China Security Memo: May 7, 2009

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[Teaser:] Operating in China presents many challenges to foreign businesses. The China Security Memo tracks and summarizes key incidents throughout the country over the past week. (With STRATFOR Interactive Map)

China Security Memo: July 16, 2009

<h3>OC Operations<h3>

Chinese Public Security Minister Meng Jianzhu said July 7 that China is launching a new security operation targeting organized criminal activity ahead of the 60th anniversary of the People's Republic of China in October. Meng cited the country's economic problems as a source of increased criminal activity and called for the police to "cut off ties between gangsters and economic operations and prevent them from infiltrating the political sector." The effort marks the continuation of a crackdown on organized crime that began in earnest toward the end of 2008, when officials noted that organized crime was increasing as the economy slowed.

Organized crime poses obvious security challenges for a country like China. But Meng's emphasis on the economic and political sectors indicates that China's recent crackdown is about tackling those operating outside state control, making it part of a wider net to catch both corrupt officials and criminals who threaten the economic underpinnings of China's social stability. Two recent examples of organized criminal activity described below show how such illegal networks can undermine Beijing's economic and territorial consolidation of power.

<h3>Organized Crime Arrests in the South</h3>

A trial began July 13 for 37 members of an organized criminal gang in Guangzhou who are being charged with illegal possession of firearms, public fighting, kidnapping, illegal detainment of a person, disturbing the public, swindling and destruction of public property. The charges stem from the group's alleged involvement in the theft and fencing of steel shipped from the Hengshan district in Hengyang city, Hunan province, a major steel hub for the south, to Guangzhou, Zhongshan and Zhuhai cities between April 2007 and June 2008.

The gang allegedly engaged in highway robbery of trucks transporting steel and used physical violence in doing so, according to the charges. Gang members sometimes kidnapped the drivers, hijacked the vehicles and used the drivers and vehicles as collateral to engage in extortion. The gang then turned around and sold the stolen steel to construction firms in the cities, overcharging purchasers by lying about weight. One of the leaders of the gang registered the Guangzhou City Tianhe Jiajian Trading Company under a false name to provide cover for the group's activities and then hired unemployed workers (mostly from Hengshan) through the company to serve as his thugs. By June 2008, according to Chinese media, the gang had established control of the steel supply of nine cities in Guangdong province, including the capital, Guangzhou.

Cargo theft is common throughout the world and the crimes this gang is accused of are consistent with traditional organized-crime tactics. However, the product they were steeling (steel) is not a typical black-market commodity elsewhere in the world. Successful theft and fencing of a commodity requires the concealment and covert transportation of that commodity.

Shipments of steel are neither easy to conceal nor easy to transport without someone finding out about it, making it a very difficult commodity to sell and fence. However, it appears that the gang was successful not only in hijacking steel shipments to corner the market but also in making agreements with over 20 steel producers to supply steel to construction companies, falsifying weight to dupe the companies. It is possible that these companies aided the group in concealing and transporting the hijacked shipments.

Nevertheless, the fact that the gang was able to do this for 15 months, possibly with industry collaboration,demonstrates the ability of organized-crime groups in China to successfully penetrate and disrupt legitimate markets in the country -- not just the illegal ones. And this means that a government crackdown on organized crime involved in industries like steel (and not illicit industries like drug smuggling and prostitution) could well impact other legitimate business operations in China. As the government tries to break up criminal influence over key legitimate industries like steel, more legitimate businesses (such as the steel producers involved in this incident) will inevitably be affected by the campaign.

Authorities in Yining city in western Xinjiang province revealed July 13 that they had arrested 70 suspected members of two criminal gangs. The members are being charged with conspiring to riot in connection with the July 5 unrest in Urumqi. Yining city is a Chinese outpost along the border with Kazakhstan that has a long history of criminal activity.

