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An index that China's leaders use to measure economic growth looks horrible

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The office of China's Premier, currently Li Keqiang, has traditionally been tasked with monitoring the economy.

And in the past, Li Keqiang has said openly that he doesn't necessarily use GDP to track how fast it's growing. He uses a combination of metrics put together — a composite of electricity output, rail freight and loan growth.

Right now, all of those metrics are screaming major slow down — something like growth around 2%-4% — despite the fact that the government has said time and time again that the country's GDP is growing at 7%.

Here's what Premier Li's metric looks like, via Bloomberg economist, Tom Orlik:

li keqiang growth metric chart china

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New survey conflicts with the notion that the global market sell-off was China's fault

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Employees work along a production line of a textile factory in Suzhou, Jiangsu province, China, June 13, 2015. REUTERS/China Daily

SHANGHAI (Reuters) - Profit margins at Chinese firms improved in the third quarter while loan demand remained weak, a private survey showed , with the overall results suggesting the stock market crash would have minimal impact on the broader economy.

The quarterly survey of over 2,100 businesses by China Beige Book International (CBB) showed continued robust growth in the service sector but persistent weakness in manufacturing.

Still, while revenue growth slowed quarter-on-quarter, and only 38 percent of firms surveyed planned to hire more staff in the fourth quarter - down 4 percent on the year - the authors emphasized the relative resilience of the corporate sector heading into year-end.

"Q3-15 was hardly a game changer...the broader collapse assumed by disciples of the PMI has strikingly little basis," report authors Leland Miller and Craig Charney wrote, noting that firms also reported falling real interest rates.

"In fact, there is very little to distinguish Q3’s revenue performance from many previous quarters, calling into question August’s global market sell-off that most attributed to China’s sudden 'fragility'," they said.

The relatively sanguine views of the Beige Book report contrasts with the recent string of weak economic indicators, which have raised fears of a deepening economic slowdown in China and in part prompted the U.S. Federal Reserve last week to hold off from delivering its first rate hike in almost a decade.

A stock market crash has further dimmed investor sentiment, which remains fragile despite a flurry of stimulus measures including several interest rate cuts as Beijing stepped up efforts to support an economy growing at its slowest pace in decades.

HOPEFUL SIGNS

But the report pointed to some hopeful signs, with hiring steady in the third quarter and the economy continuing to draw support from a healthy services sector where many of China's more productive private enterprises lie.

Revenue rose at 59 percent of service sector firms surveyed in the third quarter, up six percent on the quarter.

Across all firms, profit margins were up at 47 percent of the companies surveyed, 2 percent higher than the second quarter.

Capital expenditure was another bright spot, rising for the second quarter in a row, with 48 percent of firms surveyed reporting increases in capex, up 3 percent on the second quarter.

Loan demand, however, was extremely weak, continuing a pattern evident for much of the year. Of bankers surveyed, only 36 percent reported a rise in applications, down 11 percent from the second quarter.

Moreover, the modest rebound in the real estate and construction sector evident earlier in 2015 also appeared to be losing steam.

 

(Reporting by Nathaniel Taplin; Editing by Pete Sweeney and Shri Navaratnam)

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The government just put £2 billion on the table to try and get a stalling nuclear project off the ground

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A nuclear warning sign

The government has announced a £2 billion ($3.1 billion) loan guarantee for the construction of the delayed Hinkley Point C nuclear power plant in Somerset.

Britain's Chancellor George Osborne announced the deal on Monday, during a 5-day tour of China.

The Telegraph reports that the guarantee means any banks or financial institutions that lend money to developers involved in the project will get up to £2 billion back from the taxpayer if the developers go bust.

Without this guarantee, developers could have struggled to get funding for the project, which will cost an estimated £24.5 billion ($38.1 billion) according to the BBC.

The government could end up backing way more than just the £2 billion announced today. Osborne said in a statement from the Treasury that the figure could rise "should EDF meet certain conditions and subject to fuller government approvals."

In October last year, the EU cleared the government to guarantee up to £16 billion ($24.8 billion) in loans for the project, under EU rules on state aid.

France's EDF energy is leading the construction of Hinkley Point C, while Chinese state nuclear companies are meant to provide substantial investment, hence the timing of the announcement.

Hinkley Point C is set to be the first new nuclear power plant built in Britain since 1995. Plans for the new reactor there were first announced back in 2010.

But today's guarantee doesn't necessarily bring the project any closer.

EDF said earlier this month that construction of the plant, which was due to start generating energy by 2023, has been delayed, the latest is a string of setbacks to the project's timeline. Earlier this year it also put off a decision about whether to invest in the project.

The government is hugely keen to push through Hinkley Point and other new nuclear plants across the UK, as part of plans to wean the UK off dependence on foreign energy supplies and meet a growing shortfall from coal and nuclear plants reaching the end of their life cycles over the next decade.

Once completed, Hinkley Point C should produce enough energy to power 6 million homes, meeting around 7% of the country's energy needs.

George Osborne said in a statement today: 

Nuclear power is cost competitive with other low carbon technology and is a crucial part of our energy mix, along with new sources of power such as shale gas.

So I am delighted to announce this guarantee for Hinkley Point today and to be in China to discuss their investments in Britain’s nuclear industry.

It is another move forward for the golden relationship between Britain and China – the world’s oldest civil nuclear power and the world’s fastest growing civil nuclear power.

Aside from hesitation among potential funders, Hinkley Point C has plenty of opponents too, who'd love to see the project derailed.

The Independent reports that anti-nuclear Austria is planning a legal challenge of the EU state aid decision while a German law firm is representing an alliance of energy suppliers and traders is also fighting the decision.

The UN has criticised Britain for failing to consult with neighbouring countries on the project and green activists in the UK are also opposing the project.

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The White House is more afraid of offending China’s president than the pope

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pope francis

The Vatican has raised objections to a few of the guests invited to the White House arrival ceremony next week for Pope Francis. The Wall Street Journal reported that the guests include transgender activists, the first openly gay Episcopal bishop and a nun who criticizes church policies on abortion and euthanasia.

