wall Street Journal, by Newley Purnell, March 2, 2018

China is issuing demanding cybersecurity requirements. It is requiring that all cloud data be located on servers in China, including encryption keys. Apple has said that the keys will be stored in a secure location, they will retain control of them, and havn’t put in any backdoors. However, Chinese seizure is always a possibility, or China could require that Apple give them specific keys. The U.S. Congress is very concerned about these keys being stored in China

The Apple data is vulnerable to Chinese surveillance. Apple also removed 700 apps that allow users to bypass Internet restrictions. Other restrictions include censoring content, and having to set up joint ventures with Chinese companies. Most smartphones are assembled by Chinese companies.
**Apple’s Cook Plays Along With China, Wall Street Journal, by Yoko Kubota, February 27, 2018
***Apple Puts iCloud Keys in China, Wall Street Journal, by Robert McMillan and Tripp Mickle, February 26, 2018

Boeing
*Boeing is an extremely large commercial plane producer. It is also an import resource to NASA in pursuing a commercially competitive space vehicle program, including using very powerful space launch systems. Those vehicles can compete with Space-X, which is looking to launch a system that might reach Mars in 2024.

*China and Russia are modernizing their nuclear forces, and there is growing risk from North Korea. The first phase of a U.S. land-based missile program replacement for the Minuteman 3, deployed in silos in the Great Plains, is underway. The first phase is a $700 million design phase, and Boeing and Northrop have been selected to compete for this business. It will include 600 land-based missiles, of which 400 will be deployed, and 200 will be used for testing.
*Nuclear Missile Overhaul Falls to Small Pool of Contractors
Wall Street Journal, By Doug Cameron, August 27, 2017

Daimler
*In 2010, Geely purchased Volvo from Ford for $1.8 billion, a fraction of the $6.4 billion that Ford had paid for Volvo in 1999.

In February, 2018, Li Shufu, the chairman of Chinese automaker Geely, bought Daimler stock, worth $9 billion. The stake will not be owned by Geely. It will be held by an investment vehicle known as Tenaclou3 Prospect Investment Ltd., according a regulatory filing.

Daimler has said it plans to begin assembling Mercedes-Benz vehicles in 2018 from a $1 billion facility shared with Renault-Nissan, in Aguascalientes, Mexico.The purpose of the Geely investment in Daimler is not clear, but because Geely is working to improve the quality of its vehicles, particularly in the luxury vehicle area, that is very likely a reason.
*China Humiliates Another Western Company, Wall Street Journal, by Michael Auslin, February 21, 2018

Facebook
*In December, 2017, Facebook had 2.13 billion active users, a 15% year-to-year increase. It had revenues of $40.7 billion in 2017. It is extremely profitable, with pre-tax margins of about 50%.

Facebook is facing significant scrutiny because of the hacking that apparently allowed 50 million of their customer’s data to be used for political purposes without their knowledge. It also faces inssues in Asia that included it being banned in the Chinese market.

*Russian interference in the 2016 presidential election is also an Issue for Facebook. Russians bought ads that were targeted at creating social divisions in the U.S. Facebook generates about $40 billion of annual revenues from ads that are narrowly targeted at specific audiences.
*Tone-Deaf: Facebook’s Russia Bungle, Wall Street Journal, By Deepa Seethharaman, Robert McMillian and Georgia Wells, April 3, 2018
**Facebook and the Tools of Uprising, Wall Street Journal, by Christopher Mims, February 20, 2018

IBM
*U.S. companies such as Tesla, Apple and IBM will, through their foreign subsidiaries in China, meaningfully assist China in their global trade ambitions. It is a brilliant scheme to use unfair trade practices to promote Chinese trade, economic, and political influence in the region from Europe to Asia and Africa, and use U.S. companies such as Tesla and IBM to do it.

