The Tianlangxing, a Chinese People’s Liberation Army-Navy Type 815 Dongdiao-class auxiliary general intelligence ship, passed through the Tsugaru Strait off the coast of Japan on July 2, and stayed off the Alaskan coast during the July 11th test of a U.S. missile defence system. (Courtesy Japanese Ministry of Defence)The Tianlangxing, a Chinese People’s Liberation Army-Navy Type 815 Dongdiao-class auxiliary general intelligence ship, passed through the Tsugaru Strait off the coast of Japan on July 2, and stayed off the Alaskan coast during the July 11th test of a U.S. missile defence system. (Courtesy Japanese Ministry of Defence)

The Chinese spy ship that sailed international waters off the coast of Alaska during a recent missile defense test was a class that had never been seen before in Northern Command’s area-of-responsibility, a spokesperson said Friday.

It was the first Chinese military vessel in the area since 2015 when a Chinese “surface action group” transited through, said Michael Kucharek, a spokesperson for North American Aerospace Defense Command (NORAD) and U.S. Northern Command.

Kucharek would not speculate as to what the ship was doing in the area, but mentioned several times that it was in international waters where it had the right of free navigation.

A military source familiar with the incident told The Epoch Times it was the same ship as reported by the Diplomat on July 4th, a Chinese People’s Liberation Army-Navy Type 815 Dongdiao-class auxiliary general intelligence (AGI) vessel.

Chinese state-owned media, the English language China Daily, reported on the ship in January in an article based on a report from a People’s Liberation Army (PLA) news outlet. The report focused on a newly commissioned ship, the Kaiyangxing.

The ship that was present for the missile test was the Tianlangxing, which passed through the Tsugaru Strait off the coast of Japan on July 2, according to the Japanese Ministry of Defense.

According to the PLA report cited by the China Daily, the PLA Navy now operates six electronic reconnaissance vessels. The report also gave specific information about the ships such as their capabilities and functions.

“Until now, the PLA Navy has never made public so many details about its intelligence collection ships,” said the report.

The newly launched Kaiyangxing was capable of conducting all-weather, round-the-clock reconnaissance on multiple and different targets,” the China Daily reported.

“The ship is so sophisticated that only a few countries, such as the United States and Russia, are capable of developing it,” it continued.

The China Daily quoted an unnamed source in the shipbuilding industry saying that the United States had 15 such ships.

The Tianlangxing arrived off the coast of Alaska shortly before the July 11 test of the Terminal High Altitude Area Defense (THAAD) system against an intermediate-range ballistic missile.

A spokesperson for the Missile Defense Agency told The Epoch Times it was the fastest target the system has been tested against so far.

The ship stayed approximately 100 miles off the Alaskan coast.

The THAAD system is designed to protect against intermediate- and short-range ballistic missiles, like those North Korea has amassed and threatened to launch against Japan and South Korea.

China is North Korea’s closest ally and major trading partner, accounting for 75 percent of North Korea’s imports and exports.

China’s ruling Communist Party, which has a faction that is close to the North Korean regime, has denounced the THAAD system that is now partially deployed in South Korea.

Speaking at an emergency meeting of the UN Security Council on July 5, the day after North Korea successfully tested an intercontinental ballistic missile that experts say could reach Alaska, representatives of China and Russia both called for the system to be dismantled.

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Sailors with the Chinese navy stand on the deck of a missile frigate in Manila on April 13, 2010. The Chinese regime is building a military base in Djibouti that will extend its military reach. (Ted Aljibe/AFP/Getty Images)Sailors with the Chinese navy stand on the deck of a missile frigate in Manila on April 13, 2010. The Chinese regime is building a military base in Djibouti that will extend its military reach. (Ted Aljibe/AFP/Getty Images)

China’s first overseas military base—located at a critical choke point for global trade looking to navigate the Suez Canal—could be a geopolitical game changer, but it has less impact in military terms.

Establishing the Djibouti base at the Horn of Africa signals the Chinese regime’s long-term strategic intentions, say experts. A Chinese Communist Party that once pledged to stay out of the affairs of other countries is now building military capacity far beyond its immediate border. 

But the change is less important to China’s military capability than to its ability to directly intervene in global shipping. Earlier this year, the regime convinced Panama—home to the world’s other great shipping pass—to cut ties with Taiwan and fully back China’s claim on the island nation, which the regime describes as a breakaway province. 

These moves follow a series of port deals that have given the regime the ability to ensure its critical shipping lanes. 

Until now, however, none of those facilities have been for direct military use.

Establishing the Djibouti base reverses a long-standing military policy, said Gabe Collins, a researcher and co-founder of China Signpost.

“If you look at basic foreign policymaking throughout the vast majority of the PRC’s history, overseas bases are major redlines they weren’t willing to cross, and they pretty clearly crossed that now,” he said. Collins co-authored a report on the base and its implications two years ago.

Territorial claims in the South China Sea. (VOA News)

Territorial claims in the South China Sea. (VOA News)

The change comes as the Chinese regime becomes increasingly bellicose in its expansive claim to a major swath of the South China Sea. The regime has also been vocal and threatening in its ongoing and multiple border disputes with India. Those disputes have reached an intensity not seen in decades.

Military reform

Personnel from China are now en route to build out the facility, carried on ships that are part of the regime’s rapidly modernizing military.

That military is being reformed to develop the capability to fight battles beyond its shores.

The People’s Liberation Army’s (PLA) aims to, among other things, “improve its ability to fight short-duration, high-intensity regional conflicts at greater distances from the Chinese mainland,” reads the secretary of defense’s 2017 report to Congress on Chinese military developments.

While the regime is most intent on potential conflict in the South and East China seas, Djibouti’s position on the northwestern edge of the Indian Ocean has fueled concern in strategic rival India that the PLA is gaining another position that could threaten Indian interests.

Limited military value

Fortunately for India, the actual military strategic value of the base is limited, said Collins. While it may be useful to launch attacks against much weaker foes in the Middle East or North Africa with limited attack capabilities, it is as much of a liability as it is an asset in a conflict with a greater power.

“I suspect that base would become a high explosive sponge fairly quickly. It’s a targeter’s dream because it’s built a way outside of the town,” he said.

Using Djibouti as a base of operations to fight another great power would be like throwing stones from a house made of “very, very, very thin glass,” said Collins. The base wouldn’t last long, he said.

The base is more useful for power projection into regional conflicts, a refueling and resupply depot rather than a base of operations. The fact that the United States, France, and Japan have bases there reinforces the point. To date, China has used its commercial facility there for years in ongoing anti-piracy efforts and to evacuate 500 Chinese nationals from Yemen in 2015.

Those operations gave China the pretext to forward-deploy naval forces in the region. With its Djibouti foothold now being expanded for military use, the regime gains a base in a country that is relatively stable in a region rife with conflict. For an expansionist China looking to build geopolitical influence in Africa and with oil-rich Gulf states, it’s an important gain.

“If you have an amphibious ship with some armed helicopters on it, and you are dealing with insurgents in some countries in East Africa, or even Yemen or place like that, you just came to the table with a lot of currency and you can play all night long,” said Collins.

Even if India can have some confidence that the base has limited military value, the ability China gains to forward deploy its navy along a critical shipping lane has unsettling implications.  

Pax Sinica

The Chinese regime has been working to secure its presence at the world’s most important chokepoints for shipping oil: the Strait of Malacca, the Suez Canal, the Strait of Hormuz, the Panama Canal, the Bab el-Mandeb Strait, and the Turkish Straits.

The Chinese reigme is working to gain influence at every major oil trade chokepoint. (Epoch Times)

The Chinese reigme is working to gain influence at every major oil trade chokepoint. (Epoch Times)

In doing so, the regime could play a major role securing or controlling world trade. That trade is now assured through the “Pax Americana,” a state of relative international peace overseen by the United States.

But a “Pax Sinica,” or “Chinese Peace,” could look very different, said Collins.

“One of the things you have to look at is the countries that are serving as security guarantor, you have to see what sort of mentality they bring to the table. Are they coming to this with a mercantilist mindset or much more with a globalist and trading oriented mindset,” asked Collin.

The United States has been an equal opportunity security provider, he said, basically indifferent to where oil was going, whether it be Europe or East Asia.

“We don’t discriminate at all in how we provide security based on the destination of the shipment and so I think that’s something that makes the Pax Americana unique,” he said.

While China’s intentions are unclear, its aggressive claims in the South China Sea and habit of using PLA hackers to steal commercial technology for China’s state-owned companies and high-priority industries are just two of many examples fueling allegations that the regime takes the mercantilist approach to trade.

At the moment, China can do little more than fly its flag in Djibouti, said Collins. It naval assets are limited to the few warships and support vessels that have made a passing presence there.

But that could change, and China could take a tactic it has used successfully in the South China Sea—using “coercive tactics, such as the use of law enforcement vessels and its maritime militia, to enforce maritime claims and advance its interests in ways that are calculated to fall below the threshold of provoking conflict.”

From that perspective, even if the base has little value in an actual war, it could boost efforts to otherwise assert the interests of the Chinese regime.

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This picture taken on May 14, 2017 and released from North Korea's official Korean Central News Agency (KCNA) on May 15 shows North Korean leader Kim Jong-Un (3rd R) inspecting a ground-to-ground medium long-range strategic ballistic rocket Hwasong-12 at an undisclosed location. (STR/AFP/Getty Images)This picture taken on May 14, 2017 and released from North Korea's official Korean Central News Agency (KCNA) on May 15 shows North Korean leader Kim Jong-Un (3rd R) inspecting a ground-to-ground medium long-range strategic ballistic rocket Hwasong-12 at an undisclosed location. (STR/AFP/Getty Images)

Prospects for an amicable resolution to the North Korean nuclear and ballistic missile crisis faded on July 4, when Pyongyang launched its latest Hwasong-14 intercontinental ballistic missile. Dictator Kim Jong Un called it an Independence Day “gift.”

North Korea conducted its fifth nuclear test last September, exploding a 20-to-30-kiloton bomb and sparking the saber-rattling that has characterized the last few months of Pyongyang’s interactions with the United States and countries throughout Northeast Asia.

Trump has expressed disappointment with Beijing’s role in the crisis, saying via social media that Xi and China had “tried” but failed to help with North Korea. Since the July 4 missile test, Washington has begun to move unilaterally on sanctioning Chinese banks and firms that it says have been helping funnel hundreds of millions of dollars to Pyongyang.