The Vatican worries that photos taken with the pope might be used to suggest his endorsement of activities he in fact disapproves of.

White House spokesman Josh Earnest, in his briefing Thursday, wouldn't comment on individual invitees but noted that a very large crowd will assemble for the Wednesday event.

"[T]hat's why I would warn you against drawing a lot of conclusions about one or two or maybe even three people who may be on the guest list, because there will be 15,000 other people there too," Mr. Earnest said.

That's a fair point. The White House also might argue that it can't be expected to turn its back on people, or values, that are important to President Obama, especially in a house he's occupying on behalf of the American people.

No doubt there's often a fine balance between hospitality and principle when foreign visitors come to town. The administration doesn't want to give offense, but it also doesn't want to give in to what it may see as prejudices that it doesn't share.

Obama Xi JinpingWhat struck us as we read about this small controversy is the contrast between the administration's apparent decision to risk a bit of rudeness in the case of the pope and its overwhelming deference to foreign dictators when similar issues arise.

When Secretary of State John F. Kerry traveled to Havana to reopen the U.S. Embassy recently, he painstakingly excluded from the guest list any democrat, dissident or member of civil society who might offend the Castro brothers.

And when Chinese President Xi Jinping comes to the White House next week, shortly after the pope leaves town, it's a safe bet that he won't have to risk being photographed with anyone of whom he disapproves. Chen Guangcheng, the courageous blind lawyer, for example, lives nearby in exile, but he probably won't be at the state dinner. Neither will Falun Gong activists, democracy advocates or anyone else who might, well, give offense.

A cynic might say it's easy to explain the difference. The pope, famously, has no army — or, to update the cliche, no carrier-busting missiles, and relatively few U.S. Treasury bonds in his portfolio.

On the other hand, Pope Francis, whatever you think of the Catholic Church's policies on abortion and gay marriage, has been during his short tenure a powerful voice for more tolerance and inclusion, while Mr. Xi is responsible for ever-growing repression. Maybe that should count for something, too, as the guest lists are drawn up.

 

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APPLE BREACH: Apps infected with malicious code found in the App Store

Another sign that things are going wrong in 3 of the world's largest economies

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moon star russia lunar eclipse

UK construction machinery firm JCB has said it will cut 400 jobs around the world, mostly due to a massive slowdown in business in Russia, China, and Brazil.

This is a horrible sign for three of the biggest economies in the world.

"In the first six months of the year, the market in Russia has dropped by 70%, Brazil by 36% and China by 47%," said JCB CEO Graeme Macdonald in a press release.

"Parts of Europe are also struggling, with France down by 26%," he added. "Even the strong growth in the UK and North America has softened due to a fall in market confidence over the summer, which has been prompted to an extent by low oil and commodity prices in countries which depend on these resources to drive economic growth."

JCB makes construction and agricultural machinery and competes with US rival Caterpillar for much of that business. Caterpillar said in its second-quarter earnings statement that continued economic weaknesses in China and Brazil "haven't helped confidence."

Brazil, Russia, and China were all countries that consumed and exported a ton of commodities like steel, copper, and oil. Commodities prices started falling at the end of last year. The Bloomberg Commodities Index has fallen by almost 26% over the last year.

Bloomberg Commodities Index chart

China is especially dependent on new buildings being built to drive its economy. That has led to over-building, with the real-estate market slowing in recent months.

Russia's slowdown has largely to do with the slumping oil price and sanctions the world placed on it after Russian troops moved into Ukraine.

Brazil is another story. It's a big commodity exporter, so the commodities price plunge has been rough on the country. It's also going through another domestic disaster, as a corruption scandal at $40 billion quasi-state-owned oil-company Petrobras has reached the highest levels of the Brazilian government.

Now President Dilma Rousseff's approval rating is sitting at 7%, the country's currency has lost a quarter of its value since the start of the year, and inflation is around 10%.

Brace yourselves.

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China's slow internet may be to blame for the biggest hack in the history of Apple's App Store

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iPhone 6 Plus China

China's slow internet may be to blame for the biggest hack in the history of Apple's App Store.

According to Claud Xiao, a security researcher at the online security company Palo Alto Networks, developers in China sometimes turn to online forums instead of companies for software because it can take so long to download large files from Apple's servers, which are outside of China.

Such was the case with Xcode, the official Apple software developers use to make iPhone apps. 

Developers in China used a tainted version of Xcode, known as XcodeGhost, rather than the official version from Apple, to develop iPhone apps. As a result, hundreds of apps, including popular ones like WeChat, Angry Birds 2, and Didi Chuxing, a ride-hailing app, became infected with malware.

As Josh Horwitz writes in Quartz, websites based outside of China are slower than sites within the country because the activity is monitored by the government. This is known as "The Great Firewall."

Horwitz searched for a download Xcode using the Chinese search engine Baidu, and found four different forums where people could get unofficial versions of the software toolkit. All of the results appeared in search results above Apple's official version.

According to Palo Alto Networks, the malware can create fake alerts that pop up on your phone and request sensitive information, like passwords and login credentials.

Apple has removed affected apps from the App Store. But to protect yourself from the hack, security experts recommend making sure all of your apps are up to date and exercising vigilance when prompted to enter information in apps.

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UK finance minister: China could develop and own a nuclear plant in Britain

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Roads cut through the site where the Hinkley Point C nuclear power station will be constructed in Bridgwater in south west Britain, in this file photograph dated October 24, 2013.  REUTERS/Suzanne Plunkett/files

China could build and own a nuclear power plant in Britain in future, UK finance minister George Osborne said on Monday, potentially paving the way for China's first nuclear project in the West.

Chinese companies are expected to help finance the 16 billion pound ($25 bln) Hinkley Point nuclear plant in southwest England and Osborne said their participation could lead to China developing and owning a future nuclear plant, possibly at Bradwell, a site earmarked for development in eastern England.

