Below we present some pertinent thoughts on the arrest of Huawei CFO Meng Wanzhou from former Fed Governor Larry Lindsey and current head of the Lindsay Group.
[The Lindsey Group] has always been skeptical of conspiracy theories that involve the government; generally, it is too incompetent to pull one off. Moreover, the rigidity of the institutional structure requires things must be done in certain ways that often signal what’s up. The available facts surrounding the detention of Huawei CFO Meng Wanzhou sends plenty of signals, some of which confirm the prevailing narrative, some of which suggest there is more to it. Start with: who knew what when?
National Security Advisor John Bolton says he knew about the arrest in advance as he was informed by the Justice Department. This makes sense. Decisions regarding arrests are not made in the White House but by the regional district offices of the Justice Department in charge of investigating the case, in this case the Eastern District of New York which specializes in investigating financial crimes. Justice informed Bolton because he is quite passionate about Iran policy and the fraud charges Meng faces involve breaking those sanctions.
The timing of the arrest coinciding with the G20 Xi-Trump dinner was a matter of happenstance, not a conspiracy to blow up the talks. The arrest warrant has been out since August 22nd. The arrest happened when it did because Meng was transiting through Vancouver on her way to Mexico. She had been avoiding travel to the U.S. for almost two years. The U.S. and Canada have very good extradition arrangements. She was careless (or possibly feeling untouchable) and the cops nab their suspects when they can, not because of geopolitical developments. It makes lots of sense that Trump did not know. Presidents are not routinely informed of arrests, even sensitive ones. And given his talents at tweeting and making “straightforward” comments, would you have informed him?
The stories that Xi was informed before the dinner make sense operationally, but one can never be sure. Meng’s father, Ren Zhengfei, who founded Huawei, is understood to be quite tight with Xi. Which also may explain why he is one of the relatively few survivors in what appears to be a purge of heads of major Chinese technology firms. Aides to Xi would likely think it made sense to tell Xi as soon as they found out and not wait until the flight home. If Xi did know, it is a tossup about whether he would have raised the issue. He holds cards close to the vest and may have wanted to think things through. But this is not the only possibility.
What does NOT make sense is that the arrest happened on Saturday and markets did not find out about it until Wednesday night. Let’s try out one of those equivalence narratives so popular in the business press. If Google’s global CFO had been detained in Hong Kong for extradition to China, would the world have waited five days to find out? This is where what had to be a massive conspiracy of silence begins to raise some interesting questions.
U.S. prosecutors are never shy about their victories. Their detention of Meng is a BIG story – it sends the message that not even the rich and well connected are immune from prosecution under the sanctions regime. Since those who violate the sanctions are at least well paid and well connected and not mere bank tellers, getting this message across is crucial. Our bet is that Bolton (or someone else) told them to keep the story under wraps, probably to protect the trade negotiations, not sabotage them.
If Huawei were an American company, it would have been legally obligated to announce the detention of its CFO. That is a material fact that must be disclosed promptly. Chinese security laws are enforced in a more “flexible” way. But why wouldn’t the Chinese government want the information out if they are really so furious as they appear to be in the last few days? Something really begins to smell at this point.
Then along comes a story in the South China Morning Post about an October meeting with employees in which Meng said that there are cases where, “the external rules are clear-cut and there’s no contention, but the company is totally unable to comply with in actual operations. In such cases, after a reasonable decision-making process, one may accept the risk of temporary non-compliance.”
That statement is full of euphemisms, but it makes putting the corporate interest ahead of complying with the law the official position of management. Put that in the context of a four-year anti-corruption campaign by Xi and a purge of top-level tech executives who have gotten too big for their britches. In Xi’s new world it may be one thing to have said that it was ok to put China’s interests first, but she is putting the corporate interests ahead of China’s interests.
Also note that these comments were in quotes from an internal (and closed) Huawei meeting. How did the SCMP acquire these direct quotes? The SCMP is one of the world’s truly great papers, publishing candid news and commentary focused on getting to the truth in a way that is only a distant memory in American newspapers. That said, it is also like Hong Kong – one nation, two systems. If Beijing really wanted a story out, it would provide the sources and the reporters would do the rest. And if they really wanted a story spiked it probably would be spiked. Those direct quotes obviously came from Chinese authorities and the story was printed at a very inconvenient time for Meng – when she was protesting her innocence. Somebody in Beijing thinks Meng is a loose cannon.
