Published July 15, 2021
China's new tech regulations are punishing the West, not Didi.
By Berit Anderson
China is a bad place to be a billionaire. Just ask Jack Ma, founder of Ant Group, who suddenly went missing for three months in late 2020 after he criticized the Chinese financial system, characterizing banks as operating with a "pawnshop mentality."
His Shanghai IPO, slated for the next day, was supposed to have been the world's biggest. Instead, the listing was blocked. And Ant Group lost $76 billion in market value.
Whether Ma was detained or forced into house arrest during that time is murky. But what is crystal clear is that Chinese companies are operating at the whims of their leader, President Xi Jinping. Not the other way around, as is the case here in the US.
"There are [Communist] party committees there to remind the companies... that the party ultimately has power, even over powerful individuals like Jack Ma," says Samantha Hoffman, a researcher at the Australian Strategic Policy Institute.
This control extends to secrecy, she says.
"Not only is a company responsible to do what the party demands, but they also can't admit to doing that if they're asked."
This has been China's MO for years now, so it's not surprising that a new set of regulations out of Beijing over Chinese listings on US stock exchanges is being interpreted by US media as "a crackdown on Chinese tech companies."
As is often the case with mainstream-media analysis of Chinese behavior, however, this interpretation is not only wrong; it also misses the entire point of the new regulations. Which is unfortunate, as they're quite significant.
China's new Wall Street IPO regulations are designed to protect China and its economy from international sanctions and retaliation for acts of warfare it currently anticipates carrying out. Economic, military, cyber, or otherwise.
Not to punish Chinese tech companies. Although it may seem that way to those who can't see beyond the day's earnings report.
On Wall Street, money is religion. In China, the CCP is religion.
Inside the New IPO Laws
Ride-share company Didi Chuxing Technology Co. knows this, of course. Which is why, on June 30, when it debuted on the NYSE, it didn't post about it on Weibo or even send an executive to ring the bell. That didn't stop investment from pouring in. The company raised $4.4B, debuting at $16 a share.
The next day, on July 1, Xi Jinping addressed the world in Tiananmen Square. As The Economist reported, "China's leader had just pledged that any foreigner who tried to bully China would 'dash their heads against a Great Wall of steel, forged from the flesh and blood of over 1.4bn Chinese people.'"
Well. That got real pretty fast now, didn't it?
"On Friday, before trading opened in New York, the CAC announced it had launched an investigation into Didi on suspicion the company had violated data privacy and national security laws. It ordered the company to stop registering new users. On Sunday, the [Cyberspace Administration of China] instructed all Chinese app stores to remove Didi's app. On Monday, the agency said it had broadened its investigation to include two more U.S.-listed Chinese companies."
And per CNBC on Tuesday, "Over the weekend, CAC also announced that companies with data on more than 1 million users would likely need approval before they listed overseas."
The focus on data access and users is what sets this regulation apart from the Ma case: This is not retaliation for speaking out against the Chinese Communist Party, but rather the acceleration of preplanned policies to protect China from US intrusions. (Although it does seem that Didi likely knew these rules were coming and rushed to list beforehand anyway. For that it is being punished.)
Neither is the point of these new rules to keep Chinese companies from raising money. In fact, the CCP is going above and beyond to create room for dual raises for Chinese companies on the Hong Kong stock exchange. Just look at Tesla copycat Xpeng, which was allowed to list in Hong Kong as a primary listing, giving Hong Kong regulators oversight of the deal.
The idea is to keep Chinese data - and Chinese companies - out of reach of US regulators.
For China, most of 2020 was about resource acquisition, filling up its storerooms to protect itself from being cut off from key supplies. 2021 is about neutralizing potential sanctions that would allow adversaries to pressure China.
China is raising the drawbridges of the castle and slamming shut the gates to keep out retaliatory efforts by the US, the EU, Australia, and other allies.
China's Warfare Trajectory
Let's review the CCP's global economic, information, and technical warfare strategies for the last 15 years, because it brings into stark relief the context for China's IPO regulations.
It's really been a very simple 35-part process that we've done our best to keep you all apprised of. But for now, we'll just dig into the first dozen or so steps.
So here I present to you the evolution of China's warfare tactics:
- Steal IP from Western companies like Nokia, Apple, Google, and Boeing and reproduce their products more cheaply to undercut them on price, pushing many of them out of business.
- Deny those same companies access to the Chinese market without in-country data colocation to give China access to all proprietary data.
- Fund centers, fellowships, and beyond at major academic institutions across the US, Europe, and Australia to control public intellectual thought. Use that control to keep intellectuals in the US from criticizing President Xi Jinping and the CCP.