He also said the British government would provide 2 billion pounds in initial support for the Hinkley Point project, which is owned by the British subsidiary of French energy company EDF with China General Nuclear Corp (CGN) and China National Nuclear Corp (CNNC) expected to be investors.

"This civil nuclear cooperation ... opens the door to majority Chinese ownership of a subsequent nuclear project in Bradwell," Osborne said during a visit to Beijing, presenting Britain as one of the West's most open countries to Chinese investments.

Exporting its technology to Britain would be a boost to the credibility of China's nuclear industry.

However, while Osborne said Britain welcomed the "potential for majority Chinese investment in future nuclear projects in the United Kingdom", others have voiced opposition.

Trade union GMB has been a vocal opponent of Chinese involvement in the country's nuclear new build program.

"The UK Government is relying on foreign state-owned companies to fund the development of new nuclear stations having stood down UK state-owned companies to do the job that the private sector is clearly not prepared to do," said Gary Smith, GMB National Secretary for energy.

The Bradwell site is also owned by EDF's British subsidiary.

nuclear power

"The UK will benefit from this long-standing co-operation and the extensive and proven capability of CGN and CNNC in the construction and operation of nuclear plants," an EDF Energy spokeswoman said, without elaborating on plans for the site.

Britain's Department of Energy and Climate Change, which deals with the country's nuclear new build program, said the development of the Bradwell site was a commercial matter for EDF.

For years China depended on Western nuclear technology to build up its nuclear power fleet but it has now developed its first domestically produced nuclear reactor design, named Hualong 1.

Premier Li Keqiang told an annual parliamentary meeting earlier this year that China aimed to increase its share of global sales in a range of advanced industries, including implementing major projects in nuclear power. However, it still needs to show it can build and safely operate reactors at home.

In Britain, the Hinkley Point project has been slow to take shape as construction delays on other EDF nuclear projects and difficulties raising financial support have pushed back the final investment decision.

The British government announced a first tranche of a state loan guarantee worth up to 16 billion pounds on Monday, saying further amounts would be subject to EDF meeting certain conditions.

"It is further progress toward a final investment decision," said Vincent de Rivaz, chief executive of EDF Energy, the French utility's British subsidiary.

 

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IG Index revenue soars 24% as retail traders pile in to volatile markets

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Falling

China's two share market sell-offs and sudden devaluation made for a volatile summer, which is good news for online trading company IG Index.

The company said revenue in the three months to August was £106 million ($ million), 24% up on the previous year.

The number of active clients surged 18% on the back of the market turmoil.

The news was full of the financial problems of China and Greece, leading people to see trading opportunities in the markets.

Here's what IG said (emphasis ours):

In what is traditionally a relatively quiet period for the business, the financial markets presented a range of trading opportunities for clients, responding to news flow, including around the Greek eurozone membership debate and the current state of the Chinese economy. 

August was the key month. The Chinese central bank suddenly devalued its currency, then fought to support it using up its reserves, sending shockwaves around the currency and commodities markets.

Then, on Monday Aug. 24., panic spread as Chinese stock markets plunged around 8%. It was scary enough to turn hardened traders to hypnosis. 

But it seems this was the exact moment people picked to dive in and have a flutter. IG said "client levels activity levels were at their highest during the second half of August."

Here's what those market conditions looked like:

Shanghai Comp

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Chinese President Xi Jinping says his government does not hack

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China's President Xi Jinping attends a signing ceremony with King of Jordan Abdullah II (not pictured) at The Great Hall Of The People in Beijing, China, September 9, 2015 REUTERS/Lintao Zhang/Pool

BEIJING (Reuters) - China's government does not engage in the theft of commercial secrets and does not support Chinese companies which do this, President Xi Jinping told the Wall Street Journal in an interview published on Tuesday.

"Cyber theft of commercial secrets and hacking attacks against government networks are both illegal; such acts are criminal offences and should be punished according to law and relevant international conventions," Xi said in the written interview, ahead of his U.S. visit.

"China and the United States share common concerns on cyber security. We are ready to strengthen cooperation with the U.S. side on this issue."

U.S. national security adviser Susan Rice on Monday issued a stern warning to China that state-sponsored cyber espionage must stop, calling it a national security concern and critical factor in U.S.-China relations. 

(Reporting by Ben Blanchard and Sui-Lee Wee; Editing by Michael Perry)

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Boeing is reportedly 'planning a China factory'

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Boeing aircraft models are seen at the Beijing International Aviation Expo in Beijing, on September 17, 2015

Shanghai (AFP) - Plans for a Boeing factory in China have been submitted to the government in Beijing, state-run media reported Tuesday ahead of President Xi Jinping's US visit, where he will tour one of its plants.

A Boeing factory in China would represent an about-turn in the US giant's strategy in the crucial market, where European rival Airbus has a final assembly operation for medium-range Airbus 320 aircraft in the northern port of Tianjin and plans to open a new completion and delivery centre for long-haul A-330s.

A plan for the Boeing plant in Zhoushan, in the eastern province of Zhejiang, has been submitted to the State Council, China's cabinet, the Shanghai Securities News reported.

The newspaper, which is run by the official news agency Xinhua, gave few details -- including who had put the proposal forward -- but said an update could be expected as early as this week.

Xi is due to visit Boeing's main airplane factory in Washington state on Wednesday, two days before he meets President Barack Obama at the White House.

The factory would be the centrepiece of a new aerospace industrial zone in Zhoushan, it added.

China is expected to add 6,330 new aircraft worth $950 billion to its commercial fleet by 2034, Boeing said last month in its annual China Current Market Outlook.

At the launch, Randy Tinseth, vice president of marketing at Boeing Commercial Airplanes, said that “Airbus has its way to address the Chinese market, we have our way... we have a different path”.

But he added that neither strategy was "right or wrong... we always keep our options open for the future".

