Wall Street's stunned! DiDi crackdown puts an end to market illusions in China investments; New EU-US council is litmus test on China & PRC "holds talks" with Taliban -- China Boss News 7.12.21
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Wall Street’s stunned! DiDi crackdown puts an end to market illusions in China investments
Analysts are abuzz with the news that ride-hailing app Didi has become Beijing's latest battered victim in a months-long crackdown on home grown tech firms. It was a big shocker for Wall Street. Here’s how it happened:
Cheng wei, the billionaire founder and chief executive of Didi Global, had scarcely a moment to revel in his firm’s $4.4bn New York listing. Within 48 hours of the initial public offering (ipo), which valued the Chinese ride-hailing giant at around $70bn, regulators in Beijing spoiled the party. On July 2nd the Cyberspace Administration of China (cac) said it had launched an investigation into the company. The announcement shaved 5% off its share price.
Two days later the regulator ordered Didi’s mobile app to be pulled from app stores in China, halting new customers from joining the service (existing users can still hail taxis). The cac alleges that Didi was illegally collecting and using personal data. Didi said that it would “strive to rectify any problems” but warned of “an adverse impact on its revenue in China”. Predictably, the ban also adversely affected the company’s market value. When American markets reopened on July 6th, Didi promptly shed more than a fifth of it. It is now worth $22bn less than a week go.
In a widely-read piece for the Washington Post, “Wall Street is finally waking up to the reality of China,” Josh Rogin wrote:
Until now, many in the financial world wanted to believe the Chinese Communist Party was fundamentally pragmatic. They insisted that Beijing would never risk its economic development by killing its Wall Street cash cow, and that investors could always count on rational decision-making and solid returns. None of that is defensible anymore. With the Didi move, Xi has put an end to business as usual.
Bloomberg analyst Shuli Ren says authorities’ decision to crackdown on DiDi after its celebrated IPO shows Beijing no longer cares about “foreign market sentiment.”
Ren, Bloomberg:
A few years ago, Beijing maybe cared a bit. The nation’s domestic equity market experienced a spectacular crash in late 2015. In 2018, it entered a deep bear market again, caused by Donald Trump’s trade war. Chinese companies needed to raise capital, and the U.S. was the world’s most resilient and vibrant stock market.
Much has changed since. Last year, China proved itself the only major economy to grow despite the Covid-19 epidemic. As such, it overtook the U.S. as the world’s top destination for new foreign direct investment, while the country’s stocks and bonds also hit record highs. Beijing is no longer worried about capital raising. If anything, it is worried about too much hot money going in.
The Economist noted that Beijing’s subsequent decision “to tighten rules for firms with foreign listings, or those seeking them,” looks a whole lot like a major step towards US-China decoupling, and Niall Ferguson opined that China’s bludgeoning of its own tech firms “is a losing Cold War II strategy.”
But the major takeaway for foreign investors from yet another Chinese tech champ’s arbitrary regulation tale has to be obvious: Politics prevails over markets in Xi’s China, making wise investment decisions inherently more difficult.
No more can Wall Street pundits, asset managers, lawyers and lobbyists argue with a straight face that Chinese firms are anything but under the effective control of the CCP. That means admitting Beijing can squash them or pilfer their coffers at any time — for any reason. Wall Street must now acknowledge that the risk of investing in these companies can’t be known, much less disclosed. …
As a result of authorities’ regulatory clampdown, China’s tech firms “have seen a combined $823 billion wiped from their market value since a February peak,” according to Bloomberg, and “the selloff is far from over,” it warns.
Law and International Xi
Xi reaches out to salvage relations with Europe
According to Politco’s Stuart Lau, President Xi spoke with the leaders of Germany, France, Czech Republic and Greece in an attempt to patch over the large cracks in his European ties.
Lau:
The trilateral call on Monday with German Chancellor Angela Merkel and French President Emmanuel Macron came weeks after the two EU heavyweights gave a partial nod to U.S. President Joe Biden’s move to toughen the transatlantic line on Beijing during the G7 summit.
On Wednesday, the Chinese leader reached out to Czech President Miloš Zeman and Greek PM Kyriakos Mitsotakis. Both countries are part of the now 16+1 platform, down from 17 after the recent departure of Lithuania, a move that caused some unease in Beijing.
Despite the Chinese President’s telephone calls, Lau says, “all EU countries are expected to back a plan …[to] work out details on how to confront one of Xi’s main political initiatives: the Belt and Road.”
The EU Council has asked the European Commission to “to spend the next nine months coming up with a list of ‘high impact and visible projects’” that will be an alternative to China’s BRI, according to Politico.
Politico:
Crucially, the EU is seeking to move beyond the 2018 EU-Asia connectivity strategy and is vowing to build a "globally connected" EU which would allow the bloc to turn its attention to Africa and Latin America, key destinations for Chinese investments.
Espionage: German authorities arrest double agent for China
Lau also reported that Germany has arrested a former intelligence officer it suspects is a double agent for China.