President Donald Trump has repeatedly requested that China and its leader Xi Jinping assist with the effort to make North Korea give up its nuclear weapons program. However, China’s relationship with Pyongyang has been made ambiguous and fractured by different interests within the Chinese regime, a result of behind-the-scenes Communist Party factional intrigue.

Nevertheless, North Korea’s nuclear and missile programs pose an immediate national security risk for China, which shares a border with the aggressive state. Meanwhile, the Kim regime’s continued existence—which hinges on Cold War-style brinksmanship and isolationist communist tyranny—does a disservice to both the Xi Jinping leadership, which is struggling to consolidate power internally, and a China attempting to present an image of peaceful rise.

Politics in the Party

In China, the ascent to power of Xi Jinping means that the Kim family’s links to the Chinese regime are growing distant. Xi’s anti-corruption campaign has purged hundreds of powerful cadres, among them key associates of an informal Communist Party clique centered around former Party leader Jiang Zemin.

Jiang headed the Chinese Communist Party from 1989 to 2002, and wielded power behind the scenes through 2012. Under Jiang, relations with North Korea were warm, even if the Chinese regime outwardly disapproved of Pyongyang’s nuclear program, which produced its first working weapon in 2006.

One of the legacies of the Jiang leadership is widespread human rights abuses and mass murder, particularly the persecution of the Falun Gong spiritual practice ordered by the former leader in July 1999. Falun Gong adherents and those belonging to other repressed groups have been harvested for their organs and murdered on a nationwide scale.

For Jiang and his lieutenants involved in this gruesome business, holding onto power as long as possible is necessary to keep their atrocities under wraps and to avoid being held accountable for these crimes.

Today, Jiang associates are doing whatever they can to put the brakes on Xi’s anti-corruption campaign, including stirring up trouble for him on the North Korean issue. While many of Jiang’s allies have been purged, the faction’s influence still extends deep into Chinese state and business institutions.

Between 2003 and 2015, Jiang’s protégé Wang Jiarui was head of the Communist Party’s International Liaison Department, which conducts diplomacy with other revolutionary parties and North Korea in particular. Wang often accompanied Chinese leaders to North Korea.

Some of Jiang’s most powerful backers, including Politburo Standing Committee members Liu Yunshan, Zhang Dejiang, and Zhang Gaoli, all have a history of close ties with Pyongyang.

Last September, the purge of Jiang’s cohorts in the provincial leadership of Liaoning Province was quickly followed by the arrest and investigation of Ma Xiaohong, a businesswoman whose trading firm was singled out by U.S. authorities for supplying Pyongyang with materials blocked by U.N. sanctions for their use in nuclear weapons production. Ma’s firm was based in the city of Dandong, which borders North Korea.

Referring to the Ma Xiaohong scandal, U.S.-based political commentator Wen Zhao said the illicit trade had “gone far beyond the realm of normal commerce.”

“This is not something that the local authorities, or Ma Xiaohong herself, would dare to do,” Wen said.

According to China analyst Don Tse, “Jiang Zemin made use of the nuclear threat from North Korea to distract American attention from Chinese human rights violations, as well as resist political attack from factions within the Communist Party that don’t have the blood of innocents on their hands.”

A Faded Alliance

China under Xi has placed a variety of restrictions on Sino–North Korean trade, including banning coal imports, curtailing petroleum sales, and supporting U.N. sanctions.

This has evoked ire from Pyongyang. In early May, North Korean state media issued seldom-seen direct criticism, warning Beijing that it “should no longer try to test the limits of the DPRK’s [North Korea’s] patience.”

Referring to China’s censuring of its nuclear program, the Pyongyang-controlled Korean Central News Agency condemned the “reckless act of chopping down the pillar of the DPRK-China relations.”

In response, China’s Communist Party-controlled Global Times declared that China was able to strike back “at any side that crosses the red line.”

Xi himself has expressed support for tougher action against North Korea, in line with official Chinese policy statements that support U.N. sanctions. Chinese regime-run media have also lauded his conversations and meetings with Trump as “fruitful” and as having made progress.  

At the recent G20 summit in Hamburg, Xi reiterated the demand for Korean denuclearization and said that he would order Chinese forces to take part in U.S.-led military exercises in the Pacific.

Chinese President Xi Jinping speaks after his tour of the Boeing assembly line in Seattle, Washington on Sept. 23, 2015. (Mark Ralston - Pool/Getty Images)

Chinese President Xi Jinping speaks after his tour of the Boeing assembly line in Seattle, Washington on Sept. 23, 2015. (Mark Ralston – Pool/Getty Images)

“Let me just say that it’s an honor to have gotten to know you. We are developing and have developed a wonderful relationship,” Trump said to Xi after their second meeting on July 8 at the summit. “I appreciate the things that you have done in regard to the very substantial problem that we all face in North Korea.”

As the U.S. Navy positions aircraft carrier groups near the Korean Peninsula, there have been hints that China is making its own military preparations. In April, unconfirmed reports suggested that over 100,000 soldiers of the People’s Liberation Army had been deployed to the Sino–North Korean border.

In June, an elite Chinese airborne division was reorganized for combined arms operations and part of it redeployed to Northeast China, hinting at Beijing’s planning for a scenario in which it must quickly secure the North Korean nuclear arsenal.

North Korea’s ‘Survival Diplomacy’

The Kim leadership, now in its third generation under 33-year-old Kim Jong Un, runs an inefficient, oppressive regime reminiscent of Maoist China or Stalinist Russia.

According to Andrei Lankov, a Russian scholar of North Korea’s society and regime, Pyongyang is forced to run what he calls “survival diplomacy” because it is in the “peculiar and unenviable position” of being “stuck with an outdated economic system that cannot generate growth.”

Unable to support itself on central planning, or to enact Chinese-style economic reform without risking total collapse and absorption by South Korea, Kim’s regime instead subsists on nuclear blackmail in hopes of scooping up international aid and other concessions, Lankov says.

Translated into recent events, this has meant ever more radical provocations from North Korea. In his six years of power, Kim Jong Un has test-launched dozens of ballistic missiles, compared to just 16 during the entire 17 years when his late father Kim Jong Il ruled the country.

Provocation is just one of the ways that North Korea disturbs the peace. Aside from normal cross-border trade with China, North Korea also has various means of illicit fundraising and resource procurement. Regime authorities have set up and encouraged a drug production and export industry. North Korean hackers carry out bank robbery. Pyongyang sends tens of thousands of laborers to work abroad in countries like China and Russia in slave-like conditions, receiving in return hundreds of millions, or possibly billions, of dollars. These activities sustain the regime’s ambitions.

Strategic Liability

Conventional analysis holds that China sees North Korea as a useful buffer state between itself and South Korea, a strong U.S. military ally.

But in a time when China no longer seeks Marxist revolution, North Korea only undermines its larger neighbor’s goals in the region.

According to Zang Shan, a veteran journalist of China affairs based in Hong Kong, “North Korea’s aggressive nuclear tests have brought great harm to China’s interests, far worse than the THAAD system deployment in South Korea. North Korea not only acquired nuclear weapons, but forced Japan to work with South Korea, enforcing their cooperation with the United States.”

Zang believes that a significant goal of Chinese foreign policy in Northeast Asia is to prevent an alliance between South Korea and Japan, something that a belligerent North Korea makes more rather than less likely.

Meanwhile, Zang wrote in an article published by the Chinese edition of The Epoch Times: “North Korea is just a chess piece that justifies the United States to have a military presence in the area. The threat from the nuclear weapons and missile program come second in its calculus.”

Russia, for its part, can use North Korea in its overarching strategy to confound and redirect U.S. and allied efforts—and lessen North Korea’s dependence on China in the process. New Russian technology may be behind the latest North Korean missile designs, wrote Tetsuro Kosaka of Japan’s Nikkei Asian Review in June.

Ri Jong Ho, a high-ranking North Korean official and defector, revealed in an interview with Voice of America last month that much of the Kim regime’s fuel needs are covered by Russian rather than Chinese oil, but that the ships traveling to North Korea are transported with forged documents showing destinations in China.

In an interview later adapted to an article and published on Duowei, top Chinese scholar of Korean affairs Jin Qingyi argued that an isolated North Korea was not only a political nuisance but was also in direct contradiction with China’s market economy.

“The only way to change it is to induce North Korea to reform and open up; there is no other way. If North Korea reforms and opens up, the entire region will thrive,” Jin said.

The northeastern Chinese provinces of Liaoning, Jilin, and Heilongjiang, which are widely known as the economically depressed rustbelt of state-run heavy industry and resource extraction, would benefit from a reformed North Korea. Liaoning and Jilin border the country, and Heilongjiang is north of these two provinces.

“I think what the three northeastern provinces lack most is an open economy. The best way to have an open economy is to have a unified Korean Peninsula,” Jin said.

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Greg Autry spoke at the Rayburn House Office Building on June 23 at an event held by the non-profit Defense Forum Foundation.Greg Autry spoke at the Rayburn House Office Building on June 23 at an event held by the non-profit Defense Forum Foundation.

Despite China’s rapidly growing economy and engagement with the free world, the Chinese Communist Party remains firmly hostile to the liberal democracies of the West and has been overtly and covertly subverting the leadership and interests of the United States for decades, according to Greg Autry, who co-authored the 2011 book “Death by China: Confronting the Dragon.”

In a speech given on June 23, Autry said that he first became aware of Chinese regime’s brutal nature after a visit to China some years ago. Autry displayed a photo he took with several Chinese friends, one of which is a Chinese woman named Jennifer Zeng, whom he befriended during the trip and who was a Falun Gong practitioner. Zeng was later jailed, tortured, and separated from her family, all because the Chinese regime outlawed and persecuted her spiritual practice since 1999.

Autry said that the U.S. policy toward China since Richard Nixon’s rapprochement in the 1970s has always been defined by a persistent attempt to court China. According to Autry however, not only did this policy of appeasement fail to draw China into the U.S. orbit, it actually created a “Frankenstein” that remains fundamentally hostile to U.S. values and interests and is now turning the tables against the U.S.-led free world.