* Staying up with China in quantum computing, and trying to get to a 100-qubit quantum computer, will likely be the next military frontier for the U.S. Countries such as China, Russia, the U.K., the European Union, and Australia are in a race to develop quantum computers, as are companies such as Intel, IBM, Microsoft and Alphabet (Google). The winners of the race will be able to obsolete existing cybersecurity technologies and systems.

China is apparently the leader in quantum computer research. In mid-2017, it launched the first satellite capable of transmitting quantum data. It is building the world’s largest quantum computing facility. Its focus is on code-breaking, and supporting its military with quantum navigation systems for stealth submarines. It appears to be getting close to getting a 40-qubit quantum computer prototype.
*The Computer That Could Rule the World, Wall Street Journal, by Arthur Herman, October 27, 2017

Lockheed Martin
*The first phase of a U.S. land-based missile program replacement for the Minuteman 3, deployed in silos in the Great Plains, is underway. The first phase is a $700 million design phase, and Boeing and Northrop have been selected to compete for this business. It will include 600 land-based missiles, of which 400 will be deployed, and 200 will be used for testing. Aerojet Rocketdyne Inc. has announced it is building the rocket motors for Northrop.

Some have estimated that the total cost of this program could be as high as $500 billion over the next 20 years, which is about 5% of the Defense Department budget.

A decision is expected in 2020 to determine the general contractor for the Ground-Based Strategic Development (GBSD) program, including the ICBMs, new communications systems, and a refurbishment of the launch silos.
*Lockheed Pursues Longer Jet Pack, Wall Street Journal, March 10, 2018, by Doug Cameron, March 10, 2018

Microsoft
*Microsoft is at the center of an email data storage lawsuit, on which an appeals court has ruled. Warrants cannot be enforced to gain access to data that is stored exclusively on foreign servers. The case, as of early 2018, is at the Supreme Court. The companies want to protect user data, and in some cases, public authorities are seeking access to that data. In the case of data in China, the authorities often have full unrestricted access to that data.

Companies such as Microsoft and Alphabet (Google) claim that if their customer data is not protected, they would be in the middle between U.S. law and the foreign country data privacy requirements. U.S. dominance of the $250 billion cloud computing industry is claimed to be at stake.

In the case in question, the data is stored on a database in Ireland, to which Microsoft has full access in the U.S. The case revolves around an antiquated 1986 U.S. law, the Stored Communications Act. The law is not a fit for today’s large scale cross-border data storage environment. The current law needs to be interpreted until the Congress can revise it.

Google and other tech companies are supporting Microsoft.
*Justices to Hear Microsoft Case on Email Storage, Wall Street Journal, By Brent Kendall and Nicole Hong, February 27, 2018
**Justices Grapple With Microsoft Case, Wall Street Journal, by Brent Kendall and Nicole Hong, February 26, 2018

Companies have a choice of where they store their data. If U.S. law does not apply to data stored outside the U.S., then the tech companies can find a place to store U.S. data that would be immune to access by U.S. authorities.
***Microsoft’s Legal Cloud Cover, Wall Street Journal. Editorial, February 27, 2018

Qualcomm
*Qualcomm is a worldwide leader in semiconductors used in cellphones and wireless communications networks. Qualcomm has developed 5G wireless networks that are used throughout the world. It was in a hostile takeover situation that could have resulted in a Singapore company, Broadcom, taking over the 5G networks being developed in the U.S. These networks will significantly improve the performance of artificial intelligence networks. The two main risks are that:
• China might have gained control of the networks that are used to deliver artificial intelligence in the U.S., and are very important to military systems; and,
• China might have used Chinese companies, including Huawei, the second largest supplier of 5G networks worldwide, to infiltrate the U.S. broadband communications networks;
o Chinese companies have sworn allegiances to China, or they wouldn’t be allowed to operate in China. This presumably applies to Broadcom.
The Broadcom acquistion of Qualcomm was blocked by the Treasury department.