- Finance infrastructure all over Africa, South America, and Eastern Europe through the Belt & Road Initiative to increase sway in key strategic countries.
- Invest in key Western companies and innovations to create deep, interlocking dependencies between the US, European, and Chinese economies while retaining access to company data and inside information.
- Buy and bug hotel chains across the Western world to capture the intimate goings-on of elite travelers.
- Partner with Russia to influence elections across Europe and the US through cyber and information warfare.
- Use lots of investment from US funders and VCs to fund Chinese business growth through Wall Street and the NYSE.
- Withhold information about Covid for years - not months - that would have helped the rest of the world respond to the global pandemic.
- Rush back into business while everyone else is still shut down.
- Hoard Chips through the fall of 2020 to prepare for sanctions by the US.
- Hoard Global Commodities throughout 2020 and Q1 of 2021.
- Bulk up military development in partnership with Russia, Iran, and North Korea, including construction of massive naval and air-force infrastructure.
China 2020: The Great Hoarding
In my last Global Report ("China's Massive Resource Hoarding Belies Its Real Plans," 6/23/21), I outlined the extent to which China has been hoarding global commodities, including unprecedented imports of oil, corn, soy, silver, gold, and so on. Just as we published that report, China's significant acquisition rate began to slow, suggesting, to me, that the party has deemed its stockpiles sufficient for the time being.
This was reflected in plummeting commodities prices across the board, which give us a backwards estimation of the magnitude of Chinese resource hoarding.
As the Financial Times reported on Monday:
Brent, the international oil marker, fell as much as 1.7 per cent to $74.27 a barrel, while copper dropped 1.1 per cent to $9,390 a tonne - leaving it more than $1,000 below the record high reached in May. Gold was also weaker as the dollar rose, something that makes the previous metal more expensive for holders of other currencies. It fell 0.6 per cent to $1,800 a troy ounce. Corn was trading at $6.23 a bushel, down 20 per cent from this year's peak in May, as some market bulls retreated owing to the recent rains in the US midwest.
It would be easy to take this downward spiral as a sell signal if you didn't understand what was going on.
China's stockpiling suggests to me that it is preparing for a global shock event that will drive demand even higher.
Why would the Chinese be preparing for a global shock event? Either:
- They understand the full scale of climate-change-caused global drought to agriculture and, therefore, how essential it is to stockpile crop resources. This could be true of corn and soy crops, but doesn't explain the bumps to other assets, such as oil, gold, and silver. Or:
- They know the shock event is coming because they intend to cause it themselves and they want to be ready for global blowback. This one is much more likely.
A shock event created by Chinese military or cyber engagement would drive global panic and demand for commodities. China, which is already well-supplied with these wartime essentials, will have the upper hand.
In other words, this downturn on largely nonrenewable resources that are essential for the continuation of the global economy is likely to be very temporary. This might be a fantastic time to buy commodities.
China 2021: Raising the Drawbridges
If 2020 was about global hoarding as a warning sign that China is preparing for international conflict, the CCP's actions in Q2 of 2021 all but confirm it. This spring, the CCP has shifted from resource hoarding to protecting itself from economic and policy backlash.
Now that the castle storerooms are full, China is raising the drawbridges, removing international ability to harm the Chinese economy and firms. In fact, it's doing it quite methodically.
One of the first signs of this shift took place on June 10, when China's National People's Congress passed the Anti-Foreign Sanctions Law, making foreign companies around the world, their employees, and their employees' families liable for enacting any international sanctions.
Below, a rough English translation of the law's key parts.
Article 4: The relevant departments of the State Council may decide to enter persons [sic] or organizations that directly or indirectly participate in the drafting, decision-making, or implementation of the discriminatory restrictive measures provided for in article 3 of this Law in a countermeasure list.
Article 5: In addition to the individuals and organizations listed on the countermeasure list in accordance with Article 4 of this Law, the relevant departments of the State Council may also decide to employ countermeasures against the following individuals and organizations:
(1) The spouses and immediate relatives of individuals listed on the countermeasure list;
(2) Senior managers or actual controllers of organizations included in the countermeasures list;
(3) Organizations in which individuals included in the countermeasure list serve as senior management;
(4) Organizations in which persons included in the countermeasure list are the actual controllers or participate in establishment and operations.
Article 6: In accordance with their respective duties and division of labor, the relevant departments of the State Council may decide to employ one or more of the following measures against the individuals and organizations provided for in Articles 4 and 5 of this Law, based on the actual situation:
(1) Not issuing visas, denying entry, canceling visas, or deportation;
(2) Sealing, seizing, or freezing movable property, real estate, and all other types of property within the [mainland] territory of our country;
(3) Prohibiting or restricting relevant transactions, cooperation, and other activities with organizations and individuals within the [mainland] territory of our country;
(4) Other necessary measures.