Falun Gong practitioner Jennifer Zeng, cries as she honors a victim of the persecution at the Washington Monument, July 22, 2010. (Mark Zou/The Epoch Times)

Falun Gong practitioner Jennifer Zeng, cries as she honors a victim of the persecution at the Washington Monument, July 22, 2010. (Mark Zou/Epoch Times)

“Promises of benefits of engagement with China didn’t pan out. Chinese Communist Party rulers are still commies after all these years,” said Autry. “They live a good life for themselves at the expense of the common people of China.”

According to Autry, China’s trade practices against the U.S. economy and the stealing of U.S. technologies through hacking and other means are just the beginning of the Chinese regime’s decades-long campaign to undermine the free West.

Autry said that U.S. and the rest of the world are now entering a period of consequences, as evidenced by China’s ever-mounting military build-up and mounting aggressiveness against Taiwan, Japan, the United States, and “all of China’s neighbors.”

While the U.S. military remains superior in terms of technology and training, China can eventually defeat such an advantage in quality by building an overwhelming quantity of equipment and personnel for its People’s Liberation Army, said Autry.

“Productive capacity is what wins a real world war,” said Autry, citing the experience of World War II in which the United States overwhelmed Germany and Japan through its sheer amount of industrial capacity to produce and field military units. Due to decades of deindustrialization and manufacturing decline, the U.S. today no longer possesses such an advantage over China, according to Autry.

The non-profit Defense Forum Foundation invited Greg Autry to speak in the Rayburn House Office Building on Capitol Hill on June 23. Autry has published extensively advocating for a revitalization of America’s domestic industry and space program, and he also served briefly as a liaison for the Trump administration’s NASA transition team.

The 2011 book “Death by China: Confronting the Dragon” was co-authored by Greg Autry and University of California, Irvine professor Peter Navarro. The book was later made into a documentary film of the same name and released in 2012. Navarro, an economist who is also known for outspoken criticism of the Chinese regime and China’s trade practices against the U.S., was designated by President Donald Trump in January 2017 to head the newly created National Trade Council.

Speaking of his friend Peter Navarro, Autry said that Navarro is “doing his best” to alter the failed U.S. trade policy toward China, but resistances to Navarro’s efforts remain stiff.

“People who profited from doing business with China try hard to stop any talk of action confronting China,” Autry said. “I am still hoping we will see change.”

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A worker processes silk at the Kim Jong Suk Silk Mill in Pyongyang, North Korea on February 21, 2017. 
Ed Jones/AFP/Getty ImagesA worker processes silk at the Kim Jong Suk Silk Mill in Pyongyang, North Korea on February 21, 2017. 
Ed Jones/AFP/Getty Images

On June 19, Japan’s Nikkei Asian Review reported that Chinese authorities had instructed a number of domestic companies not to hire any workers from North Korea. The order was communicated in implicit means, such as verbal agreement and other informal instructions, an unidentified source told Nikkei. No formal statement or order has been issued.

In May, the Associated Press reported that China had done a “number of … things” on Chinese companies that deal with North Korea, citing Acting Assistant Secretary of State Susan Thornton.

The reports suggest a new dip in the China-North Korean relationship, which has reached unusual lows in recent months.

China, though North Korea’s only ally and also a communist state, has agreed to enforce international sanctions against the Kim Jong Un regime over its continued pursuit of nuclear weapons and delivery systems. A ban on coal imports from North Korea has been in place since February this year, cutting the country’s vital currency sources sustaining the fragile economy.

According to Reuters, citing a 2015 report by the UN, at least 50,000 North Koreans lived abroad serving as laborers, sending billions in earnings to their home country.

China, alongside Russia and Middle Eastern states, is one of the major host countries.

The United Nations has broadened sanctions against North Korea on June 2, 2017, condemning the country’s repeated nuclear tests. So far the sanctions have exhibited little weight on North Korean government, which conducted several anti-ship missile tests in the Sea of Japan on June 8. A North Korean diplomat  responded to the resolution, calling the sanctions “a hostile act to “completely strangle North Korea’s national economy.”

China has also tightened its border security control, according to the Associated Press. Lu Kang, the China foreign ministry spokesperson, stated that China will be “strictly implementing” UN sanctions.   

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  • Author: <a href="http://www.theepochtimes.com/n3/author/eva-fu/" rel="author">Eva Fu</a>, <a href="http://www.theepochtimes.com/" title="Epoch Times" rel="publisher">Epoch Times</a>
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People walk past an entrance to the Anbang Group's offices in Beijing, June 14. (AP Photo/Mark Schiefelbein)People walk past an entrance to the Anbang Group's offices in Beijing, June 14. (AP Photo/Mark Schiefelbein)

In a move that stunned New York dealmakers at the time, the famed Waldorf-Astoria Hotel on Park Avenue was sold in 2014 to a little-known Chinese company.

That Chinese company is Beijing-based Anbang Group, an insurance conglomerate known for its aggressive overseas asset purchases, including a failed 2016 bid to acquire Starwood Hotels and Resorts. At the time, Chinese companies were engaged in a global takeover spree, and Anbang appeared to be leader of the pack.

Merely a year later, the once high-flying Anbang is suddenly grounded.

Anbang billionaire chairman Wu Xiaohui has been detained by Beijing authorities. And several Chinese state-owned banks were told to stop their dealings with the company, sources told Bloomberg on June 15. Its more than 30,000 employees and nearly $300 billion of assets are left hanging in the balance.

On June 9, Beijing anti-corruption investigators detained Wu, according to the Financial Times. While it is yet unclear if the Central Commission for Discipline Inspection will announce a formal investigation of Wu, he is certainly the highest-profile business executive reeled in so far by Chinese leader Xi Jinping’s sweeping anti-corruption efforts.

Anbang’s Meteoric Rise

In a short time, Anbang has risen from relative obscurity to become one of China’s largest holders of foreign assets. Before its activities were curtailed recently, Anbang had become well known among Western private equity firms and real estate moguls as a competitive bidder for assets.

Wu and Anbang have cultivated extensive business and political connections abroad. Wu is known to be close to Jonathan Gray, head of real estate at U.S. private equity giant Blackstone Group. A few of Anbang’s recent asset acquisitions have been bought from Blackstone. Wu was also in discussion to acquire a stake in the Manhattan office tower owned by Jared Kushner, son-in-law and senior advisor of President Donald Trump, but the deal was called off in March.

Today, Anbang’s portfolio of well-known foreign assets includes the Waldorf-Astoria Hotel, the 717 Fifth Avenue building in New York, the Chicago-based Strategic Hotels & Resorts Inc., Belgian insurer Fidea, Belgian bank Delta Lloyd, and a controlling stake in South Korean insurer Tongyang Life Insurance.

Anbang_holdings

List of major foreign asset holdings of Anbang Group, as of June 1, 2017 (The Epoch Times)

‘White Gloves’

Anbang’s sudden fall seems as startling as its rapid ascent. What caused the disgrace of Wu Xiaohui, who led a conglomerate described by the Financial Times in 2016 as “one of China’s most politically connected companies?”

In China, business is always driven by politics. And Wu’s political network could very well landed him in trouble. 

Wu was in discussion to acquire a stake in the Manhattan office tower owned by Jared Kushner.

Wu’s background, like many other Chinese tycoons, is relatively obscure. Born in Wenzhou, Zhejiang Province, Wu founded Anbang as a small insurance company in 2004. His fortunes elevated after marrying Zhuo Ran, a granddaughter of former Chinese Communist Party (CCP) leader Deng Xiaoping.

Overseas Chinese language media and sources of this newspaper note that Wu and Zhou are now divorced, although Wu and Anbang have publicly denied such reports.

Wu, 50, is believed to be a close ally of an influential political faction that is in opposition to the Xi leadership. Jiang Zemin was head of the CCP for over a dozen years (1989–2002) and continued holding sway over the Chinese regime through a network of cronies for another ten years (2002–2012). Since coming to office in 2012, Xi Jinping has waged a battle to uproot the influence of Jiang and his faction. 

Sources close to Zhongnanhai, the central headquarters of the CCP, told The Epoch Times that Anbang and Wu have close ties to the family of Zeng Qinghong, the former Chinese vice premier, member of the powerful Politburo Standing Committee, and longtime confidant of Jiang.

The source said that both Wu and Xiao Jianhua—the Chinese billionaire and Tomorrow Group owner who was abruptly brought back to Beijing from Hong Kong for investigation earlier this year—are key “white gloves,” or money launders, of the Zeng family and the Jiang faction.

The source added that Wu and Xiao used financial transactions to funnel and launder funds abroad on behalf of the Jiang faction, while at the same time parlaying their roles as business tycoons to spy on and influence foreign dignitaries.

There are questions surrounding the sources of Anbang’s capital. The company was founded in 2004 as a small insurer with a mere 500 million yuan ($73 million) of capital and eventually became a behemoth with assets of almost 1,971 billion yuan ($292 billion).

Anbang’s capital suddenly swelled in 2014, with a number of mysterious investors injecting a total of 50 billion yuan into the company. Research by Caixin, a respected mainland business magazine, found that some of Anbang’s 39 investors are obscure outfits such as auto dealerships, real estate firms, and mine operators that sometimes use shared mailing addresses, many of whom are connected to Wu. There’s also a trend of major state-level investors scaling back their ownership, with SAIC Motor Corp. and Sinopec decreasing their ownership levels from 20 percent each to 1.2 percent and 0.5 percent respectively.

Waldorf_hotel_17

The Waldorf-Astoria hotel is shown January 17, 2005 in New York City. (Spencer Platt/Getty Images)

The insurer also relies on fundings from selling risky wealth management products called universal life policies. These products offer high interest rates and are a hybrid bond and a life insurance policy, have been extremely popular with consumers dissatisfied with bank deposit rates of around 1 percent.

Crackdown on ‘Barbaric’ Insurance Sector

Xi Jinping has made reforming the financial industry a core focus this year. At a speech on March 21, Premier Li Keqiang urged authorities to take powerful measures to prevent corruption in the financial sector, which is vulnerable to the advent of shadow banking, bad assets, and illegal internet financing, according to state-controlled media Xinhua.

Xi has also shown he’s unafraid to challenge captains of industry with extensive political connections. Wu’s detention is the latest in a string of recent disciplinary actions taken against high ranking officials within the financial industry, and thus far, with the insurance sector as ground zero. In February, chairman of financial conglomerate Baoneng Group Yao Zhenhua was banned from the insurance industry for ten years. In April, the former head of China Insurance Regulatory Commission (CIRC) Xiang Junbo was placed under investigation.

