Chinese banks investigated for ties to private firms, Foreign companies prepare for selective decoupling & LinkedIn leaves China -- China Boss News 10.18.21

Oct 18, 2021

The Big Stories in China Business

Chinese banks investigated for ties to private industry

This story didn't receive the attention it deserves: Lingling Wei at the Wall Street Journal last week wrote that "Chinese President Xi Jinping is zeroing in on the ties that China’s state banks and other financial stalwarts have developed with big private-sector players, expanding his push to curb capitalist forces in the economy.”

Wei, WSJ:

Mr. Xi, who started his campaign late last year with a regulatory assault on private technology giants, is launching a sweeping round of inspections of financial institutions. According to people with knowledge of the plan, the inspections, announced in September with few details, focus on whether state-owned banks, investment funds and financial regulators have become too chummy with private firms, especially some that have recently landed in Beijing’s crosshairs, such as property giant China Evergrande Group, ride-hailing company Didi Global Inc. and financial-technology firm Ant Group.
The examination, which is led by China’s top anticorruption agency and centers on 25 financial institutions at the heart of the Chinese economy, is the most extensive of a sector Mr. Xi has been suspicious of since coming to power nearly a decade ago. It is part of his broad effort to steer China’s economic system away from Western-style capitalism in the run-up to a leadership transition late next year, when Mr. Xi is expected to sidestep convention and continue his rule beyond the usual two five-year terms.

That businesses need access to capital to operate and grow is widely understood. For the first few decades of the early reform period, China’s banks - nearly all of which are state-owned - rejected private entrepreneurs credit applications, opting to lend to state-owned companies to minimize risk of nonpayment. Overtime, as the private sector grew in strength and power, China’s banks were gradually persuaded to relax their lending standards, so that - by 2013, according to one Brookings report, they provided “about three fifths of total credit to the private sector.” Before then, however, select companies went to foreign investors for cash, and everyone else sought loans outside the traditional banking system in China.

China’s shadow-banking problem isn’t discussed as much today as it was in the past, probably because analysts are too quick to trust authorities’ reports that the worst of it has been tamed. But underground financial activity in China, of course, is still an important part of China’s economy: The question is not whether informal lending and borrowing occurs, but, rather, how much of that already taking place is toxic enough to cause systemic risk.

That the party-state says it has the most threatening bits under control is likely to be a tall propaganda tale. Shadow-banking is, by definition, banking that happens outside the purview of financial regulators. It’s like saying Chinese authorities can control all the viruses and people infected with them they don’t know about. Yes, of course, Beijing says it can, but I’ve always believed authorities know they can’t, and so they focus on presenting false assurances instead.

Unfortunately, the latest reports on China’s failing property giants do indicate shadow-banking in China still occurs on a scale considered systemically risky: Just last week, Bloomberg described the recent finding of “opaque debt in the [property] sector” as a source for concern.

Bloomberg:

One key concern is opaque debt in the sector, flagged in recent days when people familiar said that a widely unknown dollar note with an official due date of Oct. 3 issued by an entity called Jumbo Fortune Enterprises is guaranteed by Evergrande. In Fantasia’s case, the company had said just several weeks before defaulting that its operating performance was good, it had sufficient working capital and no liquidity issue. It stirred unease about hard-to-quantify obligations last week when it refuted a report that money for a privately placed bond hadn’t been transferred.

Emphasis added.

Should China’s regulated banks be prohibited - or simply discouraged - from lending to private industry after President Xi’s scrutiny of their dealings, the country’s private sector could be starved of capital and die out. A more likely scenario, however, is that billions in loans will continue to change hands at interest rates so high they threaten borrowers’ liquidity, and that the loans, themselves, would be recorded, if at all, so far off book that no one will be able to keep track of them.

For Lingling Wei’s report in the Wall Street Journal, click here. For Bloomberg’s update on Evergrande’s “opaque debt,” click here.

Financial Times: “Companies prepare for ‘selective decoupling’

The Financial Times reports that “executives across the semiconductor, autos and telecom industries [are] plan[ning] as if [decoupling] is happening.”