Lau, Politco:
The man — named only as Klaus L. — allegedly supplied the Chinese secret service with information for almost a decade, starting in 2010. At the same time, Mr L, aged 75, had also been an informant for the German Federal Intelligence Service (BND) for 50 years, effectively leading a “double life.”
. . . Publicly, he was a political scientist, working for the Hanns Seidel Foundation — a political research foundation closely associated with the Christian Social Union (CSU), the Bavarian sister party of Angela Merkel’s conservatives — from the 1980s until retirement. . . .
How it started: As part of his work, he traveled abroad frequently, for example for guest lectures, across “the former Soviet Union and later Russia, the Balkans, South Africa and South Asia,” ARD reported. In 2010, according to the prosecutor’s office, he traveled to Shanghai for a lecture and was approached “by members of a Chinese intelligence service in order to win him over for cooperation.” “Subsequently, until November 2019, the defendant regularly provided information to the Chinese intelligence service in the run-up to or after state visits or multinational conferences, as well as on current affairs,” the statement from the prosecutor’s office continued.
Geopolitics
New EU-US trade & tech council is a litmus test on China, says MERICS
The new EU-US Trade and Technology Council (TTC) is “a litmus test for transatlantic coordination on China,” say MERICS analysts Rebecca Arcesati and Grzegorz Stec.
Launched after the EU-US summit in Brussels last month, TTC is intended to “serve as a forum for the United States and European Union to coordinate key global trade, economic, and technology issues and to deepen transatlantic trade and economic relations based on shared democratic values," per the Commission’s press release.
This simple info-graphic from MERICS explains the council’s makeup-up and scope:
The analysts say supply chain security and technology protection are at the core of the TTC’s priorities, and, although the new council is no “panacea for tackling China-related challenges,” it could be helpful “in aligning approaches - not just across the Atlantic but also within the EU.”
Italy does 180 on China policy under Draghi
Italian Foreign Minister Luigi Di Maio told reporters last week the U.S. was "much more important" as an "ally for Italy" than Beijing, Politico reported.
According to Politico, Di Maio specifically said:
Let me be very clear. Italy's alliances with the U.S., NATO and the EU are not just strategic alliances, but alliances of values which allow our democracy to confront issues such as violations of human rights.
Italy is a strong commercial partner with China, we have had historic relations, but they absolutely do not compare with and do not interfere with our alliances of values with the U.S., NATO and the EU.
In an article for Foreign Policy, freelance China researcher Ludovica Meacci explained that Italy’s new stance has to do with a “botched handling of [its] Belt and Road memorandum” - after which “Rome became viewed as ‘the European weak link in the power struggle with China’”- as well as a change of government.
Meacci:
Since current Prime Minister Mario Draghi took office in February, Italy’s official discourse on the U.S.-China rivalry has emphasized a return to international alliances.
At the beginning of his mandate, the newly appointed prime minister clarified that his administration is “strongly pro-European and Atlanticist, in line with Italy’s historical anchors” and said he is worried about the increasing number of conflicts involving China. Draghi’s incisive phrasing leaves no space for misunderstanding: China’s political stances represent a concern.
Meacci also notes that “a more nuanced discussion on China is also taking place” in Italy’s Parliament, and that “Beijing’s escalating crackdown in Hong Kong and a renewed global attention toward human rights abuses in Xinjiang in Italy, where members of the lower chamber are asking the government to do more to push back against China.”
Afghanistan: China’s making deals with the Taliban via Pakistan
Financial Times reports that “Beijing has held talks with the Taliban” and that “officials, diplomats and analysts from Afghanistan, India, China and the US said that crucial aspects of a broad strategy were taking shape.”
FT:
An Indian government official said China’s approach was to try to rebuild Afghanistan’s shattered infrastructure in co-operation with the Taliban by channelling funds through Pakistan, one of Beijing’s firmest allies in the region.
“We can vouch that China will fund the rebuilding of Afghanistan through the Taliban via Pakistan,” the official said. “China is Pakistan’s wallet.”
Another diplomat in the region said: “China at the request of Pakistan will support the Taliban.”
The person added that Beijing was insisting that the Taliban limit its ties with groups that it said were made up of Uyghur terrorists in return for such support.
One expert told FT that “China might join an international peacekeeping team to enter Afghanistan.”
Sadly, Afghanistan’s stability is expected to “evaporate” quickly after the US withdraws. One diplomat noted that the “Afghan military only has the means to fight in 40 per cent of the area without the US air support.”
The Week’s Best China Reads
China’s Attacks on Tech Are a Losing Strategy in Cold War II (Niall Ferguson, Bloomberg)
Read if you want to learn why Stanford Hoover Institution’s Niall Ferguson thinks Cold War II between the US and China has already started.
Ferguson:
Unlike with a “hot” war, it is hard to say exactly when a cold war breaks out. But I think Cold War II was already underway — at least as far as the Chinese leader Xi Jinping was concerned — even before former President Donald Trump started imposing tariffs on Chinese imports in 2018. By the end of that year, the U.S. and China were butting heads over so many issues that cold war began to look like a relatively good outcome, if the most likely alternative was hot war.