Sources close to Zhongnanhai have told The Epoch Times early this year that the Xi leadership is focusing on tackling corruption in the Chinese financial industry in 2017. 

China’s insurance industry has garnered immense power—and controversy—during the last six years, a period of deregulation overseen by its former chief regulator, Xiang, currently under official investigation.

From 2012 to 2016, China’s insurance sector grew 14.3 percent overall, and non-life insurance grew 16.5 percent in premium volume, according to data from Munich Re. Last year, China overtook Japan to become the world’s second biggest insurance market by premiums.

During this period, the insurance sector has turned into a den of corporate raiders.

Insurers are traditionally bastions of conservatism, holding stable assets such as government securities and corporate bonds. Insurers by nature must consider preservation of their clients’ capital as paramount. These assets are also liquid and can be easily sold to pay back policy-holders.

Flush with cash from universal life policies, Chinese insurers embarked on a spending spree, amassing portfolios of risky assets not typically associated with insurance, such as stocks, real estate, and foreign companies. Such assets are risky and illiquid, and could impede an insurer’s ability to repay holders during times of distress.

The insurers most closely associated with such practices are Evergrande Life, Foresea Life—a unit of Baoneng—and Anbang. These companies’ business model closely resemble a private equity fund, where capital is expensive and investment returns are the main focus.

Last year, Foresea and Evergrande amassed a large stake in residential real estate developer China Vanke. A public and protracted dispute to wrest control of Vanke from founder and CEO Wang Shi—one of China’s most famous entrepreneurs—ensued, creating a market firestorm that was finally dispelled after Beijing intervened in December.

In late 2016, China’s insurance regulator criticized the entire domestic insurance industry, calling its aggressive purchases of Chinese companies “barbaric.” Wang Shi also portrayed Foresea’s stock accumulation as “barbarian,” a reference to the 1989 book “Barbarians at the Gate” about the hostile takeover of RJR Nabisco by private equity giant Kohlberg Kravis Roberts & Co.

In just six months, Xi has replaced China’s top insurance regulator, banned the sale of universal life policies, and for now, seemingly brought a wild industry to its heels.

But years of free-wheeling cannot be corrected overnight.

Foresea, which depends on cash from sales of universal life products, issued a warning last month of financial difficulties leading to potential social unrest from its customers unless regulators lift the ban on such products. In a letter to regulators, Foresea called for a lifting of ban “to avoid mass riots by clients, causing systemic risks and much damage to the wider industry.”

Reference to “mass riots” is anathema to the CCP and a potential challenge to the Xi leadership. The insurance industry, in the end, may not give up without a fight.

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In this Wednesday, May 11, 2016 photo, children accompanied by their parents and caretakers, attend an art class at the I Love Gym center in Beijing. A television personality in China argues that children are taught to lie from a young age. (AP Photo/Andy Wong)In this Wednesday, May 11, 2016 photo, children accompanied by their parents and caretakers, attend an art class at the I Love Gym center in Beijing. A television personality in China argues that children are taught to lie from a young age. (AP Photo/Andy Wong)

Wang Chong is a well-known scholar of diplomacy and international relations, a best-selling writer, and a reporter and television personality. He was the first Chinese news reporter to interview Barack Obama, in 2004. In this article, published on the author’s blog, Wang Chong reflects on the culture of dishonesty in China and how it impacts children. — Epoch Times translation team

I remember a survey a few years ago that asked people whether they were willing to fight for their country in a time of war. Only 11 percent of Japanese replied “yes,” while 71 percent of Chinese said “yes.” Does this indicate that Chinese people are more patriotic than the Japanese, or Chinese are not as honest as the Japanese? Would this many people actually be fighting for the country if there really was a war?

There have been a number of similar surveys. On April 8, 2010, the Japan Youth Research Institute published a survey conducted with high school students from China, Japan, Korea, and the United States. The results showed that up to 45 percent of Japanese high school students doze off during class, the highest among the four countries, while the ratio was only 4.7 percent for Chinese students.

If there were 50 students in a class, 22 students in Japan doze off, while only 2 students in China doze off. It is easy to draw the conclusion that Chinese high school students love to study. The survey reflected a negative attitude by Japanese students toward studying, while Chinese students’ learning behavior appeared to be the most positive.

However, this conclusion is far from the facts that all we Chinese know. Everyone who has gone through high school remembers very well that a class with only two or three students dozing off was extremely rare, no matter whether it was an ordinary or a gifted classroom.

There are two possible reasons for this extremely low “dozing off ratio.” One is an unscientific sample, i.e. the majority of students participating the survey were outstanding students who do not doze off in class. Or the Chinese students lied on the survey.

In China, every student has a “standard” answer — one that’s expected of them — and an “honest” answer when responding to a survey. “Paying attention in class” is the standard answer, and “napping” may be the honest answer. Chinese children are likely to choose the standard one. But why did Japanese children answer honestly? It involves social and cultural values that are reflected in the family environment and education system.

Southern Weekly once published an article titled “The Lying Essay,” about how Chinese school children are first taught to lie when writing an essay. It quoted a teacher saying: “I gave the students an assignment to write an essay titled ‘The Teacher in My Heart.’ All students wrote about a Teacher named Ye. They listed her heroic deeds, which even surpassed Confucius. I was Teacher Ye’s co-worker for years, how come I never heard of any of this? Their essays became more and more outrageous and full of lies year after year, from the teacher getting cancer to her parents passing away.”

Scholar Zhu Dake once recalled that he used to lie in his essays. He also wrote “Red Diaries” about Chairman Mao’s quotations, saying how “very touched” they made him feel. Or he watched a revolutionary movie, and it too made him feel “very touched.” All his essays followed similar patterns — ensuring they were correct politically.

Japan makes a striking contrast.

Japanese parents generally attach importance to cultivating childrens’ honesty. If a three or four-year old child accidentally breaks a vase at home, he will be praised if he tells the truth, instead of being punished. If he doesn’t tell the truth and blames others, he may be severely punished and even forced to use his pocket money to pay for it. A clear system of reward and punishment helps to establish honesty at an early age.

If a Japanese child says he wants to be a baker when he grows up, the adults will listen and nod their approval. Chinese children often have grandiose aspirations, as they will otherwise be criticized by adults. Over time, “standard” answers become deeply rooted in their minds.

When Zhou Yang won a gold medal at the winter Olympics, she did not follow the standard answer to thank the country. Instead, she said that her parents could now live a good life. Chinese people praised her for this, yet she was forced to change her statement later. Current in China the social atmosphere is so bad. People fear that telling the truth will result in bad luck, while by telling lies one can at least survive.

In Japan, education in integrity runs through the entire life. At home, parents tell their children not to lie. At school, children also learn to be honest. At work, integrity is almost treated as a universal business philosophy.

I once participated in a Sino-Japanese education exchange seminar. The host asked both sides to list the shortcomings of their education system. Chinese delegates discussed which ones to bring up. Some mentioned campus violence, lack of respect for teachers, etc., but these were immediately rejected as China’s image during international exchanges had to be protected, and one should not tell the truth.

Lies don’t become truth even if repeated a thousand times. It is better to tell fewer lies even when they seem harmless.

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Two people look towards high-rise buildings in Kowloon, Hong Kong, in a file photo. The Hong Kong Monetary Authority and Beijing have agreed to launch a cross-border bond connect, granting foreign investors access to the Chinese onshore bond market. (Antony Dickson/AFP/Getty Images)Two people look towards high-rise buildings in Kowloon, Hong Kong, in a file photo. The Hong Kong Monetary Authority and Beijing have agreed to launch a cross-border bond connect, granting foreign investors access to the Chinese onshore bond market. (Antony Dickson/AFP/Getty Images)

Beijing and Hong Kong have approved a new cross-border bond trading program, called bond connect, hoping to attract a new wave of foreign investors to buy Chinese onshore bonds.

The platform is similar in theory but differs in execution to the existing stock connect between Hong Kong and the mainland, which allows foreign investors to purchase mainland stocks. The bond connect will link Hong Kong to Shenzhen’s bond markets and is expected to go live on July 1, the 20th anniversary of Hong Kong’s handover to China.

Beijing hopes the bond connect will legitimize its bond market on the global stage and help diversify bearers of onshore default risk. But immediate success is unlikely, given the existing lukewarm reception of the similar stock connect program and overall investor skepticism of Chinese credit.

Expanding Access

China is the world’s third largest bond market following the United States and Japan, but is largely closed off from foreign investors. It first opened the onshore bond market to foreign investors in February 2016. Under this arrangement, foreign asset managers wishing to purchase such bonds must register locally in mainland China.

The bond connect will officially eliminate that requirement, as firms in Hong Kong will have the ability to purchase onshore bonds at will, without a mainland license.

In a joint statement May 16, the People’s Bank of China (PBoC) and Hong Kong Monetary Authority (HKMA) said that “Northbound trading will commence first in the initial phase, i.e. overseas investors from Hong Kong and other countries and areas (overseas investors) to invest in the China Interbank Bond Market.” The opposite southbound trading, or mainland investors investing in Hong Kong bonds, will commence in the second phase at a later date.

Oppenheimer_bonds1

China is the world’s No. 3 bond market (Source: Oppenheimer Funds)

In theory, bond connect will no doubt expand the market for Chinese onshore bonds and bring in a new wave of investors. “The major advantages of the Bond Connect compared to the existing China Interbank Bond Market scheme are the speed of gaining the access and the fewer onshore account set up needed,” Gregory Suen, investment director of fixed income at HSBC Global Asset Management, told industry publication Fund Selector Asia.

Today, prior to the bond connect, about 473 foreign investment firms are active within China’s onshore bond market with investments totaling 800 billion yuan ($117 billion), according to PBoC estimates. However, the true number of foreign firms holding Chinese debt is less than the official figures, as about 200 of the 473 are investors from the Chinese territory of Hong Kong, which Beijing deems foreign.

To cater to the anticipated trade flow, the Hong Kong Exchanges and Clearing and China Foreign Exchange Trade System formed a joint venture on June 7 called the Bond Connect Company to offer trading and support services to market participants of the bond connect.

‘Not a Case of Build It and They Will Come’

Beijing hopes demand for bond connect from foreign institutional investors will exceed the lackluster enthusiasm investors currently have for the Hong Kong-Shenzhen stock connection, where trading activity remains tepid.