Then there is the apparently bellicose Chinese reaction largely in the internal Chinese press. Any country is obligated to protest the detention of one of its leading citizens and to let its citizens know that it is loudly protesting. But consider a Friday story from the SCMP written by Zhou Xin, the head of the political economy section at the paper. “China has separated the arrest of Huawei’s chief financial officer Sabrina Meng Wanzhou from trade talks between Beijing and Washington" Gao Feng, a spokesman for the Ministry of Commerce, said on Thursday that he had no information at all about Meng’s case. Gao also said China was confident about reaching a trade deal with the United States within the 90-day truce agreed by the two sides in Argentina last weekend. Separately, Chinese foreign ministry spokesman Geng Shuang also refused to directly link the arrest of Meng – in Canada last Saturday at the request of the United States – with the trade negotiations.” That is an authoritative story outlining the official Chinese position.
Let’s be a little conspiratorial or, more precisely, try and create a narrative that fits the facts. It arguably serves everyone’s interests for Ms. Meng to be taught a lesson. It is in Bolton’s and the DoJ’s interest to send a message that access to power
and connections does not buy you a get out of jail free card. It is in Xi’s interest, or at least in the interests of major portions of the Chinese government, to send a signal that even the extremely well-connected still have to toe the party line.
The detention did not involve any surprises. The charges against Meng were leveled three months before her arrest. The market reaction seemed to be based on the notion that this was a last-minute surprise. As for the Chinese, Xi and Company knows where everyone is going and when. They certainly knew that Meng was traveling to Vancouver, that she had a warrant for her arrest outstanding, and that Canada extradites to the U.S. They did nothing to warn her.
Why put Canada in the middle of it all? That one is easy. Plausible deniability. China can yell and scream about how horrible it is that America (via Canada) is detaining one of its leading citizens. It can plant stories to scare American executives that China will do the same thing to them and that Trump is the culprit. If she steps on American soil, then the negotiability of her fate ends. The machinery of the American justice system takes over. If Trump were to get involved then incoming House Intelligence Chair Adam Schiff could call it “obstruction of justice” and an “impeachable offense,” based on his current standards regarding those terms.
Friday was a bail hearing in a Vancouver court. The government maintains she is a flight risk. She could easily hop on a private jet at some small airport in British Columbia and be gone before anyone knew. The $1 million bail figure her defense is proposing is a tiny fraction of a tiny fraction of her family’s net worth. Her defense maintains that “face” matters a lot and not only would she lose face by fleeing she would cause China to lose face as well. All of this was said with a straight face. The judge took all this under advisement and the bail hearing will continue on Monday. Meng spends the weekend in jail and maybe longer. Our conspiracy theory holds that she will be released when everyone thinks the lesson has been learned. America scores a win in terms of signal value about enforcing Iran sanctions whether Meng spends two weeks, two months, or the rest of her life behind bars. Xi will have signaled what he thinks about prioritizing corporate interests over national interests and bending regulations. The most elegant way to have it happen would be to give her bail and let her hop on that jet. She loses face and has sharp limits on her future ability to travel. But that may be too clever by half.
One does not have to buy this conspiracy theory in all its detail to get at the essential truth that markets need to digest. Meng’s arrest is not going to affect the outcome of the trade talks. Xi (and China) have too much of a stake in this to let the antics of a close friend’s naughty daughter stand in the way of him getting what he wants. And once an example is made, America also has too much to lose.
The Meng affair is going to be just one of many bumps in the road between here and a trade deal. This is one reason why we view the 90-day time table as “aspirational.” Market participants that got so worked up about Meng probably do not have the stomach to make the whole journey to a deal. In the geopolitical world, Meng affairs do not happen every day but they do happen every six weeks or so. In that sense, having a “puke” now may be therapeutic. It gets it out of the way. Finally, a note to the Fed: even if the market is puking because of Meng, you do not give the patient something that is going to make it sicker. And do remember that it began vomiting long before Ms. Meng came to Vancouver and for entirely different reasons.
As a reminder, on Tuesday afternoon Meng was granted bail for C$10 million, and has surrendered her Chinese and Hong Kong passports while being surrounding by security at all times, making it difficult to flee to China; difficult, but not wholly impossible.