Bloomberg News reported earlier this month that Boeing was exploring whether to open a factory in China to perform tasks such as painting its top-selling 737 jetliners, which would be its first such facility outside the US.

Boeing could not be reached immediately for comment.

Zhoushan sits in the Yangtze river delta on the East China Sea and borders the commercial hub of Shanghai. 

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China's is using Islamic finance to expand its new Silk Road

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Islamic finance is gaining prominence as a channel for China to expand its economic influence abroad as banks strengthen ties with Muslim-majority countries and Chinese companies start to tap offshore pools of Islamic funds.

With a Muslim population of about 20 million, China has little reason to develop Islamic banking at home. But there are powerful reasons for it to get involved in the sector overseas.

China wants to build stronger trade ties with Asian countries under its "One Belt, One Road" strategy to rebuild Silk Road trade links with Asia and Europe.

The network will include the world's main centers of Islamic finance, the Middle East and Southeast Asia, where sharia-compliant assets account for as much as a quarter of total banking assets.

silk road stratfor

"With 'One Belt, One Road', (Chinese) state-owned enterprises and private companies are now more willing to explore Islamic finance," said Hong Kong-based Ben Ping Chung Cheung, Asia Pacific head of consultancy Shariah Advisory Group.

The firm is advising conglomerate HNA Group on what could be the first Islamic financing by a mainland firm: a $150 million deal to buy ships. HNA also plans an offshore issue of sukuk (Islamic bonds), Cheung said.

A railway project in the eastern province of Shandong is also exploring issuing sukuk to raise as much as 30 billion yuan ($4.7 billion) for a high-speed rail link, said Cheung.

If successful, such a deal would rank among the largest sukuk ever issued. Hurdles remain, however, as discussions were still preliminary and any financing would face stiff competition from domestic banks, Cheung added.

In July, Singapore-based adviser Silk Routes Financials said it had been mandated by a unit of state-owned Sichuan Development Holding Co to advise on Islamic financing options.

"There is certainly some momentum, a consequence of the large and growing trade links between China and the Gulf," said Jonathan Fried, a partner at law firm Linklaters in Dubai.

Such plans are ambitious as Chinese firms face a steep learning curve in Islamic finance, which obeys rules such as a ban on paying interest and uses formats that can be more complex than conventional finance.

For their part, Islamic investors have plenty of money to buy into dollar-denominated sukuk, but historically have tended to invest in top-rated issuers.

"The attraction would be if sukuk is cheaper for issuers, and clearly there are a lot of companies in China within the right industries, the right structures for it," said Kalai Pillay, head of North Asia industrials at Fitch Ratings. 

Government level

aiib chinaAt a governmental level, Chinese participation in Islamic finance may be mainly via the Asian Infrastructure Investment Bank (AIIB), a new multilateral lender backed by Beijing.

The AIIB has discussed using Islamic finance with the Saudi Arabia-based Islamic Development Bank (IDB), two lenders which have 20 member countries in common.

Islamic deals could help AIIB differentiate itself from rivals such as the World Bank and Asian Development Bank.

China's state-owned banks are already raising their profile in the Gulf. In the past year, Agricultural Bank of China, Bank of China and Industrial and Commercial Bank of China (ICBC) have issued conventional bonds listed on NASDAQ Dubai.

"The next stage will be sukuk issuance by Chinese entities, facilitated and co-managed by these banks," said Fried at Linklaters.

($1 = 6.3628 Chinese yuan)

(Reporting by Bernardo Vizcaino; Editing by Andrew Torchia and Eric Meijer)

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China is holding a Texas businesswoman under charges of spying as Xi arrives in the US

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Sandy Phan-Gillis

An American woman suspected of spying is being investigated, China's Foreign Ministry said on Tuesday, as President Xi Jinping left for the US on an official visit.

Sandy Phan-Gillis, from Texas, has been held by Chinese authorities for about six months, according to a statement from her family that was released online this week.

The statement said she is suspected of spying and stealing state secrets.

Chinese Foreign Ministry spokesman Hong Lei said Phan-Gillis was suspected of "endangering China's national security" and is being investigated by "relevant Chinese authorities".

China has permitted her at least 6 consular visits as of mid-September, and she is in a good state of health and is cooperating with the investigation, Hong told a news briefing.

The Ministry of State Security could not be reached for comment.

"Sandy is not a spy or a thief," her husband Jeff Gillis said, according to the statement. "She is a hard working businesswoman who spends huge amounts of time on non-profit activities that benefit Houston-China relations."

Phan-Gillis, who has Chinese ancestry and served as the head of the Houston Shenzhen Sister City Association, visited China on a trade delegation with business people and city officials from Houston, Texas, and was detained while attempting to cross from the southern city of Zhuhai to Macau on March 19, according to the family statement.

Phan-Gillis's husband did not immediately respond to telephone messages or e-mail. The U.S. Embassy in Beijing referred questions to the U.S. State Department's consular affairs office, which did not immediately respond to a request for comment.

China's state secrets law is notoriously broad, covering everything from industry data to the exact birth dates of state leaders. Information can also be labeled a state secret retroactively.

Phan-Gillis is being held in the southwestern city of Nanning, the statement says. Up until Sept. 19, she had been held under house arrest.

Over the weekend she was transferred to a detention center, the statement added. It's unclear whether any formal charges have been brought. A lawyer working on her case could not be immediately reached.

"Sandy is in very poor health," the statement said, adding that she suffers from high blood pressure, high cholesterol and high blood sugar. She has been hospitalized repeatedly while in detention, it said.

While US consular officials have been able to meet with Phan-Gillis, she has not been able to contact family and friends, the statement added.

(Reporting By Megha Rajagopalan; Editing by Simon Cameron-Moore)

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HUGH HENDRY: 'We may be approaching the end, not the beginning, of a dark period for stocks'

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Hugh HendryEclectica Asset Management, the UK-based hedge fund founded by Hugh Hendry, faltered in August.