But that’s far from a certainty.

The Hong Kong-Shenzhen stock connect has been open for six months, but logistical and demand issues remain. Clearing and settlement differences between Shenzhen and Hong Kong regulators have caused a sizable portion of trades to fail in recent months, according to a South China Morning Post report. In addition, foreign demand for Shenzhen stocks so far hasn’t met Beijing’s expectations, with the technology-heavy Shenzhen issuers viewed as perhaps too risky for foreign investors.

It’s difficult to see bonds faring better. Despite Beijing’s opening up the domestic bond market to foreign investors last February—with no approval necessary as long as the investor has a local registered entity—foreign ownership of China’s bond market remains tiny.

At the end of 2016, foreign holdings of onshore bonds are only 1.3 percent of total market value, according to estimates from the Financial Times

That means investors don’t believe the investment returns on Chinese bonds are enough to justify the heightened default risk of owning Chinese debt, which has fueled much of China’s recent economic growth and today sits at almost 260 percent of GDP, according to ratings agency Moody’s Investors Service.  

Looking past macro issues, individual bonds are also notoriously hard to evaluate for foreign investors.

The industry standard global credit rating agencies of Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings are barred from operating in China. Chinese bonds are instead rated by domestic ratings agencies, which are viewed by foreign investors with distrust for granting overly generous credit ratings. In other words, it’s difficult to assess the credit-worthiness of Chinese issuers because information on bonds is unreliable.

Oppenheimer_bonds2

Investors believe Chinese domestic credit rating agencies have tendencies to give out overly generous ratings to bond issuers (Oppenheimer Funds).

“For foreign investors, it’s not a case of build it and they will come,” concluded Rachel Ziemba, Managing Director at Roubini Global Economics, on CNBC. “They want to understand, they want to be paid for the risks they are taking on. In an environment where interest rates are rising in China, where the property market is flattening out a bit, that question mark about more information and drivers is going to be very important.”

The new U.S.-China trade deal signed during Chinese Communist Party leader Xi Jinping’s visit with U.S. President Donald Trump in April outlined a path for the U.S. credit rating agencies to begin operations in China later this year.

To foreign investors, that’s a step in the right direction, while also introducing new challenges. Foreign credit agencies will operate under supervision of Chinese securities regulators. During times of economic duress, can they remain independent and objective?

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The China Association for Science and Technology, China's peak professional association for scientists, hosts the World Life Science Conference in Beijing on Nov. 1, 2016. CAST recently criticized Springer after the academic publisher retracted 107 medical papers from Chinese authors. (Screenshot/Xinhua)The China Association for Science and Technology, China's peak professional association for scientists, hosts the World Life Science Conference in Beijing on Nov. 1, 2016. CAST recently criticized Springer after the academic publisher retracted 107 medical papers from Chinese authors. (Screenshot/Xinhua)

A major scandal in the world of scientific research was revealed last month. One of the world’s largest academic publishers, Springer, announced the withdrawal of 107 papers published between 2012 to 2015 in the Tumor Biology journal because of peer review fraud. All of these papers are related to Chinese research institutions. This is the highest number of professional academic journal papers withdrawn at any one time. Moreover, several media published the names, departments and institutions of all 524 Chinese scholars suspected of misconduct, many of whom are famous doctors from prestigious schools and institutions. This is a catastrophic international scandal, and it may have irreparably damaged the reputation for academic integrity of Chinese doctors.

Faced with this shameful disclosure, the China Association of Science and Technology (CAST) accused the Springer Publishing Group of “imperfect internal control mechanisms and loose auditing” and said Springer should “take responsibility.” This criticism is simply unthinkable. Shouldn’t CAST be blaming those who committed the fraud, instead of condemning the Springer Group for exposing it? By making that statement, is CAST labeling itself to be an association of liars?

After the CAST announcement, some Chinese doctors also stepped out to defend their peers, making excuses like: the fraud was in the peer review instead of the content itself; scientific research and clinical technology were not necessarily involved; the system in China forced doctors to commit fraud; doctors were innocent, and so on. They also criticised the publication of the names of the authors, saying that it’s a violation of privacy and damaging to the doctor-patient relationship, etc. I was shocked by these statements. What’s wrong with the Chinese scientific community and medical profession? Why is their level of morality so low?

To answer this question, we have to talk about China’s system of promotion in professional ranks (“zhicheng“). In this system of China, doctors must publish research papers to be promoted to mid- or higher-level ranks. The higher the level, the more demanding the requirements.

But do surgeons have time to complete papers? Probably not. On average a doctor conducts two to three surgeries a day, even four during busy times. It is common that doctors are on their feet six to seven hours a day. Therefore most of them do not have enough energy left to engage in scientific research, let alone publish papers in major medical journals. A survey indicated that 36.51 percent of Chinese doctors said they were reluctant to complete the requirement of rank promotion, and up to 25.88 percent said they couldn’t finish the task on time. Having to write research paper creates big challenges and enormous pressure for them. Over 30 percent of the doctors indicated that they have committed fraud in the evaluation process, and nearly 40 percent said they might choose to commit fraud if the pressure on them is high enough. The surveying institutions concluded that promotion based on paper publishing is nearly something like forced prostitution. According to such analysis, Chinese doctors committing fraud is somehow a result of the bad system. No wonder CAST stepped out to blame the Springer Group, as CAST is the one behind the scenes executing this system.

People around the world hate lies, but different countries have different degrees of cognition and tolerance of lies. When Chinese doctors publish fake papers, CAST came out to blame others, the Chinese media did not pay much attention, and the general Chinese public did not care much either. In Japan, things are different. Let’s take a look at their most famous case of scientific fraud, known as the “Obokata Haruko Fraud.”

On Jan. 29, 2014, the young Japanese stem-cell biologist Dr. Obokata Haruko published two papers in Nature, one of the world’s most authoritative research magazines. She claimed to have discovered a much simpler way of creating stem cells, using a technique called “stimulus-triggered acquisition of pluripotency.” The discovery might have made her a candidate for the Nobel Prize. The news immediately gained enormous attention in Japan, as prominent female scientists are rare. But the excitement was short-lived when Paul Knoepfler, a leading U.S. scientist, found that other scientists were unable to replicate Obokata’s findings. When it was found that there were doubts about the research, the Japanese public was shocked; they felt that Obokata had brought shame to Japan, and criticised her severely.

Facing such a strong media response, the Japanese institution where Obokata worked quickly set up an investigation committee. On April 1, 2014, the Institute concluded that Obokata’s STAP paper contained fabrications and called it academic misconduct.

Obokata’s mentor and co-author Yoshiki Sasai committed suicide in August of the same year. He said in an email to the media that he was “overwhelmed by disgrace, and the death is an apology to society.”

In Japan, fraud is considered even more serious than being sent to prison. The entire society appears to criticize such behavior, and the consequences can be as bad as, or even worse than death.

We don’t know the fate of the 524 Chinese doctors who conducted fraud, but I assume nothing will happen to them. The next question is, will China reform the current system in removing the requirement of journal publication to doctor’s rank promotion? I’d say it is difficult. As long as the system in China doesn’t change, there will be more fraud, harm to doctors and patients, and an absence of trust in China’s medical research.

Tian You is a popular blogger and commentator on Chinese society, economy, and culture. His personal blog has over 2.4 million subscribers. This is an abridged article from the author’s personal blog.

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Doris Liu, director of the film “In the Name of Confucius,” discusses her documentary on Confucius Institutes at the Alliance Defending Freedom, April 26. (Gary Feuerberg/ The Epoch Times)Doris Liu, director of the film “In the Name of Confucius,” discusses her documentary on Confucius Institutes at the Alliance Defending Freedom, April 26. (Gary Feuerberg/ The Epoch Times)

 WASHINGTON—Since 2005, the Chinese government has been funding Confucius Institutes (CI) in the United States—a multi-billion-dollar enterprise. For example, it gave $4 million to Stanford University as a onetime gift. What is behind the largesse? Does the China regime just want to promote Chinese culture or is there something more insidious about its intentions?

To address this question, the National Association of Scholars (NAS) commissioned a report released in April, “Outsourced to China: Confucius Institutes and Soft Power in American Higher Education.” NAS, consisting primarily of current or former university professors, describes itself as an independent association seeking to foster “intellectual freedom and academic excellence in American higher education.”

The report’s author, Rachelle Peterson, presented her findings at an event hosted by Alliance Defending Freedom on April 26.

In recent years, faculty at universities hosting Confucius Institutes often voice concerns such as the university’s Confucius Institute was established in secrecy, is beyond faculty control, and competes with their modern language program. It’s also reasonable to ask about the intellectual costs of an arrangement that grants significant authority to a party outside the university.

The University of Chicago in 2014 closed its Institute after five years, soon followed by the University of Pennsylvania. Several scholars of China have written books and articles critical of the program. The faculty at the University of Chicago objected to an external party hiring and training teachers. The faculty was also not comfortable with the university’s ties to the Hanban, an agency of the Chinese communist regime, and the constraints on free speech and belief that is to be expected from the Chinese Party-State.

To better understand the role of Confucius Institutes in American higher education, Peterson, who is director of Research Projects at NAS, examined 12 Confucius Institutes—two in New Jersey and 10 in New York. It was a challenge to conduct the research. Most of the CI’s she studied were not very forthcoming and in some instances, very hostile to her research.

The faculty at the University of Chicago objected to an external party hiring and training teachers.

Following the report’s discussion, the U.S. premiere of the documentary, “In the Name of Confucius,”  was shown. It reenacts the personal story of former CI Mandarin teacher and Falun Gong practitioner Sonia Zhao. She exposed secrets of the CI program that led to the first closure of a Confucius Institute in North America. The film also profiles contentious scenes taken at Canada’s largest school board, the Toronto District School Board (TDSB), as it debated the CI program. Shown also were boisterous public protests in Canada for and against CIs.

CI Growing

The CI program is managed within an agency of China’s Ministry of Education: The Office of Chinese Languages Council International, usually called the Hanban. It operates 103 Confucius Institutes in the United States, nearly all out of universities. As well, it operates Confucius Classrooms (CC) at 501 primary and secondary schools in the United States. These 604 entities are the most of any nation, and represent 38 percent of China’s 1,579 CIs and CCs worldwide. The 501 U.S. CCs represents nearly half (47 percent) of all CCs worldwide. Other countries which have high numbers of education outposts are UK, Australia, Italy, South Korea, Thailand, Germany, Russia, Japan, and France.