In November, 2017 a new bill was introduced in the U.S. Congress entitled the Foreign Investment Review Modernization Act. The Committee on Foreign Investment In the United States (CFIUS) has the responsibility to review foreign investment in the U.S. There are continued attempts by China to invest in U.S. technology. The most recent controversy surrounds Broadcom’s hostile bid to take over Qualcomm.

The new bill comes amid increasing scrutiny of defense threats under the Trump administration, as the U.S. government has blocked several investments from China, including the high-profile proposed acquisition of Lattice Semiconductor Corp by Chinese state-backed Canyon Bridge Capital Partners.
*For Qualcomm, Yet More Fights Are on the Card. Wall Steet Journal, by Ted Greenwald, March 20, 2018
**Treasury’s Qualcomm Reversal, Wall Street Journal, Editorial, March 6, 2018
***The Qualcomm Question, Wall Street Journal, Editorial, March 5, 2018

Tesla
*Tesla has substantial electric vehicle intellectual property, including wireless car batteries, that it will protect by building an electric car manufacturing plant in Shanghai. This will likely avoid Chinese companies stealing their technology.

China does not allow foreign companies in China to set up manufacturing plants anywhere except in “free trade zones”. One of those free trade zones is Shanghai, where Tesla will locate its plant. There are also ten more such free trade zones throughout China.

China uses unfair trade practices, such as requiring foreign manufacturers to have a Chinese partner, or pay a 25% import duty, if the car is manufactured outside of China. Tesla seems to be unwilling to give away its technology to a Chinese company partner, and perhaps give away 50% of the local Chinese market to them.

Batteries, which are a significant portion of the cost of an electric car, will undoubtedly be able to be imported to the Shanghai plant. This will protect Tesla’s electric car battery technology. Tesla will also be able to benefit from the low cost of Chinese manufacturing, by being in Shanghai. This plant will be able to ship to Asian and European markets from this plant, and enjoy the low cost of Chinese manufacturing plants. It will also benefit from the low cost of automobile parts manufactured in China for its export markets outside of China.

China Uses Restrictions Banned By The World Trade Organization to Restrict Competitive Tech Company Access To The China Market

ArmchairTechInvestor, March 21, 2018, by Brad Peery

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China Uses Restrictions Banned By The World Trade Organization to Restrict Competitive Tech Company Access To The China Market

Chinese tech companies are heavily favored in accessing the China market. The restrictions vary by sector, but the most onerous restrictions applied to foreign competitors are on providing Internet access to their databases or Internet search services. Only three Chinese companies, Alibaba Group Holding, Baidu and Tencent Holdings, are allowed to directly access the Internet.

Alibaba
*Alibaba Group Holding is one of three companies, including Tencent Holdings, and Baidu that dominate e-commerce, social media, mobile payments. With China moving toward what could be mostly an all-electric automobile market by 2030, providing a variety of subscription services to vehicles is viewed as an extremely large market opportunity in China, but also perhaps elsewhere. For example, Renault is forecasting that it could achieve a fivefold increase in revenues by 2023 as a result of its ability to sell automobiles in Alibaba’s platform.
*China’s Tech Giants Take to the Road, Wall Street Journal, by Trefor Moss and Liza Lin, March 19, 2018

**China is encouraging Chinese companies to list their stocks in China. However, there are Chinese stock market listing requirements that make this difficult for companies that are listed on the New York Stock Exchange, or other foreign exchanges. If they are listed elsewhere, they are not eligible for listing in China. Chinese regulators are looking at using American Depository Receipts (ADRs) as a way of getting around this dilemma. Alibaba uses these ADRs for its U.S. listing. Alibaba may be able to raise capital in China less expensively, but stock listed in China will not be convertible into its U.S. ADRs. That probably makes it inevitable that over time there will be two listing prices for Alibaba’s stock.
**Alibaba Looks to go Home, Wall Street Journal, by Julie Steinberg and Liza Lin, March 17, 2018