Eclectica's flagship fund fell 7.1% over the month, dragged down by its exposure to European equities. That drop left the fund up 2.7% for the first eight months of the year, according to an investor update.

The average macro fund fell 1.29% in August and is down about 0.75% for the year,according to Hedge Fund Research.

The Scottish fund manager placed the blame on the market's reaction to the People's Bank of China's unexpected devaluation of the currency.

"Up until August, Chinese stocks had been an idiosyncratic asset class waxing and waning independently of other global markets. This changed abruptly with the currency devaluation. Pandora's Box had been opened," Hendry wrote. 

He added: "Was the Chinese economic slowdown so severe that it prompted the currency intervention? We don't think so but other investors are less sure and the aftershocks reverberated through almost every financial markets from US Treasuries to European stocks which fell over 9% during the month and have now almost given back all the gains following the enactment of QE earlier this year."

While the Chinese economic slowdown will have an impact on global equity prices, Hendry thinks that we may be approaching the end of a "dark period for stocks."

More from Hendry: 

"Today's environment seems analogous to the greatly mistimed bout of bearish sentiment that enveloped markets from 1983 to mid-1984 and marked the end of an especially dark decade for bond investors. As economic data began to show a US economy recovering from the [Volcker] induced interest rate shock[,] the fixed income market, conditioned by the inflation of the 1970s, panicked and sold treasuries once more pushing the 10-year yield back up from 10% to 14%, the S&P fell 15%. Today the fear is almost the reverse: that the Chinese economy is set to suffer a growth slump and generate similar deflationary forces to those experienced in 2008 with evident and profoundly negative repercussions for global equities. But as we have noted previously with the S&P 500 having lost 80% of its value relative to Treasuries over the last 15 years (and even more so for the DAX and the Nikkei relative to their domestic bond markets) there is an argument that we are approaching the end, not the beginning of a dark period for stocks relative to bonds, and that we should be wary of reinventing the deflationary ghosts of the past decade.

"For now, it is likely that the Chinese economy will be the principal determinant of global equity prices. On the one hand we think this is a positive as it will provide cover should the European or Japanese monetary authorities wish to boost their economies further. But on the other hand, the immediate return from global equities will likely be constrained to the upside until Chinese economic data [stabilizes]..."

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China just publicly shamed the richest man in Hong Kong

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Li Ka-Shing

The People's Daily, the Chinese government's media mouthpiece, went off on the richest man in Hong Kong in a social-media post published Sunday for investing his money outside the mainland.

Li Ka-shing controls CK Hutchison Holdings, a conglomerate of mostly energy and infrastructure assets. He also owns some mobile-phone networks and Cheung Kong Property Holdings, a property development company.

Bloomberg estimates that he is worth $32.6 billion.

He has recently been restructuring his company, in part to prepare for his 51-year-old son to take over the company. In doing so, Li has purchased assets and moved money to the European Union.

The last thing the government wants is for Li's money to go elsewhere just when the Chinese economy has been experiencing a slowdown.

The People's Daily editorial went through three distinct positions on Li. The first was that his moves were immoral, the second argued that his moves were stupid, and the last one argued that China didn't need him anyway.

Kind of like a breakup.

On the first argument, The People's Daily questioned whether it was "moral" for Li, who has made money on the mainland, to leave at a time when China's stock markets are convulsing and economic indicators are flashing red.

"In the eyes of ordinary people we shared comfort and prosperity together in the good times but when the hard times come he abandons us — this has really left some people speechless,"it said, according to the Financial Times.

The People's Daily also went beyond that argument, saying that even if Li's money moves were not a moral issue, they were illogical. The Chinese economy, it seemed certain, would come back to life soon enough.

"Li Ka-shing has earned money in the mainland and even if it is morally legitimate to stop him from moving his capital out now because of special privileges he received in the past, it is not logical and not in accordance with the spirit of rule by law."

mao flag cave

Finally, there was the whole "who needs him?" thing.

“China accounts for more than 12% of the global economy … Can the withdrawal of a single businessman affect the fundamentals?"

It continued: "We won't need to worry about investors not coming after Li's departure as long as China deepens its reforms … and keeps the market lively."

So far China's reform plans have not really materialized. The Economist said in a recent article that China's attempts to reform its state-owned enterprises had "failed to impress" and that this summer markets had been more than lively — they have been treacherous.

Since its first precipitous drop on June 12, the Shanghai Composite, the mainland's biggest stock market, has fallen 37%. In August, the government devalued its currency, the yuan.

Who needs him, indeed.

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EUROPE: It's a car crash!

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European markets are getting wiped out.

The FTSE 100 just closed down 2.83%, or 172.87 points at 5,935.84. That's a 1-month low.FTSE 100Germany's DAX is down 3.68%, France's CAC 40 is down X%, and Euro Stoxx 50 is off 3.35%. 

The reason? Volkswagen and the Asia Development Bank.

The German car maker's growing emissions scandal is casting a dark shadow over both the US and Europe, and traders are in a bearish mood.

Here's Connor Campbell, a financial analyst at SpreadEx:

The Dow Jones dropped by the 190 points the futures had suggested, as Ford (down 3%) and General Motors (down 2.7%) joined in with the auto sector sell-off that began in the wake of Volkswagen’s shameful emissions-deceit admission. This limp start to the American session meant that the FTSE, DAX and CAC all saw no change to their own hefty declines, with Volkswagen and Porsche (both falling by nearly 17%) joined by Fiat Chrysler (down 5.6%) and Daimler (down 6%).

Meanwhile, in London miners are tanking after the Asia Development Bank cut its forecasts for growth in Asia and India. That's bad for miners, as the two heavy-weight economies gobble up huge amounts of raw materials.

Commodities giant Glencore, which has been struggling to get to grips with its massive debt pile by issuing new shares, was the biggest faller on the FTSE.

