The battle for control over China business narratives has begun -- China Boss Update 12.03.21
Update
Financial Times' Leo Lewis in October wrote that "we have entered high season for divergent or conflicting China narrative-building.”
Lewis, FT:
The Asia-based managing partner of one of the world’s largest law firms last week set out what he reckoned was the prevailing story of foreign business in China in the final quarter of 2021. Corporate clients are spooked by a range of factors, he said, adding that global supply chains established over the past two decades are in unprecedented flux and the operative word in boardrooms is “decoupling”.
Nonsense, I was told a day later by an ebullient Asia supremo of one of the world’s biggest investment banks. Whatever souring geopolitics or white-knuckle regulatory uncertainties may afflict the tech and property sectors, Beijing remains fundamentally supportive of private business. The opportunities of a demand-driven market this buoyant remain far too huge to shun. Corporate clients, he said, are either increasing their investment in China, or, for those that blenched during the 2018 opening salvos of the US-China trade war, girding themselves to “re-couple” before the chance is lost.
So which to believe? Or, if both are correct now, which will still be right in a year’s time?
Lewis’ point proved especially salient this week as the SEC took another step to delist Chinese companies for their failure to comply with U.S. auditing requirements, while billionaire investor and business guru Ray Dalio “defend[ed] China's move to disappear citizens from the public eye by likening it to being 'a strict parent.” According to a recent Bloomberg report, Mr. Dalio’s firm Bridgewater Associates raised $1.3 billion last month for a new private fund in China. So, the stakes for getting his China narrative across are quite high.
Whither China? It’s a question that has been asked for decades. The answer will, indeed, vary depending on whom you ask. As a former bankruptcy attorney who cut her baby lawyer teeth on debt obligations and failing businesses during the 2008 Financial Crisis and a long-obsessed student of China everything, I know what I think about the PRC’s strengths and weaknesses - past, present and future. But in the event you haven’t made up your mind, here are some excellent updates from the news this week that might help you decide.
What happened this week.
Decoupling.
SEC Moves a Step Closer to Delisting Chinese Companies in the U.S. (Benjamin Bain and Robert Schmidt, Bloomberg)
China app giant Didi plans US stock market exit in move to Hong Kong (BBC)
China to Close Loophole Used by Tech Firms for Foreign IPOs (Bloomberg News)
Read Bain and Schmidt’s update on the SEC's new rules for identifying companies - and, yes, they mean Chinese companies - who are "subject to delisting" as well as the "procedure for kicking non-compliant firms off exchanges." The BBC’s report on Didi's self-delisting from the NYSE and Bloomberg’s news of leaked “plans to ban companies from going public on foreign stock markets through variable interest entities,” indicate the strength of Beijing's commitment to also decouple certain firms from U.S. influence and scrutiny.
Trilateral pushback.
Japan’s former PM warns China invading Taiwan would be an ‘emergency’ for Tokyo (Kathrin Hille, Robin Harding, Eri Sugiura and Demetri Sevastopulo, Financial Times)
China and Russia in spotlight as Greens take charge of German foreign policy (Guy Chazan, Financial Times)
Pentagon Plans to Improve Airfields in Guam and Australia to Confront China (Gordon Lubold, Wall Street Journal)
Read to see how Japan’s Shinzo Abe may have made the legal case for his country’s military involvement in the Taiwan Straits, how the language in Germany’s new coalition agreement signals dramatic change for its China policy, and how U.S. defense strategy will be “adjusted” to counter China.
Why it matters.
China’s rising vulnerability to foreign investors (Russell Napier, Financial Times)
Read to understand how external and internal problems are merging to increase downward pressure on China’s currency, elevating the risk of “forced intervention from the People’s Bank of China” and “a tighter monetary policy, just as China is struggling with falling residential property prices and growing distress in the private credit system.”
Napier, FT:
Foreign investment in China has historically focused on direct investment, and investment in portfolio assets was largely confined to foreign currency denominated debt.
Things have changed dramatically in the past 10 years. In 2011, foreigners’ holdings of China’s liquid portfolio assets were just 14 per cent the size of China’s reserve assets.
In June, they were almost two-thirds the size at $2.1tn. This surge, when combined with the country’s managed exchange rate policy, confers a new power upon foreigners, as evidenced when one considers the size of foreign holdings of China’s portfolio assets in relation to the size of the country’s foreign reserves. What happens if these assets are liquidated?
…The consensus among professional investors is that foreign ownership of Chinese portfolio assets can only continue to rise. The reasoning goes that Chinese bonds can provide the uncorrelated returns that boost their value to any diversified portfolio and they will be in large demand.
This faith in future inflows to portfolio assets is bolstered by the belief that those who construct benchmark indices of global portfolio assets, those conductors of blind capital, will only raise the weightings of China’s portfolio assets within those indices.
However, there is a growing list of reasons why foreign portfolio inflows to China can stop or even reverse. The increased risk of a cold war means it is not clear that foreigners will be permitted to fund, even partially, the Chinese government’s military build-up through their purchase of Chinese government bonds. Growing focus on environmental, social and governance concerns will probably impinge upon foreign investors’ ability to add to their Chinese positions.
These key external factors are exacerbated by China’s growing internal problems.
What to watch.
Could China’s Massive Public Debt Torpedo the Global Economy? - War on the Rocks (Antonio Graceffo, War on the Rocks)
Read to learn “how China’s debt is considerably larger than it appears at first glance,” and how the country’s economic problems, while severe, may not result in financial collapse, but are likely to change its role as a “driver of global growth” and impact its rise in the international order.
Go deeper.
Xi’s Expanding Power Is a Growing Risk for China’s Economy (Bloomberg)
Read to understand how Xi's 6th plenum victory last month, which cleared the way for his indefinite rule and unchecked political power, is at odds with the country's economic progress. Here, Bloomberg highlights several Xi risk factors where "[o]fficials either take orders too far, as in the case of coal mine and power plant supervisors who worsened a national energy crisis, or they’re so paralyzed by fear they fail to take autonomous decisions — even during major crises such as unprecedented flooding or an emerging pandemic."
****
Thought you might also be interested in a glimpse at submarine expert H.I. Sutton’s Nov. 29th tweet in which he says he’s identified a Chinese Type-94 nuclear-powered ballistic missile sub in a satellite photo of the Taiwan Strait taken by the open source European satellite imagery service, Sentinel-2.
According to CNN, the sighting in the Taiwan Strait is “unexpected” and illustrates “the dangers posed by the frequent presence of military vessels in the narrow waterway, which analysts warn could ultimately spark an unintended conflict.”
CNN:
The sub was spotted allegedly cruising above the surface of the waters separating Taiwan from mainland China, where many analysts say conflict is more likely to start from an accidental collision than a planned event -- and the more warships in a confined space, the more chances there are for accidents to happen.
The reason for its alleged presence in the strait is unknown, but Sutton said it was likely the Chinese sub -- also known as an SSBN or boomer -- was on a routine mission, possibly heading back to a People's Liberation Army (PLA) Navy port on the Bohai Sea for repairs or maintenance.
But other experts who viewed the satellite image said the alleged presence of a boomer on the surface was perplexing.
"An SSBN on the surface is all but unheard of," said Carl Schuster, an ex-US Navy captain and former director of operations at the US Pacific Command's Joint Intelligence Center. "This may suggest a hull or engineering problem that requires a major shipyard to investigate and fix."
For the rest of CNN’s report, Analysis: Chinese submarine's alleged surprise show highlights risk of the unexpected at sea, click here.
Have a great weekend.