In a nutshell, the law renders US sanctions - long one of its most effective tools against Chinese aggression - null and void. Anyone responsible for implementing any kind of government sanctions against China in any company (and their families) is essentially barred from doing business in China or ever setting foot in China again. Or else. I think we can all guess what "other necessary measures" might entail.
This joins a series of earlier laws, including the Unreliable Entity List (identifying foreign bodies deemed threatening to Chinese national interests) and the blocking statute (requiring Chinese people and companies to report any restrictions they face internationally and allowing them to sue for compensation).
As the Atlantic Council explained in a post about the Anti-Foreign Sanctions Law:
This could put companies all over the world doing business with the US and EU and China in an untenable position: complying with Western sanctions means violating Chinese law, exposing those companies to counter-sanctions by China and other liabilities. This has raised the complexity and risk of doing business globally, especially as sanctions and counter-sanctions are likely to proliferate in the intensifying US-China strategic competition....
Currently at risk of being at the receiving end [of] these measures are companies complying with the US ban against selling high-tech products such as advanced semiconductors to listed Chinese entities like Huawei or military-related companies; companies such as H&M, Nike, and Adidas boycotting cotton allegedly produced by forced labor in Xinjiang; and financial services firms - in particular Western banks in Hong Kong - withholding services to persons and entities sanctioned by the United States. In this context, it is not clear if Beijing intends to apply the law in Hong Kong by inserting it in Annex III of Hong Kong Basic Law.
Sorry, Xi - what was it you planned to do to any foreigner bullying China? Oh, right. "[D]ash their heads against a Great Wall of steel, forged from the flesh and blood of over 1.4bn Chinese people."
How Wall Street Became the Problem Child
Throughout China's escalation of human-rights abuses, aggressive manipulation and control of its own people, and moves to indebt most of Africa and South America, Wall Street has thrown money at China with the enthusiasm of a Nickelodeon host dousing gameshow contestants with slime.
As Stanford Hoover Fellow Niall Ferguson wrote recently in Bloomberg,
According to the Rhodium Group, China's gross flows of foreign domestic investment to the U.S. in 2019 totaled $4.8 billion. But gross U.S. FDI flows to China were $13.3 billion. The pandemic did not stop the influx of American money into China. Last November, JPMorgan Chase & Co. spent $1 billion buying full ownership of its Chinese joint venture. Goldman Sachs Group Inc. and Morgan Stanley became controlling owners of their Chinese securities ventures. Just about every major name in American finance did some kind of China deal last year.
And it wasn't only Wall Street. PepsiCo Inc. spent $705 million on a Chinese snack brand. Tesla Inc. ramped up its Chinese production. There were also massive flows of U.S. capital into Chinese onshore bonds. Chinese equities, too, found American buyers. "From an AI chip designer whose founders worked at the Chinese Academy of Sciences, to Jack Ma's fast-growing and highly lucrative fintech unicorn Ant Group and cash cow mineral-water bottler Nongfu Spring Co., President Xi Jinping's China has plenty to offer global investors," my Bloomberg opinion colleague Shuli Ren wrote last September.
What JPMorgan Chase & Co. doesn't seem to understand is that full ownership of a Chinese joint venture means little to nothing within Chinese borders. Just look at Jack Ma. Look at Didi.
Here's Niall again, a man after my own heart: "Wait, you're saying that investing in the other side in the early phase of Cold War II might have been a bad idea? You're telling me that 'long totalitarianism' was not a smart trade?"
To use an Evan Anderson analogy, Wall Street is playing a game of chess. The CCP is playing Go.
What to Do About China's New Phase
Those in military and security should be on high alert, particularly if they're involved in any operation that could be perceived as critical to the infrastructure of Western democracies. Yes, this includes key strategic businesses. The chances of attack by foreign adversaries, always high, are currently at astronomical levels.
Those in business should be reducing dependencies on Chinese supply chains and creating backup plans for complete disengagement with China on a 3- to 12-month timeline, should it become necessary.
Those on Wall Street still plunging money into China should spend 24 hours binge-watching instructional Go strategy videos on YouTube and then attend a 10-day vipassana retreat.
Ideally, all of this would be resolved via diplomacy, but Xi's past behavior doesn't make that seem particularly likely. I'd put the chance at about 5%.
In either case, let's plan for the worst - and hope for the best.
Your comments are always welcome.