Glencore tanked 10.63% to 106.35p.glencore 

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A no-hacking deal with China will probably happen — but it will be costly

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It’s been called the “greatest transfer of wealth in history” — and it’s about to come to an abrupt end. 

China’s massive cyber espionage campaign against US interests, which over the years has likely stolen hundreds of billions of dollars worth of intellectual property from US corporations and industries, is now finally being confronted with a very real deterrent.

The Obama administration’s threat to levy sanctions against specific Chinese businesses benefitting from stolen US secrets puts the Chinese in a very difficult position.

Such sanctions would be “sticky,” i.e., hard to get out of, and in addition to crippling Chinese businesses in the international marketplace, they would also effectively blacklist them within the Chinese economy as well — since any firm doing business with sanctioned companies could face their own sanctions.

By now, we’ve all grown accustomed (and maybe even a little numb) to news reports about large-scale breaches on corporate networks with traces of Chinese involvement.

Many may see this ongoing spate of attacks as unstoppable, both in terms of corporate cybersecurity defenses, but also on the political level — since these breaches have greatly benefited the Chinese economy, as well as aided its geopolitical aspirations, and have had few consequences.

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After all, no one wants to escalate this into a real diplomatic or military confrontation over stolen tractor designs or oil resource maps; and ‘hack-backs’ against Chinese-run networks have been deemed too risky to carry out.

As a result, over the past few years the White House has been limited to making smaller threats. Such as indicting specific Chinese officials for their roles in US cyber attacks. These obviously haven’t worked.

However, the greatest weapon the US has in the world is its control over the international financial system. Leveraging that, as the President now appears ready to do, will be enough to bring the Chinese government to the negotiating table.

But the Chinese won’t scale back their hugely successful cyber espionage program without requiring serious concessions from the US. It is worth considering what exactly these will be.

After all, we’ve spent so much time over the past five years worrying about the ‘unstoppable’ nature of Chinese cyber attacks, that few of us have made it to the next step - what would a deal actually look like? And what capitulations will the US be asked to make?

US Cyber Attack ChinaIt’s time for us to move past the disbelief that such a deal is even possible, because the threat of sanctions is a game changer - as long as the President is willing to follow through on this threat, it will force the Chinese into making a deal.

Any such deal is likely to have high costs associated with it. The US would get a commitment from the Chinese to scale back its cyber espionage program against the US private sector (but don’t expect to see attacks on government and military agencies to stop any time soon — those are fair game).

In return, the Chinese are likely to ask for four things: US technology source codes, US encryption backdoors, censorship of Chinese language content on the Web, and a broader program for US intellectual property transfers to Chinese partners

How could the US go for such a deal? It will. And here’s why. 

The US government’s top objective is to secure cyber space within its borders. It will do so eventually either by pacts, treaties, threat of reprisals or technological means - but the first two are obviously much more expedient.

Additionally, the US government is less concerned about IP transfers that happen voluntarily between US businesses and the Chinese government (known as the “pledge of compliance”), particularly since these are already happening.

In fact, many of the conditions the Chinese are likely to demand in a cyber pact, they’re already pursuing unilaterally with US companies attempting to do business there. 

cyber securityBut the US government’s motives here are more complex because it actually shares the same basic goals as the Chinese.

This is what makes a deal even more likely, in spite of the perceived ‘concessions’ on the US side. For instance, the recently leaked “NSC Strategic Options on Encryption” paper reveals the Obama administration’s commitment to ensuring that government backdoors remain in encryption products in a way that will work both domestically and internationally.

It’s also putting pressure on Apple and Google to open their encryption products. It’s suing Microsoft to establish the ability to access customer data Microsoft stores in Ireland. The government also accesses software source codes via clauses in the export control regime.

The US government’s tactics have a lot more in common with the Chinese than we realize. While this would create a more Balkanized Internet, the US government is not necessarily against the Chinese (or for that matter, the Europeans) having them.

A US/China deal to end cyber espionage attacks is viable now that economic sanctions are on the table. But any deal will only help to solidify the erosion of privacy and business security on the Web which is already being pursued by multiple national governments around the world. If the US government achieves domestic private sector cybersecurity at the expense of these larger issues, everyone loses. 

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A Chinese jet nearly collided with a US spy plane

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A Chinese interceptor jet conducted a second dangerous pass near a U.S. surveillance aircraft over Asian waters—a week before a state visit to the United States by Chinese leader Xi Jinping that begins Tuesday.

The latest incident took place Sept. 15 over the Yellow Sea, not far north from Japan’s Senkaku Islands, when a Chinese interceptor flew in front of an RC-135 electronic intelligence-gathering jet, nearly colliding with the aircraft.

It was the second time a Chinese aircraft nearly collided with a U.S. surveillance jet. The last incident took place in August 2014 over the nearby South China Sea.

Pentagon and U.S. Pacific Command spokesmen declined to provide details of the latest encounter but did not dispute that it took place.

“I have nothing for you regarding the incident you mention,” said Cmdr. Bill Urban, a Pentagon spokesman.

The latest U.S.-China aerial confrontation was mentioned indirectly by Adm. Harry Harris, commander of the U.S. Pacific Command, during Senate Armed Services Committee testimony last week.

Harris called the 2014 incident “a very dangerous event,” referring to the barrel roll conducted by a Chinese jet over the top of a P-8 maritime surveillance aircraft as “a dangerous maneuver in acrobatic circles, let along in an intercept regime in an open ocean.”

“And we most recently have seen that again, but I’ll give the system credit for that intervening period of time, we’ve seen very few dangerous activities by the Chinese following that August 2014 incident,” Harris said.

Harris, without mentioning the RC-135 incident, said the decline in dangerous aerial encounters until the latest incident was due to military and political relationships worked out with the Chinese.

Asked about a second recent dangerous aerial encounter mentioned by the admiral, a Pacific Command spokesman at first said “there is no new P-8 incident.”

Questioned later about the RC-135 incident, the spokesman, Capt. Darryn James, refused to provide details and referred questions to the Pentagon.