Anbang
Anbang is essentially a bankrupt very large insurance company that tried to act like a money manager in the guise of being an insurance company. Its distress is comparable to the failure of AIG in the U.S. The interesting aspect of Anbang is that the Chinese financial regulator is running the company and looking to use successful companies, such as Alibaba and TenCent Holdings, to bail out Anbang in return for being allowed to provide additional financial services beyond mobile services, which together they dominate. This is a risk that existing shareholders of Alibaba and Tencent Holdings may be required to take in return for China’s tight control being loosened on financial services sectors that are not openly competitive.
*Beijing Could Recruit Help to Clean Up Anbag’s Mess, Wall Street Journal, by Jacky Wong, February 21, 2018

Baidu
Baidu is one of three companies, including Tencent Holdings, and Alibaba Group Holding, that dominate e-commerce, social media, mobile payments. In particular it provides search and mapping services. With China moving toward what could be mostly an all-electric automobile market by 2030, providing a variety of subscription services to vehicles is viewed as an extremely large market opportunity in China, but also perhaps elsewhere.
*China’s Tech Giants Take to the Road, Wall Street Journal, by Trefor Moss and Liza Lin, March 19, 2018

Broadcom
Broadcom is a very large semiconductor company based in Shanghai. It attempted a hostile takeover of Qualcomm, which has an impressive portfolio of intellectual property patents. The attempted acquisition was rejected by the U.S. on the grounds that such an acquisition could jeopardize national security and the development of 5G Internet technology in the U.S. 5G will become crucial for developing advanced services such as artificial intelligence and advanced defense capabilities.

Huawei
*Huawei is a Chinese telecommunications equipment manufacturer. It is the largest wireless equipment manufacturer and the third largest smartphone maker. The company is making an investment in the United Kingdom. The UK has set up a facility, run by Huawei to examine the intricacies of their own equipment. U.S. politicians have expressed concern that the company’s equipment can be used to gather intelligence for China or even disable U.S. equipment. Even equipment in other countries might also be used for spying on the U.S. or network control purposes. The U.S. is a member of the “Five Eyes” intelligence-sharing partnership that also includes Brittain, Canada, Australia and New Zealand. These countries could be vulnerable to Huawei equipment security risks.

The House and Senate have each introduced bills to address the Huawei risk. Huawei counters that it is an employee-owned company and is respected in 170 countries around the world.

Canada’s Parliament is debating cybersecurity risks. South Korea’s largest carrier’s CEO called Huawei a “concern”. Australia ruled out Huawei for its Solomon Island undersea cable deployment despite the fact that Huawei is an advisor to it on its development of a 5G wireless network.
*Huawei’s Breadth Raises Concern, Wall Street Journal, by David George-Cosh, February 24, 2018.
**Caution Over Huawei Grows, Wall Street Journal, By Dan Strumph and Paul Vieira, March 21, 2018

Tencent Holdings
*Tencent Holdings is a Chinese Internet company. Because the Chinese Internet is very tightly controlled by the Chinese government, Tencent Holdings is in a very enviable position. One important capability is their ability to provide GPS mapping services. Driverless vehicles could be an extremely important application. Vehicle manufactures will need to use an Internet company to provide driverless vehicle services. Its Hong Kong-listed stock has doubled in 2017.

Tencent Holdings has made a number of attractive investments. One example is an investment in Tongcheng-Elong Holdings. The company is considering an IPO that could give it a valuation of several billion dollars. It runs Internet portals that provide online China and international travel services.
*Tencent-Backed Travel Company Is Cruising Toward IPO, Wall Street Journal, By Julie Steinberg and Liza Lin, March 10, 2018