FT:

The banker’s take is that large foreign businesses will continue to invest in China while its markets deliver much of their growth, and are doing so with long-term views. …
Behind the lawyer’s narrative is a counterpoint, supported by the ever more fiddly and cost-inducing work he is doing for clients, that little is improving for foreign businesses in China — particularly manufacturers. Forced tech transfers are a huge headache. A recent survey of European companies found a third expecting that China’s evolving cyber security law, data security law and the personal information protection law would have a “sizeable negative impact” on their company in the next five years.
Meanwhile, the wide-angle picture of decoupling, which the FT has separately heard described by executives across the semiconductor, autos and telecoms industries, is that the most sensible approach is to plan as if it is happening. If security concerns and the fostering of national champions in semiconductors and other supply chain choke points persists, many manufacturers must adapt to a decoupled reality, said one Japanese CEO in the semiconductor business.

For the rest of this FT opinion written by Leo Lewis, click here.

Law and International Xi

China issues draft measures that ban private news outlets

China has issued a new draft law (document in Chinese) that would ban news outlets from private funding. Put differently, "China could ban all news media not funded directly by the Communist Party under new rules that will likely further limit freedom of speech," The Telegraph's Sophia Yan has said.

Yan, The Telegraph:

The proposed new rules ban private media-related businesses as part of a "prohibited" list of industries.
"The 2021 list is a very broad ban on everything relating to the news media sector, while the 2020 list does allow non-public capital participation, subject to equity caps," said Henry Gao, an associate professor of law at Singapore Management University.
While it remains unclear if foreign news outlets like The Telegraph will be affected, local outlets are now likely to be facing an even more uncertain future.
Hong Kong newspaper South China Morning Post, owned by tech tycoon Jack Ma’s Alibaba Group, could potentially be impacted by the law.

Emphasis added.

Last month, Financial Times reported that Beijing was cracking down on financial news posts and commentaries by “market sceptics and those who voice pessimistic opinions about the Chinese economy — as well as misinformation and malfeasance radiating from financial news services and social media accounts.”

The latest curbs on independent news and analysis will no doubt make coming to an objective conclusion about anything happening in China, from its markets and economic situation, to social trends - like “lying flat” - more difficult.

For the rest of The Telegraph’s report, click here. For the Financial Times’ report on Beijing’s crackdown on China’s financial news blogosphere, click here.

Geopolitics

India and China talks to defuse border tensions end in stalemate

India and China have failed to come to an agreement that would relieve mounting tension "from key friction areas along their border," Aljazeera reported. Statements released from both sides blamed the other for continuing the standoff after talks aimed at disengaging troops in the Ladakh area for another freezing winter ended in a stalemate.

Aljazeera:

Sunday’s talks came amid frustration expressed by the Indian army chief at what he called the massive deployment of troops and weaponry by the Chinese side.
“Yes, it is a matter of concern that the large-scale buildup has occurred and continues to be in place, and to sustain that kind of a buildup, there has been an equal amount of infrastructure development on the Chinese side,” General M M Naravane said on Saturday.
“So, it means that they (China) are there to stay. We are keeping a close watch on all these developments, but if they are there to stay, we are there to stay, too,” he said.
The Chinese statement from Senior Colonel Long Shaohua of the Western Theater Command said “China’s determination to safeguard its sovereignty is unwavering, and China hopes India will not misjudge the situation”.

For the rest of Aljazeera’s report, click here. For another good read on the massive build-up along the India-China border, check out CNN’s Analysis: With all eyes on Taiwan, tensions are building on another Chinese frontier, here.

China’s issue-linkage diplomacy “a nonstarter” for Biden reengagement efforts

New host of Politico China Watcher Phelim Kine wrote a insightful piece last week on how China is “kneecapping the Biden administration reengagement efforts by holding hostage an improvement in the bilateral relationship for U.S. resolution of an exhaustive list of diplomatic grievances.”