China’s overseas investment in CIs and CCs is growing. In the United States, the number increased 35 percent in the last year.

Censorship

Peterson found that Chinese teachers felt pressured to avoid certain topics that are censored in China, such as the Tiananmen Square massacre, Tibet, Taiwan, Falun Gong, and criticism of Communist Party legitimacy. Teachers within Confucius Institutes, who are hired, paid by, and report to the Hanban lack formal academic freedom, states Peterson. Even working in America, they can be removed for violating Chinese law, such as using speech censored in China.

Some CI instructors told Peterson that if the subject of Tiananmen Square came up, they would describe its beautiful architecture.

Doris Liu, director and producer of “In the Name of Confucius,” said that McMaster University told a Tibetan student not to show a Tibetan flag to represent her identity in an annual activity to celebrate the various nationalities on campus. Liu determined that the request originated from the CI director who asked the activity coordinator to tell the Tibetan student not to show the Tibetan flag.

Peterson wrote that local observers at North Carolina State University said that the Confucius Institute was responsible for rescinding an invitation to the Dali Lama to speak on campus in 2009.

Rachelle Peterson, director of Research Projects, National Association of Scholars, discusses her report, Outsourced to China,

Rachelle Peterson, director of Research Projects, National Association of Scholars, discusses her report, Outsourced to China,” at the Alliance Defending Freedom, on April 26. (Gary Feuerberg/ The Epoch Times)

In 2008, Tel Aviv University shut down a student display on the treatment of Falun Gong adherents in China. The students sued and the court found that the university acted under pressure from a dean who feared harming the university’s CI.

Some American professors told Peterson that they felt pressured to self-censor. A good example of the way self-censorship works was given by Julie Wang, Binghamton University’s Asian and Asian American Studies Librarian.

The Hanban had provided a large display of Chinese opera costumes that were housed in wooden cases with glass doors. Wang, who was born in China, initially identified the display on placards as costumes and supplies for “Peking Opera,” which is the original historical term and remains the preferred terminology. She notes that the National Performing Peking Opera still uses “Peking Opera.”

But the Confucius Institute insisted on “Beijing Opera,” the term preferred by the Hanban. A compromise was worked out to use “Beijing (Peking) Opera.”

The lesson she learned in this episode and others was to avoid conflict: “I self-censored myself,” she said, noting that university faculty regularly works with the Hanban and she didn’t want to make it “awkward” for them.

Hiring Discrimination

In 2011, Sonia Zhao, who was an instructor at the McMaster University Confucius Institute, told McMaster authorities that she had been coerced into signing the Hanban contract that doesn’t allow employment of Falun Gong practitioners.

At the moment she was presented with the contract, it was too late to back out, according to the documentary. She felt pressured and feared persecution if she admitted to her religious practice. Her mother had been imprisoned for two years for being a practitioner.

Falun Gong was a very popular spiritual practice that was banned in China in 1999 out of concern that it threatened loyalty to the Chinese Communist Party. The adherents have been especially targeted by the regime, which detains hundreds of thousands of practitioners, subjects them to various tortures, and, in some cases, kills them to harvest their organs.

McMaster University, which is a public research university located in Ontario, Canada, found this hiring discrimination that excludes Falun Gong adherents as unacceptable, and subsequently terminated their relationship with the Hanban and closed its Confucius Institute.

None of the 12 Confucius Institutes Peterson examined would disclose their contract with the Hanban or its funding arrangements.

— Rachelle Peterson, author of report, ‘Outsourced to China’

Lack of Transparency

None of the 12 Confucius Institutes Peterson examined would disclose their contract with the Hanban or its funding arrangements. NAS had to file requests under Freedom of Information Law in New York and New Jersey in order to obtain the contracts from eight of the public universities among the 12 in the group studied.

In general, with notable exceptions, there was evasiveness and sometimes hostility toward the inquiries Peterson made for the NAS report. Only at two of the 12 institutes did the director agree to meet with her.

The CI director at Binghamton University agreed to a meeting, and wrote her to “feel free to let me know if you need any assistance in your visit,” but suddenly canceled two days later, and also canceled the meeting Peterson had scheduled with members of the CI staff. Nor would the latter respond to follow-up requests for comment.

When Peterson arrived at the Institute, she found it locked with the lights off. That this situation was very unusual was indicated by a CI board member who expressed surprise that the CI was closed.

Director Liu found that oftentimes, “the CI host institutions didn’t want to participate in the film or talk about the controversies surrounding the Confucius Institutes. Remarkably, none of them seemed to be worried about the controversies; rather they boasted about their close relationship with the Chinese government.”

Doris Liu, director of the film

Doris Liu, director of the film “In the Name of Confucius,” discusses her documentary on Confucius Institutes at the Alliance Defending Freedom, April 26. (Gary Feuerberg/ The Epoch Times)

Money Incentive

Peterson raises the concern that American universities are becoming financially dependent on China. “Typically, new Confucian Institutes receive $150,000 in start-up funds from the Hanban, and $100,000 in subsequent years.” The Hanban also typically pays and houses each of the teachers. However, several administrators involved with the Confucius Institute in their university downplayed the idea that Beijing is providing tons of money. Further, the host university must provide in-kind contributions, “such as office space, furnishings, computers, and staff time.”

However, the number of Chinese students coming to a university and the extensive relationships that it has in China would be jeopardized if the Confucius Institute were closed. “Several of the Confucian Institutes contracts we examined included plans for student and faculty exchanges, scholarships for American students to study in China, and other incentives,” Peterson writes.

The number of Chinese students coming to a university and the extensive relationships that it has in China would be jeopardized if the Confucius Institute were closed.

Confucius Institutes play a key role in attracting full-tuition paying Chinese students, which become very attractive for universities in search of income, writes Peterson. She cites figures from the Institute of International Education that show that the number of Chinese students enrolled in the United States during the 2015-2016 school year—328,547—was a 525 percent increase from 2005-2006, and represents 31.5 percent of all foreign students in the U.S.

Using sad photos of impoverished children in very primitive schools in rural China, the documentary questions the motivation of the China communist regime spending billions of dollars annually to educate people overseas.

Screen shots from the documentary,

Screen shots from the documentary, “In the Name of Confucius,” a Mark Media production. It shows children in rural China who would benefit from the money the government spends abroad on Confucius Institutes and Confucius Classes.

Screen shots from the documentary,

Screen shots from the documentary, “In the Name of Confucius,” a Mark Media production. It shows children in rural China who would benefit from the money the government spends abroad on Confucius Institutes and Confucius Classes.

Soft Power

Peterson sees no need to prove that China is exercising “soft power”—a term invented by Harvard political scientist Joseph Nye—by its expansion of CIs. It’s obvious that securing a relationship with American universities, including Stanford and Columbia, “boosts China’s image on the world stage.” She adds, “It is naïve to think that China’s multimillion dollar investment in American education stems from pure generosity.”

Peterson quotes Li Changchun, head of propaganda for the Chinese Communist Party, who said in 2009 that Confucius Institutes are “an important part of China’s overseas propaganda set-up.”

Liu said that on the Confucius Institute online class, an animated video refers to the Korean War as “the War to Resist US Aggression and Aid Korea.” She said that the video praises the heroic Communist Party  “In one Canadian Confucius Institute, students were taught to sing songs that incite hatred towards the Communist Party’s enemies,” she said.

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Cangjie was sent down to China from the heavens to create Chinese writing, he was born with four eyes. This portrait of Cangjie is an 18th century painting held in the National Library of France. (Public domain, combination image compiled by Epoch Times)Cangjie was sent down to China from the heavens to create Chinese writing, he was born with four eyes. This portrait of Cangjie is an 18th century painting held in the National Library of France. (Public domain, combination image compiled by Epoch Times)

New Tang Dynasty Television recently broadcast news about over 100 Taiwanese entrepreneurs living in Shanghai who went back to Taiwan to recruit young people to work at their companies.

When asked why they have to recruit from Taiwan while there are so many talented people in Shanghai, a manager at a human resource company explained with frustration: “It is because of the wolf nature of the youngsters in mainland China.”

He also said that youngsters in Taiwan have greater creativity and more loyalty to the company they work for.

Youngsters of the same race speak the same language on the two shores, so why do they retain the qualities of loyalty and faithfulness embedded in traditional Chinese culture on one side, while on the other side they show a heartless nature?

Perhaps we can find a clue from the Chinese character 愛 (ai), meaning love.

Originally the character 愛 did not have the profound sentimental meaning connected to a human or an event; rather, it was an expression of the gratitude of a hungry man.

At the creation of the character, 愛 was written as 㤅, an expression of gratitude for being granted food. The 旡 in the upper part is like a hungry man with a big open mouth. The lower part is the character 心, meaning heart; it is a literal image of a physical heart.

ai1

During the Qin dynasty over 2,000 years ago, an image of a slow pace of walking, 夊, was added at the bottom to show a reluctance to part with something. This completed the ultimate meaning of love.

ai2

The key of the character 愛, love, lies in the radical for the heart. If one is truly in love, or is truly grateful, one must do it with a heart.

However, in the simplified version of the Chinese character, the heart in the middle has been removed: 爱.

Young people from Taiwan, Hong Kong, Macau, and even Japan all write the character for “love” with a heart. But young people from mainland China write “love” without a heart.

There are only four strokes in the character 心, heart. It is not complicated to write.

What is strange is that the character 鬼, meaning ghost, which has a negative bearing, has ten strokes. It has not been simplified at all, even in its use as a radical. For example: 魔, demon; 魂, soul; 魄, sub-consciousness; and 魅, a type of ghost.

However, there is an exception. The traditional character for ugly, 醜, has the radical 鬼, because the ghost is the ugliest thing; but in the simplified character, the ghost is removed, changing “ugly” from 醜to 丑.

This makes one wonder if the real motive of simplifying Chinese writing was to undermine the traditional values of the Chinese people.