Ideological division? Check, as Xi Jinping explicitly prohibited Western ideas in Chinese education and reasserted the relevance of Marxism-Leninism. Economic competition? Check, as China’s high growth rate continued to narrow the gap between Chinese and U.S. gross domestic product. A technological race? Check, as China systematically purloined intellectual property to challenge the U.S. in strategic areas such as artificial intelligence. Geopolitical rivalry? Check, as China brazenly built airbases and other military infrastructure in the South China Sea. Rewriting history? Check, as the new Chinese Academy of History ensures that the party’s official narrative appears everywhere from textbooks to museums to social media. Espionage? Check. Propaganda? Check. Arms race? Check.
The foreigners in China’s disinformation drive (Kerry Allen & Sophie Williams, BBC News)
Read if you’re interested in how China’s disinformation campaigns are spread by foreign expats on social media platforms. In online posts and interviews with some of these guys, you get a sense that they just boarded a plane and landed in China without prior knowledge of anything China-related. Rumor has it they don’t even speak the language. Nonetheless, they’re amplified as influencers by Chinese state media. Textbook illustration of “useful idiots,” it would seem.
Allen & Williams:
Foreign video bloggers denouncing what they say is negative coverage of China on highly controversial subjects such as Xinjiang are attracting large numbers of subscribers on platforms like YouTube.
In recent years, the "vloggers" have been increasingly presenting themselves as China-lovers, spreading Communist Party disinformation.
YouTube labels Chinese state media like broadcaster CGTN as government-funded. But there is little policing when it comes to individuals promoting similar narratives.
Some vloggers are suspected of co-operating with state-owned outlets to spread China's rhetoric to the world. But it's far from clear what really motivates them, or how effective this strategy is.
When Will China Rule the World? Maybe Never (Eric Zhu and Tom Orlick, Bloomberg)
Read if you’re interested in the challenges that may prevent China from becoming the world’s biggest economy. Bear in mind that China WAS the world’s largest economy at several periods in history, but war, politics and poor administration undermined its global influence.
Zhu & Orlick:
If Xi delivers on growth-boosting reforms, and his U.S. counterpart President Joe Biden is unable to push through his proposals for renewing infrastructure and expanding the workforce, forecasts from Bloomberg Economics suggest China could grab the top spot—held by the U.S. for well over a century—as soon as 2031.
But that outcome is far from guaranteed. China’s reform agenda is already languishing, tariffs and other trade curbs are disrupting access to global markets and advanced technologies, and Covid stimulus has lifted debt to record levels.
The nightmare scenario for Xi is that China could follow the same trajectory as Japan, also touted as a potential challenger to the U.S. before it crashed three decades ago. A combination of reform failure, international isolation and financial crisis could halt China before it reaches the top.
Another possibility—enticing to the skeptics—if China’s official GDP data is exaggerated, the gap between the world’s biggest and second biggest economies may be larger than it appears, and closing at a slower pace.
Middle Kingdom Surreal
BBC news crew approached by Chinese maritime militia guarding illegal blockade in South China Sea
A BBC video uploaded to YouTube shows a news crew being approached by a Chinese Coastguard ship after they entered Scarborough Shoal in a small Filipino fishing boat. The area has been under illegal Chinese blockade since 2012.
According to the BBC, “Scarbourgh Shoal is 140 miles from the Philippine coast and more than 450 miles from China’s nearest undisputed land.” Beijing has placed a “unilateral ban” on fishing in the area despite the fact that it sits inside the exclusive economic zone part of the Philippines.
BBC:
Five years ago, the Philippines won a landmark legal victory over China over disputed territories in the South China Sea - including traditional Filipino fishing grounds like Scarborough Shoal.
Despite the tribunal ruling, there has been a constant Chinese Coastguard presence there - with Filipino fishermen reporting harassment by the authorities.
Although the Philippine military encourages Filipino fishermen to continue fishing in the area, locals told ABC News (Australia) “they stopped fishing at Scarborough Shoal altogether, for fear [they] would be apprehended or even shot by Chinese militia.”
Scarborough Shoal is also quickly escalating into a potential hotspot for conflict where “countries like the United Kingdom, United States, Australia, and India” are sending naval ships to defend right of passage in coordinated Freedom of Navigation Operations (FNOPS).
When BBC contacted the Chinese government for comment, this is what it got:
The Huangyan Island [China’s name for Scarborough Shoal] is China's territory and its adjacent waters are under China's jurisdiction.
The Tribunal's Award in the "South China Sea Arbitration" is illegal, null, and void. China neither accepts nor recognises the award . . . and we firmly oppose any claims or actions based on it.
That kind of response comes pretty close to one you might expect from a rogue state.
Greatest Hits
The Reuters report: India set to overtake China as most populous nation received nearly 19k views in less than 24 hours.
This report from The Guardian: Australians fear attack from China almost as much as Taiwanese do, survey finds received 5,387 views.
ABC News (AU): “Beijing admits Chinese tariffs on Australian goods are political retaliation received 4,424 views.
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"Fallacy of control": Why Wall Street's China strategy is probably doomed - China Boss 6.07.21.
Hate to say it, but I told you so. More China prophesies from Europe on the way. ;)
Have a great week.