The rise of China's "incapables": Investors & companies stunned as Pres. Xi's underlings turn on Chinese capitalism -- China Boss update 8.27.21
Update
The rise of China’s “incapables”
By now it should be apparent that China is no longer under the leadership of progressives who would thrust their weight behind the country’s market reforms. Members of the ruling elite, although strictly-disciplined to maintain secrecy, cannot always veil instability. For reasons that remain unclear - although, I have a theory or two - President Xi was able to quietly, but, rather, radically usurp China’s reformers and technocrats when he ascended to leadership back in 2012.
But if the political and economic fallout from President Xi’s accession to the presidency wasn’t evident to outsiders then, it most certainly is now. Unfortunately, it is increasingly clear that the “Chairman of everything” has handed economic policy-making over to his more zealous appointees - a cohort whom I consider to be China’s incapables and which include old-style and neo-Maoists, communists, and other ideologues, as well as third-rate analysts and yes-men who have coveted the power of former President Jiang Zemin’s elites for decades.
Below are 5 of the week’s best reads on how President Xi’s “incapables” are spooking e-commerce, fintech, and edtech firms and investors.
Americans Turn Against China Stocks as Crackdown Angst Deepens (Sofia Horta e Costa, Bloomberg)
Read for a glimpse at the increasing number of U.S. investors who are reducing their exposure to Chinese internet tech companies. The speed at which this is happening is truly incredible.
Costa, Bloomberg:
For American investors, Chinese stocks are becoming the asset not to own.
Influential investors like George Soros have trimmed their China exposure, and Cathie Wood’s ARKK ETF no longer holds any such shares. Many others got hit with losses, according to their 13F filings. Betting against the country’s stocks was one of the most crowded trades among managers surveyed by Bank of America Corp. In London, Marshall Wace -- one of the world’s largest hedge funds -- says Chinese ADRs are now uninvestable.
This is a huge turnaround from earlier in 2021, when global investors pumped more money into the country’s domestic equities than any time in history and the MSCI China Index rallied to a 27-year high. Now global fund managers are grappling with trillion-dollar losses as China’s government targets industries that threaten its goal for “common prosperity.” Selling continued this week even as the MSCI China Index trades at the lowest level since 2005 versus the S&P 500.
Hard lesson for U.S. investors: Chinese companies don't make the rules in China (Evelyn Cheng)
Read to learn about the “hard lesson” American investors are learning when it comes to investing in China. Hundreds of billions of dollars have evaporated overnight.
Cheng, CNBC:
American investors’ shock at an ongoing regulatory crackdown in China points to a fundamental difference between the two countries that many didn’t seem to grasp: When it comes to making the rules, corporations don’t have as much influence in China as they do in America.
U.S. investors in Chinese companies have been caught off guard this summer by a slew of actions Beijing has taken against homegrown tech companies, including several whose shares trade in the United States. Among the surprises was an order that app stores remove Chinese ride-hailing app Didi, just days after its massive U.S. IPO. in late June.
Authorities then suspended new user registrations for Chinese job search app Boss Zhipin and subsidiaries of Full Truck Alliance, which both listed in the U.S. in June. In late July, two U.S.-listed after-school tutoring companies plunged after a mandate telling the industry to restructure its businesses and remove foreign investment through a commonly used overseas listing structure.
Behind the dramatic shift is emerging political rhetoric around “common prosperity,” which analysts say means companies will be scrutinized for their contributions to the broader population, rather than rapid creation of wealth for a few.
What Happens When China’s Bling Binge Comes to an End? (Andrea Felsted & Anjani Trivedi)
Read for some superb analysis on how the “[t]he delta variant and government interest in “common prosperity” are threatening another industry with heavy foreign investment in China - the luxury brands.
Felsted & Trivedi, Bloomberg:
China’s recovery from the pandemic seems to be stalling with the spread of the delta variant in pockets of the country. Domestic travel, which was opening up, has now been restricted. As of early August, provinces were advising residents not to travel unless it was necessary. Trains have been suspended and some airports have been temporarily closed as officials take measures to contain the virus and test widely. On top of this, recent flooding in central China has also hit consumer demand quite hard.
The travel restrictions get in the way of luxury brands’ plans to expand their presence on the island of Hainan, a province that’s been remade to become a large free-trade port.
Government scrutiny on technology and internet firms has also soured sentiment within the business community and among the big spenders. It has led to growing uncertainty about future regulation and cast a shadow over e-commerce channels for luxury brands like Alibaba Group Holding Ltd.’s dominant Tmall Luxury Pavilion. All of this can have a negative wealth effect, sapping the motivation to splash out.
This week, at a meeting on financial and economic affairs, Xi Jinping turned his attention to “common prosperity.” While officials have often talked about wealth redistribution and income inequality, recent moves show it’s now becoming a priority. “Rather than being egalitarian or having only a few people prosperous,” the term refers to “affluence shared by everyone, both in material and cultural terms, and shall be advanced step by step,” state media noted, citing comments from the meeting.
The worry is that this is a prelude to repressing conspicuous consumption, much like China’s anti-corruption clampdown almost a decade ago.
Attempts to redistribute wealth could be overt (for example, through raising taxes on the affluent) or subtle (through rhetoric designed to discourage flashy displays). Either way, they are not going to be conducive for buying and toting around Chanel or Loewe.
The party’s over: China clamps down on its tech billionaires (Vincent Ni, The Guardian)
Read for another perspective on the politics behind President Xi’s turn on Chinese capitalists.
Since his ascent to power in 2012, Xi has discussed the issue of inequality on several occasions. