Add Canada to the long and lengthening list of nations locked in diplomatic disputes with China -- disputes that have an uncanny way of overlapping into the commercial world in ways that have real-life impact on investors.
A court in Dandong here on Wednesday sentenced Canadian businessman Michael Spavor to 11 years in prison on an espionage conviction. Spavor was found guilty of illegally providing state secrets to foreigners.
What exactly did Spavor do to earn the conviction? We don't know. We do know he was running tours from China into North Korea and even brokered the visit of former NBA star Dennis Rodman to Pyongyang. China's very broad definition of state secrets essentially amounts to "anything we don't want you to know." All the court proceedings took place behind closed doors.
Perhaps providing those details could get you convicted on the same espionage charge. The Dandong Intermediate People's Court, right on the North Korean border in China's far northeast, probably could convict most Dandong citizens for hiding some kind of detail about China's dealings with the hermit nation next door.
It is not a coincidence that Huawei Technologies heir Meng Wanzhou, the daughter of telecom tycoon Ren Zhengfei, this week is mounting her final legal challenge to avoid extradition from Canada to the United States. If sent across the border, she is due to face charges of fraud surrounding a business lunch in Hong Kong, where she allegedly covered up Huawei's ties to a subsidiary in Iran in violation of U.S. sanctions.
So we can see how a commercial dispute - Huawei wanted to keep doing business in Iran while accessing the global financial system - has morphed into a political spat. Canadian Prime Minister Justin Trudeau said today that Spavor's sentence is "absolutely unacceptable," calling for his immediate release. Spavor was also fined C¥50,000 (US$7,710) and will be deported after his sentence.
Meng was detained on Dec. 1, 2018, while attempting to transit through Vancouver airport on her way from Hong Kong to Mexico. China seized Spavor and fellow Canadian Michael Kovrig days later. Chinese state media reported at the time that Kovrig, a former diplomat who was then working for the think tank International Crisis Group, had "stolen sensitive intelligence from China," using Spavor, who was living in Dandong, as his "intelligence contact."
Spavor was running a nonprofit called Paektu Cultural Exchange, which hasn't updated its Facebook page since his arrest. Fluent in Korean, Spvor had personally met with Kim Jong-un and set up trips by Rodman to the North Korean leader in 2013 and 2014.
Another Canadian, Robert Schellenberg, on Tuesday had his death sentence upheld by the High People's Court of Liaoning Province, coincidentally the same province where Spavor's case was heard. Schellenberg was arrested in 2014 on a meth-trafficking charge and sentenced to 15 years in prison in November 2018. He appealed, with terrible timing: after Meng's arrest in December 2018, he was in January 2019 sentenced to death after a one-day hearing.
The details and the timing of the cases differ, but all involve Canadians apparently given specifically harsh legal decisions to make a political point after Meng was detained. Meng's case, meanwhile, has taken its full course through the Canadian system while she lives under house arrest, first in a C$4.6 million (US$3.7 million) house and then a renovated C$13.7 million (US$10.9 million) property, two doors down from the U.S. consul general's home.
The courts, police, market regulators and politicians all act in concert in China to make the point that the Chinese Communist Party wants to make. So investors should not expect due process or public hearings concerning market-moving decisions and regulatory revamps that can have huge ramifications. U.S. holders of Chinese shares can expect about as much sympathy from Beijing as Spavor has received.
Chinese shares fell 0.6% on Wednesday, trimming the year-to-date gain in the benchmark CSI 300 index of mainland stocks to 7.1%. That's one of the worst performances in Asia, where many markets are up by one-third or more in 2021.
Chinese stocks dropped 7.8% over the course of four trading days in late July when Beijing essentially outlawed for-profit after-class tutoring. It also forced higher wages on the food delivery industry. The sudden and drastic action took market participants by surprise.
It demonstrated that China's top leadership can and will decimate an industry without warning or any recourse for investors. U.S. stock listings such as TAL Education (TAL) (down 93%) and New Oriental Education & Technology Group (EDU) (down 89%) have lost almost all their value with little prospect of any rebound.
The threat expands beyond after-school education. Tutoring companies were also blocked from accepting outside and international investment. That raises the odds of a broader crackdown on Chinese overseas listings and the Variable Interest Entity structure that they normally use.
The motive behind the changes in policy is to make education more affordable and to bolster the status and importance of the government education system. There's a suggestion that the Chinese Communist Party may have grown concerned about so much education taking place outside the government-directed curriculum. Owners of private schools say they are also pressured to hand over the institutions to the state, often without any recompense.
The clash between for-profit industries in China, which had largely been allowed to grow unfettered until the last year or so, and the Chinese Communist Party's agenda is intensifying. Beijing will not want to alienate an entire private sector that, in the form of companies such as Huawei, has placed China very much on the commercial map. But private companies, just like private citizens, can expect no recourse should they fall on the wrong side of the Chinese state agenda.