Xaoimi
*Xaoimi, is one of the largest cellphone makers in the China, and has a $46 billion market capitalization. It has high quality smartphones that rival Apple in looks, but are inexpensive. It is planning an IPO that could have a valuation of $100 billion or more. Xaomi is essentially an Internet equipment company. Its China market share was 12% in 2017 and its shipments grew 50% to 96 million units. However, the company is risky and subject to the vagaries of hardware development companies with low margins. On revenues of $15.2 billion, it had profits of about $1 billion. By contrast Apple had a market capitalization of about $900 billion in early 2018. In China, non-Internet companies are generally banned from using GPS for self-driving vehicles and existing manufacturers, such as Xaomi, are very much in demand to provide future equipment for self-driving electric vehicles.
*Hot Xiaomi Carries Big Risks, Wall Street Journal, by Li Yuan, March 17, 2018.
**Beijing Dials Up Pressure on Xiaomi, Wall Street Journal, Stella Yifan Xie, March 2, 2018

Zejiang Geely-Daimler-Volvo
Geery has become the premier Chinese vehicle manufacturer by connecting with Western automaker technology. The journey began with Geely introducing a Chinese manufactured automobile at a Detroit auto show in 2006. The automobile was roundly criticized, particularly for its poor quality. Geely went to Ford to buy Volvo, and with Volvo doing poorly in 2010, it was bought from Ford for $1.8 billion, a fraction of what Ford had paid for it. The road forward for Geely was a risky one, but relying on the manufacturing expertise of Volvo in Sweden, and the design vision of a seasoned Western car designer, it has had increasing success both worldwide and in China. China is going toward all-electric vehicles, and Volvo plans to have 90% of its vehicles electric or hybrid by 2020. It has manufacturing plants in China and Europe and has a U.S. plant that will open in the U.S. in 2018.

A Reorganization of the Chinese Communist Party Has Begun

ArmchairTechInvestor, March 15, 2018, by Brad Peery

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The succession of President Ji Jinping to a position of President for life has started what amounts to a total reorganization of the 89 million member Communist Party. Key goals of the new policies include eliminating bureaucratic inertia, shifting away from wasteful investments toward sustainable growth, and making China a global power. The plan’s emphasis is on control, which could bode poorly for already heavily regulated foreign businesses. An objective is to make the economy more market driven, and use more party to more effectively run the government.

Banking and Insurance Regulation

The banking and insurance commissions will be merged. This will set the stage to address deep-seated risks to the banking system and the economy. The central bank will set overall rules for the banking and insurance industries. Oversight of individual firms will be left to the new commission. The head of this commission will be Liu He, a close confidant of President Ji, and his top economic advisor. This should lead to capital markets reforms that include reducing debt levels, and reducing the risk of financial products, such as derivatives. Also included is pricing authority and antimonopoly enforcement from other departments as well as product safety, including food and drugs.

One Belt, One Road Trade Network

An office of international development cooperation has been created, under which the One Belt, One Road Trade Network will fall. The office is described as providing foreign aid, but its objectives are far broader and include political and military influence, building an extensive array of jointly owned facilities with the host nation, and extending China’s global presence.

Additionally, in prospect are to:
• Create of a new ministry to manage land, ocean and other resources;
• Intensify an anti-corruption crackdown; and
• Add a new veterans affairs ministry;

China Faces Restrictions On Investing In U.S. Tech Companies: Will U.S. National Defense Be Strengthened?

ArmchairTechInvestor, March 11, 2018, by Brad Peery

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In November, 2017 a new bill was introduced in the U.S. Congress entitled the Foreign Investment Review Modernization Act. The Committee on Foreign Investment In the United States (CFIUS) has the responsibility to review foreign investment in the U.S. There are continued attempts by China to invest in U.S. technology. The most recent controversy surrounds Broadcom’s hostile bid to take over Qualcomm, a worldwide leader in semiconductors used in cellphones and wireless communications networks. One issue is whether Broadcom might do something to Qualcomm that would make the U.S. dependent on a Chinese company, Huawei, a very large Qualcomm rival, for its communications networks, particularly the next generation 5G networks in the U.S. These networks will bring significant new capabilities for applications, such as artificial intelligence (AI).