Kine, Politico:

Beijing has dampened administration hopes that President Joe Biden’s phone call to Chinese President Xi Jinping last month followed by the U.S. move to drop its extradition of senior Huawei executive Meng Wanzhou would temper China’s diplomatic sparring posture.
Instead, China is doubling down on its all-or-nothing negotiating strategy by pegging improvements in the relationship to U.S. resolution of its grievances in the “two lists.” They include demands that the U.S. muzzle its protests of Chinese abuses in Xinjiang and Hong Kong, allow China to “take any necessary measure” against moves toward Taiwan independence, as well as revoke sanctions on Chinese officials and companies implicated in unlawful activities.
That casts doubt on potential substantive progress on key issues, including trade, climate negotiations and military-to-military relations.
. . . The problem: Agreeing to China’s “Bottom Lines” and emptying the lists is a political and ideological non-starter for the Biden administration. Bending to Beijing’s demands would be “fundamentally caving in on the values that the U.S. espouses,” said Diana Fu, associate professor of political science at the University of Toronto.
The Chinese government has practiced issue-linkage diplomacy for decades behind closed doors as a negotiating tactic. What’s different now is that diplomatic grievance lists are now brandished publicly with demands of full compliance. “This is the natural progression of the [Chinese Communist] Party being more public and aggressive about what it’s doing,” said Matt Turpin, former China director at the U.S. National Security Council and editor of the Hoover Institution’s China Global Sharp Power Weekly Alert.

For the rest of Kine’s analysis in Politico’s China Watcher ‘Two Lists’ too far: the U.S. - China diplomatic stalemate, click here.

The Week’s Best China Reads

China Is Choking Civil Society at the United Nations (Rana Siu Inboden, Foreign Policy)

Read to learn how "Beijing is working hard to shrink space" for NGO’s at the United Nations.

China Isn't the AI Juggernaut the West Fears (Tim Culpan, Bloomberg)

Read for Bloomberg Technology reporter Tim Culpan’s response to Nicolas Chaillan's bombshell interview with Financial Times in which he says he resigned from the Department of Defense in protest because the U.S. has already lost the AI race to China. Culpan argues that China “excels in computer vision and facial recognition, but [its] practical applications are limited to surveillance,” whereas [t]he U.S. has much broader expertise.”

LISTEN: Former Mossad chief warns China can quietly take over Israel (Haaretz)

Listen for insight into Israel’s relationship with China and China’s involvement with Iran, as well as for former Mossad chief Efraim Halevy’s impressions on Elliot Ackerman and Admiral James Stavridis’ novel, 2034, which he highly recommends for the attention it draws to the global security risks of the current geopolitical tensions between China and the U.S.

Middle Kingdom Surreal

Musings on the end of a (short) era for LinkedIn in China

LinkedIn announced Thursday "that it will shut down its social media service in China due to a “significantly more challenging operating environment,” according to Forbes. The move comes after numerous complaints of censorship on its China platform among its international users.

Just a few days before LinkedIn announced it was calling it quits in China, Axios’ Bethany Allen-Ebrahimian, raised a number of points regarding the company’s censorship of her and other journalists on the company’s China platform. She also published some hard-hitting questions on censorship to which she said she “received a response but no answers.”

Allen-Ebrahimian, Axios:

1. Were the recently affected accounts removed because of specific, individual requests by Chinese government authorities?
Or, alternatively, were these accounts flagged for removal by LinkedIn's own employees, based on an internal assessment that they contain content that's likely prohibited in China?
If the latter, this would indicate that LinkedIn has transitioned from removing accounts only at the government's request to actively self-censoring.
2. Does LinkedIn maintain an internal list of topics considered prohibited in China?
Apple maintains an internal “China sensitivities list," according to a May 2021 New York Times investigation, and proactively removes apps from its China app store that are deemed to run the risk of being prohibited in China.
If LinkedIn has a similar internal list, that would indicate that Chinese government censorship is becoming more institutionalized at U.S. companies.
3. What specific Chinese law did the content on the profiles break?
In response to its recent censorship, LinkedIn stated it "respects the laws that apply to us, including adhering to Chinese government regulations for our localized version of LinkedIn in China."
But the company did not specify what content was deemed illegal and which Chinese law or regulation prohibited it.
4. If LinkedIn has blocked accounts in China due to self-censorship, will it make the number of such actions publicly known?
In its regular transparency reports, LinkedIn publishes the number of government takedown requests it receives. Between January and December 2020, the company stated it received a total of 42 takedown requests from the Chinese government and complied with 38 of these requests.
However, if LinkedIn is proactively self-censoring, as Apple does with its China app store, its transparency report in its current form would not reveal this information.