Two Pentagon officials, speaking on background, described the Yellow Sea encounter as a dangerous and unprofessional aerial intercept that was similar to the 2014 near collision between a Chinese J-11 interceptor and Navy P-8 maritime patrol aircraft in the nearby South China Sea.

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The J-11 came within 50 feet of the P-8 as it was conducting surveillance, in an attempt to coerce the surveillance aircraft to depart.

In the recent incident, the Chinese interceptor crossed very close to the nose of the RC-135 near the Senkaku Islands—the location of a major dispute over ownership of the islands located south of Japan’s Okinawa and north of Taiwan.

Disclosure of the dangerous Chinese jet encounter comes a day before Xi begins an official state visit to the United States. The incident is likely to embarrass the Communist Party secretary who arrives in Seattle on Tuesday. He is scheduled to meet President Obama later this week.

Xi’s visit is also expected to raise two contentious issues: large-scale Chinese hacking of U.S. government and private-sector databases and the theft of data on tens of millions of Americans. China also has raised tensions as a result of disputes over maritime claims in the South China Sea and East China Sea.

Xi is also contending with a wavering Chinese economy that has caused stock markets around the world to drop sharply in recent weeks.

The Chinese leader, who recently was seen in a major military parade riding in the back of a limousine as he reviewed thousands of Chinese troops, tanks, missiles, and aircraft, will be hosted at a White House state dinner, an honor normally reserved for U.S. allies.

The dangerous aerial encounter is a setback for the Pentagon’s aggressive military diplomacy with China, which President Obama has made a centerpiece of Pentagon policy.

Chinese President Xi Jinping is seen during a meeting with U.S. National Security Advisor Susan Rice (not pictured) during their meeting at the Great Hall of the People in Beijing, China, August 28, 2015. REUTERS/Jason lee

Critics in Congress, including Sen. John McCain (R., Ariz.), the chairman of the Senate Armed Services Committee, and Rep. Randy Forbes (R., Va.), chairman of the House Armed Services subcommittee on sea power, have called on the Obama administration to cut back on military exchanges that are not producing results.

The Pentagon recently concluded an agreement outlining what it calls rules of the road for encounters at sea that are designed to prevent further dangerous ship-to-ship incidents like the 2013 near-collision in the South China Sea.

On Dec. 5, 2013, a Chinese amphibious ship sailed directly in front of the guided missile cruiser USS Cowpens and stopped, forcing the Cowpens to sharply alter course to avoid hitting the Chinese vessel.

The Obama administration announced at the November 2014 summit between Obama and Xi that the Pentagon and Chinese military had concluded a memorandum of understanding on “rules of behavior” for the safety of air and sea encounters.

Pentagon officials have said the rules for maritime encounters are clearer than those for aerial intercepts.

Talks in Beijing on the aerial rules have been bogged down in Chinese demands that the United States halt all aerial surveillance near China’s coasts, something the Pentagon so far has refused to accept.

Harris, the Pacom commander, said last week that he has ordered his component commanders to continue to conduct operations when challenged by Chinese jets or naval forces.

“What I’ve told the component commanders of the Pacific fleet and Pacific air forces to tell their pilots and crews to do is to continue to insist on our right to operate in international airspace and maritime space,” Harris said.

“When challenged by Chinese fighter aircraft, our aircraft ought to maintain a professional flight profiles, predictable flight profiles, and we have the means to record that activity and then we’ll see what happens.”

The area where the incident occurred has been the focus of a major dispute between Beijing and Tokyo over the ownership of the Senkakus.

Senkaku Islands Japan China

Senior U.S. officials, while claiming neutrality in Asian maritime disputes, have invoked the U.S.-Japan defense treaty several times in recent years, stating that U.S. forces would defend Japan if the islands are attacked.

Further heightening tensions, China in November 2013 unilaterally imposed an air defense identification zone over the East China Sea, claiming control over a security zone covering the Senkakus and several South Korean islands.

China is claiming ownership of the Senkakus, which it calls the “Diaoyu Islands,” though they have been under Japanese authority for decades. The waters around the islands are believed to contain large reserves of undersea gas and oil coveted by both countries.

The Chinese have demanded that all aircraft entering the zone seek permission and submit flight plans. China has threatened to use military forces to enforce the zone, but so far has not done so.

The United States, Japan, and South Korea have said they do not recognize the air defense zone.

Officials said the most recent aerial encounter between the United States and China was less dangerous than the 2014 encounter between the J-11 and the P-8.

The Pentagon called the 2014 intercept “aggressive” and “dangerous” and threatened to cut off military relations with the People’s Liberation Army unless the maneuvers were halted.

Defense officials have said that aerial intercepts remain an unresolved issue between the two countries. National Security Adviser Susan Rice, during a visit to Beijing last fall, was told by Chinese officials that China is demanding that the United States halt all surveillance flights along Chinese coasts.

Urban, the Pentagon spokesman, while not providing details of the Yellow Sea incident, defended the Pentagon’s efforts to seek to lower the risk of dangerous encounters.

“The department has made tremendous progress with respect to reducing risk between our operational forces and those of the People’s Republic of China (PRC),” Urban said.

“Over the past year, we have seen improvements in PRC behavior, specifically the safety and professionalism with which they intercept our aircraft.”

Additionally, the Pentagon has “robust, existing mechanisms to deal with incidents between our operating forces, such as the Military Maritime Consultative Agreement,” he said.

Rick Fisher, a China military analyst with the International Assessment and Strategy Center, said the latest aerial encounter should not go unchallenged.

“Threatening intercepts over the East and South China seas require a very firm U.S. response,” Fisher said.

“The first step should be increased flights. But there must also be a deliberate program of expanding air defense cooperation with Japan and the Philippines.”

Fisher urged states in the region to conduct joint aircraft deployments to Japanese air fields in the Sakishima Islands and said that the United States should offer the Philippines air defense systems and training to bolster its defenses.

