In the news: Nu Skin gets fined, Huawei slams NSA espionage, the WTO condemns China's hold on raw materials and SOE reform is debated

Nu Skin fined for illicit sales tactics

The SAIC has fined Nu Skin Enterprises Rmb3.35 million (over US$540,000) for illegal product sales and misleading local consumers. It stated that Nu Skin sold items beyond the permitted range and overstated the potential results from using its products. This was part of the authority's efforts to strengthen regulation of China's direct sales market. The probe was prompted in January by the exposure of Nu Skin's so-called “brainwashing” gatherings, where sales staff rigorously promoted the products and convinced customers that they can make more money by recruiting new members than actual selling. Officials also individually fined six sales staff for unauthorised promotional activities and asked Nu Skin to enhance the education and supervision of sales reps. The SAIC pledged to work with other departments to secure control over this market and investigate and prosecute any illegal behaviour.

Sources:
Reuters
The Wall Street Journal

The direct sales sector is said to be another regulatory grey area in China. Like other foreign companies in China, Nu Skin sells its products through distributors, though officials have long been sceptical of multi-level marketing. Pyramid schemes are sensitive worldwide; competitor Herbalife is also being investigated by the US Fair Trade Commission. Nu Skin announced that it was correcting the issues raised by regulators and that it will remain committed to working cooperatively with the government, given the potential of China's large and growing market. The SAIC has recently increased its power over various sectors, so maintaining good relations with regulators is vital for any business with long-term plans in China.

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NSA spying on Huawei revealed

The US government has long claimed Huawei's networking equipment posed a national security risk for enabling the Chinese government to spy on customers, causing the company to largely retreat from operating in the US market. However, the latest-leaked Snowden documents have indicated the NSA has created its own backdoors directly into Huawei's telecom networks and even its sealed Shenzhen headquarters. This so-called operation Shotgiant had the NSA monitoring communications of the company's top executives as well as searching for links between Huawei and the PLA (of which CEO Ren Zhengfei was a member) since early 2009. The NSA apparently even wanted access to networking equipment sold by Huawei to other countries so it could dig through both computer and telephone networks as it saw fit. A Huawei US senior executive said: “The irony is that exactly what they are doing to us is what they have always charged that the Chinese are doing through us.”

Sources:
The Verge
TechCrunch
The New York Times
Forbes

Huawei is not happy. The NSA not only managed to intercept emails, but also gained access to Huawei's secret source codes of specific products, the “crown jewels of any tech company – laid bare by America's technology espionage apparatus,” according to TechCrunch. The leaked document directly stated the NSA's intention to exploit Huawei's products and pursue a digital offensive against the Chinese leadership. To the Chinese, Huawei is an entrepreneur's against-all-odds success story, while to the US officials it is a front for the PLA. The company had repeatedly experienced investment deals being blocked in the US or other countries under American influence due to fears of Chinese cyber espionage (the NSA had pressed Sprint to kill a US$3 billion deal to buy Huawei's 4G technology). In an age where information truly is power, nobody can afford to be innocent. Huawei has called for its global peers to establish standards and disciplines of cyber etiquette, but why set rules none will follow?

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WTO rejects China's mineral export restrictions

The WTO ruled against China's export restrictions on rare earths vital to the production of smartphones, cameras, steel and hybrid cars. This was an important victory for the US, EU and Japan, whose trade officials complained that the restrictions gave unfair advantage to Chinese companies. The WTO said Beijing had for years used trade policy to control key markets for strategic commodities and encourage manufacturers to move their operations to China. China accounts for 90% of the world's production of the 17 elements known as rare earths (for example, lanthanum, tungsten, neodymium). Beijing's first export restriction, introduced in 2009, caused a surge in prices in 2011 – costs of some rare earths increased as much as 500% in fear of global shortages. The restrictions also prompted new investment in rare earths mines in the US and Australia. China has 60 days to appeal.

Source:
The Financial Times

An EU trade commissioner noted that this ruling shows no one country can hoard its raw materials from the global marketplace at the expense of its other WTO partners. The panel concluded that once they were extracted from the ground and put on the market for sale, natural resources should be subject to WTO rules. These would make it harder for other countries to impose or maintain raw material export restrictions. China has for decades used low-cost labour and restrictions on foreign companies and the trade of raw materials to boost its manufacturing base, resulting in its rapid development as a key link in global supply chains while choking the manufacturing sectors of the US and EU. While China has been productive in securing bilateral trade pacts and treaties, global trade wars ensue. And as one of the world's leaders in export-import, it will have to learn to compromise.

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Sinopec: the paradox of SOE power

Asia's largest oil refiner Sinopec is the epitome of China's state-owned industrial sector, described by the FT as huge, sprawling and in need of cash. Like most of the nation's SOEs, about three-quarters of Sinopec's equity is in state hands. Many SOEs have raised trillions of dollars through listing shares in Hong Kong and China since the market opened in 1990. But at the heart of privatisation lies a paradox: SOEs want to gain capital without relinquishing control. SOEs in sectors such as transport and energy plan to use the recent reforms to allow private, foreign or social capital to fill a funding gap by selling minority stakes of up to 30% in discrete business units. But the reforms don't open up strategic infrastructure sectors to private or outside competitors, which might threaten the monopolies. This has disappointed those in the private sector who had hoped for greater access.

Source:
The Financial Times

While a number of “take-private” deals have taken place, it seems to be only when an industry runs into trouble that private capital gets a chance. Analysts say that while the infusion of private capital can transform bloated SOEs into nimble players, there is little evidence of structural reforms. Sinopec plans to sell up to 30% of its petrol stations business, a stake sale that could raise US$20 billion. The money is likely to be reinvested into the Sinopec family. PetroChina parent and Sinopec rival CNPC raised US$10 billion last year through joint ventures with domestic funds to mitigate the costs of a long-distance gas pipeline from central Asia to the industrial east. Sinopec has several options for selling its petrol stations, such as private equity groups and local pension funds. But neither involves handing over control of valuable assets to private management or competitors, which would create the discipline that SOEs need. Joint ventures with foreign oil companies are then also out of the question. How will the SOEs reform without shedding some control?

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