Edited by Sally Appert

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  • Author: <a href="http://www.theepochtimes.com/n3/author/joyce-lo/" rel="author">Joyce Lo</a>, <a href="http://www.theepochtimes.com/" title="Epoch Times" rel="publisher">Epoch Times</a> and <a href="http://www.theepochtimes.com/n3/author/zhu-li/" rel="author">Zhu Li</a>, <a href="http://www.theepochtimes.com/" title="Epoch Times" rel="publisher">Epoch Times</a>
  • Category: General
April 30, 2017

Courtesy of Hong Kong Disneyland.Courtesy of Hong Kong Disneyland.

Recently I read an article in a local Hong Kong newspaper.  The author, a Hong Kong lady, said that a while ago she and her Japanese husband took their children to visit Hong Kong Disneyland.  When they returned home, her husband reprimanded her.

She said Disneyland was crowded and there were long queues everywhere.  Some Mainland tourists pushed her from behind and she scolded them. She also stopped some Mainland tourists who tried to cut into the lines. 

Mr Japan was unhappy that she spoke loudly to people the whole day. “If the others want to cut the line, just let them be” he said, and added “we should not be impolite.”

Mrs Hong Kong thought that she was correct to stand up for the rights of herself and her children and to teach a lesson to those who broke the rules.

At first I agreed with Mrs Hong Kong, however, soon afterwards I read a story of a happening in China 2,500 years ago.

Scholar Nan Xiazi once visited Prince Cheng. Prince Cheng treated him to roasted Chinese giant salamander. 

Nan said: “I heard that a real gentleman does not eat salamander.”  (Salamander, also called “baby fish”, makes a sound like a baby crying, so a gentleman does not feel at ease to eat it).

The Prince said, “That is the matter of gentlemen, how does this affect you?”

Nan replied: “I hear that, if a man aims high, then he will constantly improve; if he resorts to degrading things, then his behavior will drop gradually. I dare not say that I am a true gentleman, but I really wish to become a gentleman of honor.”  

He then quoted a saying from the Analects of Confucius: “When we see men of worth, we should think of equaling them; when we see men of a contrary character, we should turn inwards and examine ourselves” (見賢思齊焉,見不賢而内自省也).

Upon reading this, I only want to congratulate Mrs Hong Kong for having a gentleman husband.

Source: “Shuo Yuan,” or Garden of Talks: stories and tales from Confucian scholar Liu Xiang from the pre-Qin period to the Western Han Dynasty.

Edited by Damian Robin.

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The aircraft carrier USS Carl Vinson transits the South China Sea while conducting flight operations on April 9, 2017. (Z.A. Landers/Courtesy U.S. Navy/Handout via REUTERS)The aircraft carrier USS Carl Vinson transits the South China Sea while conducting flight operations on April 9, 2017. (Z.A. Landers/Courtesy U.S. Navy/Handout via REUTERS)

BEIJING/SEOUL—Chinese leader Xi Jinping called for all sides to exercise restraint on Monday in a telephone call about North Korea with President Donald Trump, as Japan conducted exercises with a U.S. aircraft carrier strike group headed for Korean waters.

Trump sent the carrier group for exercises in waters off the Korean peninsula as a warning, amid growing fears North Korea could conduct another nuclear test in defiance of United Nations sanctions.

Angered by the approach of the USS Carl Vinson carrier group, a defiant North Korea said on Monday the deployment was “an extremely dangerous act by those who plan a nuclear war to invade”.

“The United States should not run amok and should consider carefully any catastrophic consequence from its foolish military provocative act,” Rodong Sinmun, the official newspaper of the North’s ruling Workers’ Party, said in a commentary on Monday.

“What’s only laid for aggressors is dead bodies,” the newspaper said.

Two Japanese destroyers have joined the carrier group for exercises in the western Pacific, and South Korea said on Monday it was also in talks about holding joint naval exercises.

Worry that North Korea could be preparing to conduct another nuclear test or launch more ballistic missiles has increased as it prepares to celebrate the 85th anniversary of the foundation of its Korean People’s Army on Tuesday.

It has marked similar events in the past with nuclear tests or missile launches.

Intercontinental ballistic missiles (ICBM) are driven past the stand with North Korean leader Kim Jong Un and other high ranking officials during a military parade marking the 105th birth anniversary of country's founding father Kim Il Sung, in Pyongyang on April 15, 2017. (REUTERS/Damir Sagolj)

Intercontinental ballistic missiles (ICBM) are driven past the stand with North Korean leader Kim Jong Un and other high ranking officials during a military parade marking the 105th birth anniversary of country’s founding father Kim Il Sung, in Pyongyang on April 15, 2017. (REUTERS/Damir Sagolj)

Trump has vowed to prevent North Korea from being able to hit the United States with a nuclear missile and has said all options are on the table, including a military strike.

The Chinese regime is North Korea’s sole major ally but has been angered by its nuclear and missile programs and is frustrated by its belligerence.

The Chinese regime, which has repeatedly called for the denuclearization of the Korean peninsula, is worried the situation could spin out of control, leading to war and a chaotic collapse of its isolated, impoverished neighbor.

Trump, in his phone call with Xi, criticized North Korea’s “continued belligerence” and emphasized that its actions “are destabilizing the Korean peninsula”, the White House said.

“The two leaders reaffirmed the urgency of the threat posed by North Korea’s missile and nuclear programs, and committed to strengthen coordination in achieving the denuclearization of the Korean peninsula,” it said.

Xi told Trump the Chinese regime resolutely opposed any actions that ran counter to U.N. Security Council resolutions, China’s foreign ministry said.

President Donald Trump and Chinese leader Xi Jinping walk along the front patio of the Mar-a-Lago estate after a bilateral meeting in Palm Beach, Fla., on April 7, 2017. (REUTERS/Carlos Barria)

President Donald Trump and Chinese leader Xi Jinping walk along the front patio of the Mar-a-Lago estate after a bilateral meeting in Palm Beach, Fla., on April 7, 2017. (REUTERS/Carlos Barria)

China “hopes that all relevant sides exercise restraint, and avoid doing anything to worsen the tense situation”, the Chinese ministry said in a statement, paraphrasing Xi.

The call between the presidents was the latest manifestation of their close communication, which was good for their countries and the world, a Chinese foreign ministry spokesman said.

‘Fully Ready’

U.S. ambassador to the United Nations Nikki Haley, speaking on NBC’s “Today” program, said the United States and the international community were maintaining pressure on North Korean leader Kim Jong Un but were “not trying to pick a fight with him”.

Asked whether a preemptive strike was under consideration, she said: “We are not going to do anything unless he gives us reason to do something.”

“If you see him attack a military base, if you see some sort of intercontinental ballistic missile, then obviously we’re going to do that. But right now, we’re saying ‘don’t test, don’t use nuclear missiles, don’t try and do any more actions’, and I think he’s understanding that. And China’s helping really put that pressure on him.”

North Korea's leader Kim Jong Un cuts a ribbon during a ceremony in this undated photo released by North Korea's Korean Central News Agency (KCNA) in Pyongyang on April 16, 2017. (KCNA/via REUTERS)

North Korea’s leader Kim Jong Un cuts a ribbon during a ceremony in this undated photo released by North Korea’s Korean Central News Agency (KCNA) in Pyongyang on April 16, 2017. (KCNA/via REUTERS)

Trump also spoke by telephone with Japanese Prime Minister Shinzo Abe.

“We agreed to strongly demand that North Korea, which is repeating its provocation, show restraint,” Abe later told reporters. “We will maintain close contact with the United States, keep a high level of vigilance and respond firmly.”

A Japanese official said the phone call between Trump and Abe was not prompted by any specific change in the situation.

Envoys on the North Korean nuclear issue from the United States, South Korea and Japan are due to meet in Tokyo on Tuesday.

The U.S. government has not specified where the carrier strike group is but U.S. Vice President Mike Pence said on Saturday it would arrive “within days”.

Japanese Prime Minister Shinzo Abe and U.S. President Donald Trump pose for a photograph before attending dinner at Mar-a-Lago Club in Palm Beach, Fla., on Feb. 11, 2017. (REUTERS/Carlos Barria)

Japanese Prime Minister Shinzo Abe and U.S. President Donald Trump pose for a photograph before attending dinner at Mar-a-Lago Club in Palm Beach, Fla., on Feb. 11, 2017. (REUTERS/Carlos Barria)

South Korean Defence Ministry spokesman Moon Sang-gyun gave no details about the South’s plan to join the U.S. carrier group for exercises, apart from saying Seoul was holding discussions with the U.S. Navy.

“The South Korean and U.S. militaries are fully ready for North Korea’s nuclear test,” Moon said.

South Korean and U.S. officials have feared for some time that North Korea’s sixth nuclear test could be imminent.

Satellite imagery analysed by 38 North, a Washington-based North Korea monitoring project, found some activity at North Korea’s Punggye-ri nuclear test site last week.

However, the group said it was unclear whether the site was in a “tactical pause” before another test or was carrying out normal operations.

Adding to the tension, North Korea detained a U.S. citizen on Saturday as he attempted to leave the country.

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President Donald Trump and First Lady Melania Trump welcome Chinese President Xi Jinping and first lady Peng Liyuan at Mar-a-Lago estate in Palm Beach, Fla., on April 6, 2017.  (REUTERS/Carlos Barria)President Donald Trump and First Lady Melania Trump welcome Chinese President Xi Jinping and first lady Peng Liyuan at Mar-a-Lago estate in Palm Beach, Fla., on April 6, 2017.  (REUTERS/Carlos Barria)

WASHINGTON—U.S. President Donald Trump praised Chinese efforts to rein in “the menace of North Korea” on Thursday, after North Korean state media warned the United States of a “super-mighty preemptive strike.”

Trump told a news conference “some very unusual moves have been made over the last two or three hours,” and that he was confident Chinese leader Xi Jinping would “try very hard” to pressure Beijing’s ally and neighbor North Korea over its nuclear and missile programs.

While Trump gave no indication of what the moves might be, U.S. officials told Reuters that the United States was aware of a higher-than-usual level of activity by Chinese bombers, signaling a possible heightened state of readiness. The officials played down concerns and left open a range of possible reasons.

 

Those possibilities included defensive exercises or Chinese concerns over North Korea. None of the officials, who spoke on condition of anonymity, suggested alarm or signaled that they knew the precise reason for such Chinese activity.

U.S. officials have been saying for weeks that North Korea could soon stage another nuclear bomb test, something both the United States and the Chinese regime have both warned against.