Yining lies along two roadways that connect western China to Central Asia -– highways 218 and 312 (see map). So situated, Yining is known as a transit route for legal and illegal trade alike. Opiates and weapons from Afghanistan, Pakistan and Central Asia are smuggled into China through Yining, as are counterfeit goods smuggled from China to Central Asia. The route is also heavily used for human trafficking back and forth between China and Central Asia.

Unregulated and below the surface, smuggling activities involve cross-border cooperation in undermining and deceiving Chinese authorities in order to conduct business. The threat of gangs like the one whose members were recently arrested for fomenting social unrest in Xinjiang becomes more urgent when the gangs are also involved in illicit cross-border trade. Similar to China's 2001 <link nid="6537">”Strike Hard” campaign</link>, whichoriginally targeted organized crime and expanded to include separatist activity (especially in Xinjiang), the latest national anti-organized-crime operation will also give police an opportunity to target separatists.

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<li>Beijing police arrested six people on allegations of forging more than 6.6 million RMB notes. The arrests are part of a campaign against counterfeiting that started on Jan. 20. The total number of cases so far has reached 21, resulting in the seizure of over 10 million forged RMD and 130,000 forged U.S. dollars. Forty-nine people also have been arrested and 90 detained.</li>

<li>The former director of the Land and Resources Bureau in Yiwu, Zhejiang province, was sued by local residents for bribery involving 960,000 RMB and selling land-use rights illegally for up to 2.54 million RMB, according to Chinese media.</li>

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<li>A former county secretary in Fuyang, Anhui province, has been arrested for corruption and the unlawful incarceration of a local dissident early this year, according to local media. The dissident tipped off officials about the secretary's corruption and provided evidence of misusing local funds from the impoverished county to construct a "White House-like” municipal building for use as his office.</li>

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<li>Homeowners in the area in which a 13-story building collapsed on June 27 in Shanghai protested the scant compensation offered by the developers. Some 50 homeowners staged a silent <link url=" outside the government building in downtown Shanghai</link>.</li>

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<li>A special forces captain from the Haozhou police department in Anhui province is under investigation for taking bribes in connection with over 6,000 criminal cases since 1988, Xinhua News Agency reported. He allegedly released more than 10,000 suspects in connection with prostitution rings and brothels in the area.</li>

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<li>A district-level National People's Congress member from Wuxi, Jiangsu province, has been put under police surveillance after allegedly implementing a scheme that took in 250 million RMB in return for promising investors 10 percent in monthly interest, Chinese media reported.</li>

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<li>Beijing media reported on the ongoing development of an academic dishonesty case at SouthwestJiaotongUniversity in Chengdu, Sichuan province. The vice president of the school was accused two years ago of plagiarism in one of his essays on management. The university is currently awaiting a third-party review of the case.</li>

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<li>The director of research and development for a wind-power technology firm stole 600 RMB worth of a core technology from the company in May 2008, according to police in Zhongshan, Guangdong province. According to an executive with the company, the technology made up 30 percent of the firm’s total assets. The company is one of the top three wind-power suppliers in China and the theft could compromise the security of state secrets.</li>v

<li>The Beijing Second Intermediate People's Court sentenced former General Manager Chen Donghai from Sinopec Corp. to a 2-year-deferred death sentence on charges of corruption. Chen was found to have taken in bribes of 196 million RMB from 1999 to 2007.</li>

<li>An explosion at a chemical factory in Luoyang, Henan province, killed five people and injured more than 100. Shock waves from the early-morning explosion shattered glass windowpanes as far away as 300 meters from the factory. Police are investigating the cause of the explosion.

Media reported that Rio Tinto has “evacuated” staff members in the research departments of its iron-ore and steel divisions after four employees were detained last week on <link url=" of bribery and stealing state secrets</link>.A Rio Tinto spokesman in Melbourne said he could not immediately comment on the report, which said an unidentified number of staff members were moved out July 15.</li>

<li>Some 200 African protestors surrounded a police station in Guangzhou after they reported that a Nigerian diedafter jumping from a window when local police came to investigate illegal-currency trading and visa violations. Official Chinese news reports claim the man is not dead but in the hospital.</li>

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