China: Risks, Relations, Revelations | The Legal Lunch Byte | Episode 26

The Legal Lunch Byte | Episode 26 | China: Risks, Relations, Revelations – YouTube

Transcript:
(00:04) hello everyone welcome again to another episode of legal lunch bite I’m thrilled today to be hosting Isaac stonefish CEO and founder at strategy risks he’s a China expert deep expertise uh We’ve interacted quite a bit before and uh I really appreciate his perspective so Isaac thanks for taking the time to be here and please introduce yourself and tell us about your China cred thank you for having me Isaac stonefish CEO of strategy risks a geopolitical risk and advisory firm I started going to China gosh more than 20
(00:38) years ago now I spent a summer in Shin Jang in Northwest China in high school and then a summer in Tibet studied Chinese literature in college worked as a literary agent in Beijing as one does for a few years before switching to journalism spent about seven years in China total and then covered the geopolitics and the political economy of China from DC for a while wrote a book called America 2 about networks between China and the United States and also networks globally and then started my firm several years ago now excellent so
(01:20) a lot going on obviously this is if we didn’t even if we didn’t have the election year coming right now there’s always a lot going on between the US and China I know there are big things happening in China China this month um with the the plenum happening there are just so many things coming out the US and China are so big that there’s always news so let’s start about talking let’s start talking about this turmoil surrounding the US election and what that’s going to mean for companies with
(01:45) large operations in China what people have started realizing is that the world is a lot more unpredictable than they thought I think you could really make the serious case that things have always been quite confusing chaotic but there was this overconfidence that I think many in the world are now losing and the heads spinning changes we’ve seen over the last couple of days and weeks with Trump and the assassination attempt and Biden and the debate and the idea which used to be the realm of right-wing conspiracy theory that a shadowy cabal
(02:25) was actually running the country and then more of a realization of Biden’s ill health than I think a lot of us were prepared for has really raised two issues Vis us companies with operations in China One is a sense that they really need to understand what Trump’s China policies are because he’s a lot more likely to win than he was say a month ago and the second is that companies need to really look long and hard at their China exposure and the geopolitical risks that they’re facing and make sure that they have a plan in
(03:04) place for what’s almost certainly going to be a turbulent few months and a turbulent few years how would you say companies are maturing uh I was just in a meeting a few minutes ago talking about this issue how are companies maturing in their viewpoint on geopolitical risk and when did you even start hearing the word geopolitics in your in your professional life and when did it become such a massive buzzword uh among companies doing business internationally it was really Niche until covid and that sparked the idea that Supply chains and
(03:40) international Affairs and the idea that for many was crazy until it happened that countries would withhold exports and imports based on geopolitical concerns all of that started raising the idea and then we saw a big shift in us China policy in roughly 2018 with the removal of XI jinping’s term limits on his chairmanship the sense that China was actually threatening us exceptionalism and US Primacy and then also the concentration camps in shinjang and the idea that this old maist system wasn’t really dead but was being
(04:28) reinvigorated with new trappings that really awoken the idea of geopolitics for many companies Vis China the war with Russia Ukraine the war in the Middle East re awoken that globally and where we are now is we don’t know if those two other Wars are isolated Wars think of the Spanish Civil War in the 30s or if they are precursors to what will become another global war a World War three in a similar way that the Japanese invasion of China in the early 30s became part of World War II fascinating that that’s really
(05:10) interesting uh take on on history and on global conflict generally I’m always ask the question and I like to ask others the question as well is what is the what is the likelihood of some conflict spilling over into the Taiwan straight or in the South China Sea uh and then of course we know what that would mean for Supply chains globally but what are your what are your thoughts on that if I can pin you down to a percentage uh on likelihood that we could have a conflict in the a significant conflict that would
(05:39) stall or hamper Global Supply Chain movement in and around Taiwan straight South China SE what would you say the likelihood is in the next five years so China has already started to invade Bhutan and I’m smiling it’s a very serious story but it gets almost no attention and then we spent some time on New York Times Carnegie endowment foreign policy and realize oh this is something that’s being tracked and people know about it’s just not gotten broad attention so if we broaden the aperture and say what are the chances
(06:16) that China becomes an aggressor and starts invading its neighbors well that’s 100% because it’s already happening if we look at the scenario of a Chinese invasion of Taiwan I think there’s broadly speaking two different levels there’s the allout China declares war on Taiwan or perhaps War without fully declaring it but the US goes in Japan goes in and that is World War III the odds of that are still hopefully quite low I would put them at still under 10% the odds of a limited Invasion perhaps akin to Russia’s 2014 invasion
(06:54) of Ukraine and its seizing of Crimea of Beijing say taking the islands of kinman and Matsu which are just miles away from Shaman or of assassinating a Taiwanese politician or of causing a large brown out in Taiwan or in having some sort of sleeper attack and then stopping those odds I say are quite high and depending on what you define as an act of War what you define as a serious disruption of Supply chains and tensions I’d put anywhere between 20 and 40% yeah extremely interesting thinking about those tactical incursions or
(07:35) things that are are more designed more along the lines of of saber rattling but can can really impact really impact the way people are doing business and how people are thinking about that that risk so let’s turn to due diligence then because that’s a big part of my world in the business uh business transactions that I do looking at how companies should think about you know really where do you where do you even starting due diligence how broad do you need to go how many years back you know what in your mind what is the kind what are the