SEE ALSO: China is holding a Texas businesswoman under charges of spying as Xi arrives in the US

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HANK PAULSON: Cyber theft is a threat to the global economic system

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Hank Paulson

China and the US need to work together to address cyber theft — or it will spiral out of control and hurt the global economy.

That is according to former US Treasury Secretary Hank Paulson, who sat down with CNBC's Michelle Caruso-Cabrera Tuesday, to weigh in on Chinese President Xi Jinping's visit to the US, tech companies, and Lloyd Blankfein's lymphoma.  

The world's two largest economies by GDP need to see eye-to-eye on the encroaching issue of cyber security, Paulson said.

"Ultimately I think it's just very, very important for our two countries to come together, because we need a global regime — a global economic regime that's going to be able to be enforceable and to curb and to punish cyber theft," he said. "And I think you're only going to that can only be done on a multilateral basis."

"I don't see how the global economic system can function if you ever have a cyber theft," he said.

"It's going to be a lot easier to do that if we're working with China.  And ultimately, China has a need to do something here too."

When asked how cyber security played into Sino-American relations, Paulson said: "When you look at our economic relations, the most troublesome and economic issue is corporate or commercial cyber theft.

"I think it's the biggest risk when we look at US-China relations."

Cyber assaults have impacted relations between the two nations in recent years. The topic is set to be a major talking point during the Chinese president's visit to the US this week.

The FBI said October last year that hackers, thought to be related to the Chinese government, had launched a spate of attacks against US companies.

It wasn't the first time. Over the past few years, US companies have accused Chinese hackers of stealing or attempting to take sensitive information. That list includes Google, Yahoo, Dow Chemical and Adobe Systems.

The Chinese central government denies any involvement.

"The Chinese government does not engage in theft of commercial secrets in any form, nor does it encourage or support Chinese companies to engage in such practices in any way,"Xi said during an interview with AFP.

Xi touched down stateside Tuesday, and will be addressing top US and Chinese corporate heads early Wednesday. He will meet with companies that do work with China — such as executives from Microsoft and Boeing.

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A Chinese billionaire developer is accused of using $4.5 million to get others to perform 'unlawful activities'

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A controversial Macau businessman with top-level connections to both Beijing and Washington has been accused by the United States authorities of engaging in a two-year scheme to move more than US$4.5 million into the US under false pretenses.

News of the arrest of Ng Lap Seng - a property developer from the former Portuguese enclave who was caught up in a political funding scandal involving former US president Bill Clinton in the 1990s – comes just hours before President Xi Jinping touches down in Seattle to begin a landmark US visit.

It also follows the high-profile repatriation to the mainland three days ago of one of Beijing’s most wanted fugitives, Yang Jinjun.

Yang, 57, who is suspected of bribery and corruption and fled to the U.S. in 2001, was listed as a wanted person by the Chinese government as part of their Skynet operation earlier this year. He was charged on his return to the mainland.

Ng and Jeff Yin, his assistant, were accused in a criminal complaint made public on Monday in federal court in Manhattan of engaging in a conspiracy to obstruct and make false statements to US customs officials.

Both men were arrested on Saturday, according to a spokesman for Manhattan US Attorney Preet Bharara. Prosecutors in Bharara’s public corruption unit are handling the case following an investigation by the Federal Bureau of Investigation. A lawyer for Ng, 68, did not respond to requests for comment. A lawyer for Yin, 29, provided no comment on the charges.

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Ng was part of the 100-strong Beijing-appointed committee – chaired by then Vice-Premier Qian Qichen - which oversaw the Macau handover to Chinese rule in December 1999. A year earlier, while chairman of the Sun Kian Ip Group, his name was last year linked to the scandal surrounding Asian funding for US President Bill Clinton’s Democratic Party.

In an interview with the South China Morning Post at the time, Ng, who has met President Clinton, denied any part in the scandal and reports in the US media that he has links to organized crime.

According to the complaint lodged in the Manhattan court, Ng, who heads a major real estate development company in Macau, with Yin’s help brought more than US$4.5 million in U.S. cash into the United States from China from July 2013 to September 2015.

The complaint said that Ng and Yin concealed the true purpose of the money, repeatedly falsely telling U.S. Customs and Border Protection officials that it was for buying art, antiques or real estate or to be used for gambling.

The complaint did not specify what the purpose was in reality.

But it cites a June 2014 meeting in the New York City borough of Queens with an unnamed business associate in which Ng brought a suitcase with about US$400,000 in cash that he had falsely claimed was meant for buying paintings and gambling.

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In July 2014, the complaint says an FBI agent served a federal subpoena on Ng in connection with an unrelated investigation.

While the subpoena required Ng to personally appear that September, Ng failed to do so or respond to it, the complaint said.

It is unclear why the case is being handled by prosecutors in Bharara’s public corruption unit.

In 1998 White House videotapes showed Ng, also known as Mr Wu, being introduced to president Clinton at a forum in Georgetown, Washington, on November 8, 1995.

During the brief meeting the President was told by a fellow Democrat that Ng had been "very helpful" in organizing a reception for the late US Secretary of Commerce Ron Brown in Hong Kong.

The introduction was unearthed by Republican investigators among 60 cassettes turned over by the Clinton administration.

The New York Times reported that, in the two years since the meeting, Mr Ng has been linked to organised crime in Asia.

"I am very upset," Mr Ng told the South China Morning Post at the time, "especially about this allegation that I am linked to organised crime. It is absolutely untrue and has no basis in fact.

"I don’t like to talk a lot because when you find yourself caught up in something like this, it is very difficult to talk your way out.

"This is political. There is a purpose to all this and the target is President Clinton," he said.

The tycoon is alleged to have passed US$7 million into Democratic Party coffers using a complex series of bank accounts, through Yah Lin "Charlie" Trie.

Ng previously figured into a Congressional probe into how foreign money was funneled into to the Democratic National Committee before the 1996 presidential election during the Clinton administration. He was never charged.

 

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