Trump has taken a hard line with North Korean leader Kim Jong Un, who has proceeded with nuclear and missile programs in defiance of U.N. Security Council sanctions.

The United States and South Korea are technically still at war with North Korea because their 1950-53 conflict ended in a truce, not a peace treaty.

Tensions have risen sharply in recent months after North Korea conducted two nuclear weapons tests last year and carried out a steady stream of ballistic missile tests. Trump, who took office in January, has vowed to prevent North Korea from being able to hit the United States with a nuclear missile.

Chinese leader Xi Jinping and President Donald Trump attend a dinner at the start of their summit at Trump's Mar-a-Lago estate in West Palm Beach, Florida. (REUTERS/Carlos Barria)

Chinese leader Xi Jinping and President Donald Trump attend a dinner at the start of their summit at Trump’s Mar-a-Lago estate in West Palm Beach, Florida. (REUTERS/Carlos Barria)

Trump has focused his efforts on North Korea on trying to persuade the Chinese regime to put more pressure on its ally and could view any unusual Chinese military movements as supportive of this.

He told a news conference with the visiting prime minister of Italy on Thursday that the United States was “in very good shape” on North Korea and that Xi, whom he met this month for a summit in Florida, was working hard to help.

“We don’t know whether or not they’re able to do that, but I have absolute confidence that he will be trying very very hard.”

Trump repeated a past comment that he had told Xi in Florida that China would make much better deal on trade with the United States “if you get rid of this menace or do something about this menace of North Korea.”

‘Super-Mighty Preemptive Strike’

The Rodong Sinmun, the official newspaper of North Korea‘s ruling Workers’ Party, struck an aggressive tone earlier on Thursday.

“In the case of our super-mighty preemptive strike being launched, it will completely and immediately wipe out not only U.S. imperialists’ invasion forces in South Korea and its surrounding areas but the U.S. mainland and reduce them to ashes,” it said.

Reclusive North Korea regularly threatens to destroy Japan, South Korea and the United States and has shown no let-up in its belligerence after a failed missile test on Sunday, which followed a huge display of missiles at a parade in Pyongyang.

South Korean news agency Yonhap quoted an unnamed South Korean government source as saying that the U.S. Air Force had dispatched a nuclear sniffer aircraft on Thursday to the east of the Korean Peninsula in anticipation of a possible nuclear test.

The U.S. Defense Department does not comment on deployments of the WC-135 Constant Phoenix aircraft used to collect samples from the atmosphere to detect and analyze nuclear explosions.

The U.N. Security Council on Thursday condemned North Korea‘s latest failed missile test and demanded it not conduct any more nuclear tests.

South Korea‘s acting president, Hwang Kyo-ahn, at a meeting with top officials on Thursday, repeatedly called for the military and security ministries to maintain vigilance.

The South Korean defense ministry said U.S. and South Korean air forces were conducting an annual training exercise, codenamed Max Thunder, until April 28. North Korea routinely labels such exercises preparations for invasion.

“We are conducting a practical and more intensive exercise than ever,” South Korean pilot Colonel Lee Bum-chul told reporters. “Through this exercise, I am sure we can deter war and remove our enemy’s intention to provoke us.”

William Perry, who served as U.S. defense secretary from 1994 to 1997 and negotiated with NorthKorea, said he did not believe Pyongyang was planning a surprise attack, despite the fiery rhetoric.

But he warned: “They are doing a lot of bluster and a lot of threats, and they might misplay that hand and blunder into a war.”

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Xiang Junbo, Chairman of China Insurance Regulatory Commission (CIRC) at the National People's Congress March 12, 2016 in Beijing. (Lintao Zhang/Getty Images)Xiang Junbo, Chairman of China Insurance Regulatory Commission (CIRC) at the National People's Congress March 12, 2016 in Beijing. (Lintao Zhang/Getty Images)

China’s powerful financial sector has officially been put on notice.

Xiang Junbo, chairman of the China Insurance Regulatory Commission (CIRC), was placed under investigation for “severe disciplinary violations” last week, according to the Chinese Communist Party (CCP)’s top anti-corruption organ.

So far, Xiang is the highest-ranking cadre from the financial industry caught in Chinese leader Xi Jinping’s anti-corruption campaign.

The inquiry into Xiang could open the floodgates on future investigations into the Chinese financial industry. Sources close to Zhongnanhai—headquarters compound of the CCP and the state council—told The Epoch Times that Xi is targeting corruption within the financial sector in 2017 and Xiang is the “first tiger” captured in the effort.

Sources suggested that Xiang’s crimes are “severe” and relate to the Chinese stock market volatility in recent years. The investigation could also lead to corruption implications of top officials at other financial regulatory bodies such as the China Banking Regulatory Commission and the China Securities Regulatory Commission.

Xiang, 60, has extensive connections and experience in China’s financial sector. Prior to his appointment at the CIRC, Xiang was chairman at the Agricultural Bank of China, one of China’s “Big Four” state-owned commercial banks. Before that, Xiang was a deputy governor at the People’s Bank of China, the country’s central bank. He worked at the Audit Commission earlier in his career.

The sacking of Xiang has surprised many in the Chinese financial sector. He was one of China’s top finance officials and a member of the CCP’s central committee. His commission oversaw an insurance industry with rapidly growing clout and a penchant for overseas asset acquisitions.

Chinese Premier Li Keqiang has been hawkish on reforming the financial sector in recent months. At a speech on March 21, Li urged authorities to take powerful measures to prevent corruption in the financial sector, which is vulnerable to the advent of shadow banking, bad assets, and illegal internet financing, according to state-controlled Xinhua.net.

The Xiao Jianhua Connection

Xiang’s capture was likely precipitated by the recent disappearance of CCP insider Xiao Jianhua, a billionaire Chinese investor residing in Hong Kong.

China’s insurance industry has garnered immense power—and controversy—during Xiang’s oversight.

Xiao disappeared from his residence at the Four Seasons Hotel in Hong Kong in late January, and was brought back to Beijing for interrogation. The Zhongnanhai source told The Epoch Times that Xiao provided information a number of top-level officials with allegiances to the “Jiang Faction.” His testimony could have served as one of the bread crumbs leading to Xiang’s investigation.

Xiao is among China’s richest individuals, with a sprawling investments across several sectors, including banking, property, information technology, and rare-earth minerals. He was worth $5.8 billion as of 2016, according to the Hurun Report.

It’s unclear where Xiao currently stands politically in the current Jiang Faction-Xi Jinping divide, although he seems to have established connections to both. In 2006 Xiao assisted Zeng Wei, the son of former Party vice-chairman Zeng Qinghong, to privatize Shandong Luneng through a series of shell companies owned by Xiao. Zeng was a top CCP official during the Jiang Zemin and Hu Jintao regimes.

And in 2012, an entity owned by Xiao acquired shares worth at least $2.4 million from Qi Qiaoqiao and Deng Jiagui, the sister and brother-in-law of Xi Jinping.

Insurers Gone Rogue

China’s insurance industry has garnered immense power—and controversy—during Xiang’s oversight in the last six years.

From 2012 to 2016, China’s insurance sector grew 14.3 percent in overall and non-life insurance grew 16.5 percent in premiums volume, according to data from Munich Re. Last year, China overtook Japan to become the world’s second biggest insurance market by premiums.

Under governance of the Xiang-led CIRC, the insurance sector has turned into a den of corporate raiders.

Traditional insurers are bastions of conservatism, holding stable assets such as government securities and corporate bonds. Insurers by nature must consider preservation of their clients’ capital as paramount.

But not in China. Sensing opportunity in a low interest rate environment, over the last few years Chinese insurers expanded outside of traditional insurance activities by issuing wealth management products called universal life policies. These products, which offer high interest rates and are a hybrid between a bond and a life insurance policy, have been popular with consumers dissatisfied with bank deposit rates of around 1 percent.

Munich_Re_China

(Source: Munich Re)

Flush with cash but saddled by promises to pay high yields, Chinese insurance companies poured money into risky and volatile assets not typically associated with insurers. These firms took large positions in Chinese publicly listed companies and snapped up overseas assets including foreign companies and real estate.

Evergrande Life—a unit of property developer China Evergrande Group—saw its premiums increase more than 40 fold in 2016.

Evergrande and Foresea Life—a unit of Baoneng Group—used their proceeds from universal life policies to amass a large stake in real estate developer China Vanke during the last year. A public and protracted dispute to wrest control of Vanke from founder and CEO Wang Shi ensued, creating a market firestorm which was finally dispelled after Beijing intervened late last year.

The raid on Vanke was far from the only instance of aggressive asset accumulation by insurers, but its virulent nature—Baoneng and Vanke engaged in a public war of words—created the most headaches for Beijing.

As an industry, insurance has also been a major vehicle to funnel money abroad in the form of foreign acquisitions, at times in opposition to Beijing’s official stance on stemming the outflow of yuan. Anbang Life was at the forefront of such purchases, and made headlines in 2015 for purchasing New York’s Waldorf-Astoria hotel for nearly $2 billion. In 2016, Anbang bought Strategic Hotels & Resorts from Blackstone Group for $6.5 billion. The company’s biggest gambit was a failed $14 billion bid to acquire Starwood Hotels & Resorts Worldwide.

For years, the cavalier investment strategies of insurers had the implicit blessing of the CIRC. After he took reins of the regulator, Xiang endorsed more flexible usage of insurance premiums and insisted on “giving innovation the biggest freedom” within the industry, according to a South China Morning Post report.

The insurance industry’s contribution to recent stock market gyrations (via equity purchases) and downward pressure on the Chinese yuan currency (through foreign asset purchases) could be factors in Xiang’s downfall. But allegations against Xiang may go beyond insurance given his previous stops at the Agricultural Bank of China and the People’s Bank of China.

Xiang had not seen in public for several weeks leading up to February, stirring rumors about a possible arrest. He reappeared on Feb. 22 at a news conference, and railed against the insurance industry for their recent activities. Xiang stated that the CIRC “will punish top executives and revoke their licenses, and definitely not allow the insurance industry to be turned into a regal club.”

The CIRC has stepped up efforts to rein in the activities of insurers in the last few months. A mid-December announcement lowered the ratios of equity to be held at insurers, and barred them from using insurance deposits to fund equity purchases. By the end of February, CIRC had already rejected four license applications, matching the total for all of 2016.

But for Xiang, it was perhaps too little too late.

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