The new bill comes amid increasing scrutiny of defense threats under the Trump administration, as the U.S. government has blocked several investments from China, including the high-profile proposed acquisition of Lattice Semiconductor Corp by Chinese state-backed Canyon Bridge Capital Partners. Trump has also introduced a 25% tariff on steel imports, and a 10% tariff on aluminum, on the basis that U.S. manufacturing of these products in vital for U.S. national defense.

The new bill also updates the CFIUS definition of “critical technologies” to include emerging technologies that could be essential for maintaining the U.S. technological advantage over countries that pose threats. China is likely to be the most important country affected by the changes.

The bill defines “critical technology” as “technology, components, or technology items that are essential or could be essential to national security,” and including “emerging technologies that could be essential for maintaining or increasing the technological advantage of the United States over countries of special concern with respect to national security, or gaining such an advantage over such countries in areas where such an advantage may not currently exist.” “Presumably this category includes artificial intelligence, robotics, aerospace, etc., and could be far reaching,” wrote Rob Hunter, partner at Baker & McKenzie LLP in a note, “To be sure, CFIUS can already reach investments in this category where the foreign acquirer takes “control.” However, some investments that might not amount to ‘control’ would also be captured where the buyer would have access to non-public information held by a critical technology company.”

ArmchairTechInvestor Opinion
China has ambitions to become the worldwide leader in defense, and defense technologies. The U.S. is beginning to fully realize the dimensions of this threat to the U.S. The first year of the Trump presidency has begun to plan for and confront these threats. A defense technology war, particularly with China and Russia, has begun.

China Has Finally Stepped Up To Enforce Sanctions On North Korea; Will This Lead To Denuclearization Of The Korean Peninsula?

ArmchairTechInvestor, March 11, 2018, by Brad Peery

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*It appears that China is enforcing the most recent U.N. sanctions. A telling consequence may be that border traffic and business activity along the China-North Korea border has changed dramatically. The lines of people going into North Korea have dropped significantly.

According to businessmen crossing the border:
• New U.N. sanctions on garments caused a dozen or more garment factories to close in North Korea;
• Battery prices have increased by at least 50% from a year earlier;
• Seafood for export from North Korea, has fallen by more than 50%, and is a glut on the market;

Somewhat offsetting these developments are smuggling crossborder and ship-to-ship cargo transfers;

Although the numbers may be somewhat unreliable, it is believed that 90% of North Korean trade is with China. Oil exports by China appear to have dropped to zero, although there may still be crude exports.
One international initiative is to get foreign countries to stop using North Korean workers, who are virtual slaves, and provide currency. Many of them appear to be heading back to North Korea, although this probably does not include Russia, which uses many such workers.

In March, 2018, a North Korean cybertheft may have occurred in Turkey, such activities undoubtedly continue. There are also continuing arms sale revenues that continue to be received through sales to the Middle East and Africa.

According to the Chinese government, exports to North Korea were down by one-third in 2017, and down by 82% in December, 2017.

The U.S. continues to put pressure on North Korea, with substantial new sanctions on shipping and trading companies. It has also been reported that the U.S. is interdicting vessels at sea that are involved in trade with North Korea.
*North Korea Feels Sting of Sanctions, Wall Street Journal, by Jeremy Page, Andrew Jeong and Ian Talley, March 2, 2018

ArmchairTechInvesor Opinion
It is estimated that North Korea went through about half of its foreign currency reserves of $3 billion in 2017. The noose is tightening on North Korea. A breakthrough may have come when President Trump agreed to meet with Kim Joug Un in May, 2018. A precondition by Trump has always been that North Korea be willing to denuclearized the Korean Peninsula. There have been many times when North Korea violated agreements they had made, leading to skepticism about their current Intentions. The U.S. needs to hold these talks, keep increasing sanctions, and propose an agreement that will have a verifiable way of guaranteeing that North Korea abandons its nuclear and missile development activities. Also, one must remember the ruthless power Kim Jong Un has used to consolidate power, including the killing of relatives such as his half-brother and uncle.