(08:06) kinds of things that companies should be looking at when they’re looking at appraising due diligence for any kinds of operations in China whether that’s their own Green Field investment or it’s a maybe it’s a joint venture with a partner in China the two pieces we think are the most important and we do a lot of work in both these areas are regulatory risk and business risk regulatory risk is does this violate the weager force labor vention act which restricts the ability to import into the United States from Shin Jang is this
(08:35) working with the sanctions is this working with a sanctioned company is this working with a company that for another reason falls in the negative category for us investors us Regulators other people in the US system one big piece of this which we think is is growing pretty rapidly is keeping people aware of Partnerships with entities that are either part of the Communist party or closely linked to the party because those could pose future regulatory risks so right now it’s not illegal for a US company to partner with
(09:12) the people’s Liberation Army and one can imagine tensions worsening and there being laws and restrictions that ban that and at the very least outside of regulatory risk working directly with the people’s Liberation Army does pose PR risks uh as Jonathan knows and as folks who follow China closely know the pla is very different from most militaries around the world it is not an independent entity it is the armed wing of the Communist party so the pl would be like if Ohio say its National Guard was part of the RNC or the DNC it’s an
(09:54) arm of the party it’s not independent its job is not to defend China its job is to defend the Communist Party so it’s just a different political structure and it acts in China differently as a result the second piece for due diligence is business risks it’s does this person that I’m potentially partnering with or does this company I’m potentially partnering with have a high likelihood of being snared in a corruption campaign or do they have bad environmental policies or is there a lot of chatter
(10:23) that they steal IP because outside of what the US government can do to a partner in China the bigger risk is what the Communist Party can do or what their competitors in China can do and so making sure that even though a company could be very independent from all these political risks they still could be polluting in a local Chinese river and you can find that information and you can realize that before you get dragged into some sort of environmental catastrophe because of your Chinese partner that’s great so you have these
(10:59) two big headings is there any other way that you when you’re explaining China exposure to your clients or or when you’re speaking on this how do you how do you classify generally these these different areas of China exposure so we have methodology called the strategy risks index which concretely quantifies this exposure and we walk through that in great detail with clients but we also say there’s a difference between real exposure and perception of exposure so a great example there is a difference
(11:29) between Huawei and Lenovo so Huawei is very blacklisted it’s very known to be an arm of the Chinese State even though it’s not technically in armed with the Chinese State and then you have a company like Lenovo which is roughly a quarter owned by Chinese State entities but is still fairly prevalent in US Government institutions and across the country and across the world and so from a reputational risk perspective and a regulatory risk perspective it’s less of a problem to have a partnership with Lenovo or to
(12:03) have Lenovo integrated into your business operations than it is Huawei because the issue is often less which company has a higher TR in exposure and more what is the perception of that in DC in Brussels and in Tokyo what is the perception I’m I’m always curious to hear people I track government things but I think you have a better a better tack on this what is the perception right now now let’s see on both sides of the aisle with regard to China we say it’s fairly unified are there different approaches to the way
(12:35) they’re looking at you know dr- risking versus decoupling from China now what are your and I know of course the Chinese government uh leaders are are very carefully tracking us elections this year and they’re probably they probably would favor one outcome over another can you comment on any of that yes I think the Chinese government would strongly favor Trump winning I think it’s fascinating to watch him say things like Taiwan has to pay more for its own defense and I also think it’s fascinating to watch him as an outlier
(13:11) not only among the Democratic candidates but also more starkly among the Republicans JD Vance has very different stated views on China than Trump as does Haley as does Des santis Trump looks at these things differently look at his comments on Tik Tock his desire to you know quote unquote make a deal his pushing back on Japan and South Korea for not paying enough to house US troops these would be big big wins for China and so we’re in this funny situation where many of Trump’s advisers and confidants and many people in the
(13:49) Republican Party arguably more vifer usly than the Democratic party want policies that are tougher on the Communist party but Trump himself doesn’t necessarily want them and and Harris is a bit of a cipher on China she’s spoken a lot less on it than a lot of other leading Democrats I think we can assume that she would be if she does take over the nominee from Biden be assertive though not to the same level that he is which represents more Progressive influences there the progressives tend to be more doish on
(14:21) China but Beijing made the mistake of very actively meddling in the election in 1996 with Clinton and Dole and they’ve been more subtle and more sophisticated since then they certainly have preferences but they want American friends of theirs both corporates and individuals to advocate for Beijing on their behalf so far they haven’t done anything explicit that shows them very directly meddling a lot of things on the internet a lot of things through proxies uh we don’t expect them to be more aggressive than that but these are
(15:04) unprecedented times excellent Isaac we’re at time 15 minutes goes quickly and certainly have enjoyed catching up with you today and hearing your perspective look forward to catching up with you again soon in the future thanks for the great questions and for