I think most of us knew that LinkedIn as a social media platform in China was not going to be sustainable under President Xi’s leadership where space for free speech is approaching nil.

The posts of more than a few us China watchers, including yours’ truly, have, indeed, been censored by LinkedIn for its China users. Ironically, I was rather surprised by how much of my content was permitted, and - while I’m not entirely certain of the availability of my profile status in the PRC now - I was only told by someone in China a few weeks ago that they could no longer access my posts without a VPN - it is my impression that Chinese users could see my profile and read the news I shared from sites normally blocked by Chinese censors without a VPN since March 2020 when I began sharing China news daily.

It may have helped that my profile describes me as an “American attorney,” which I am, or that I have followers across a a wide spectrum of government and civil society in the EU and U.S. who check my profile regularly for China updates : The implication being that censoring my content could be seen as elevating certain legal and reputation risks. Maybe.

But I was also careful to present views based in fact that were not too inflammatory. I didn’t push back hard on the few posts that were removed, because I preferred to spend the time sharing quality content that could be useful to decision-makers, here, in Europe and elsewhere which has always been my primary objective. Plus, even the few posts of mine that I know were censored - and I can count them on one hand - had already been viewed thousands of times from locations throughout Europe, the U.S., and - yes - even China - before they were taken down, and, at the time, I considered my mission accomplished even without those few meager news shares.

But none of that ever made what LinkedIn was doing in China right. I knew it, you knew it, and so did LinkedIn’s public relations staff who caved very quickly when a Bloomberg journalist contacted them to get political analyst and China specialist Peter W. Humphrey’s blocked account restored earlier this year.

On that matter, Allen-Ebrahiminian hit the nail squarely on LI’s China head when she wrote:

Why it matters: LinkedIn has promised transparency to its users regarding its China operations.
In 2014, when LinkedIn first announced its Chinese website, then-CEO Jeff Weiner said: "LinkedIn will be transparent about how it conducts business in China and will use multiple avenues to notify members about our practices."
Weiner declared that "LinkedIn strongly supports freedom of expression and fundamentally disagrees with government censorship." Despite that stance, the company stated in 2014 that it "would need to adhere to the requirements of the Chinese government in order to operate in China.”
In early 2021, Chinese regulatory authorities punished LinkedIn for lax censorship; three months later, the company blocked the profiles of a spate of researchers.
The big picture: U.S. internet companies once claimed they could help make China more open and free. But Beijing has instead brought them to heel.
. . . What to watch: There is growing congressional interest in this issue. Rep. Jim Banks (R-Ind.) and Sen. Rick Scott (R- Fla.) have both sent letters to LinkedIn in recent weeks demanding answers regarding the company's censorship.

For the rest of Forbes’ report on LinkedIn’s announcement that it will leave China, click here. For Bethany Allen-Ebrahimian’s article LinkedIn's unanswered questions about China censorship, click here.

What everyone’s reading on LinkedIn

This Forbes’ report , 5 Reasons Why Deliveries From China Are Going To Get Even Worse has received 101,105 views so far.

Bloomberg’s Taiwan Warns of Tougher Response If China Flights Get Too Close received 5,553 views.
Another Bloomberg report, European Companies Urge China to Better Manage Energy Crisis, received 4,422 views.

****

Back from my first ever trip to Germany - I was surprised by how much I enjoyed it. Shopping was a bit better than where I live in Belgium, and good food was easy to find and cheaper, too. Just look at the size of this portion, all made from scratch. For reference, the beer pictured top-left is a half liter. :)

Have a great week.

China Boss News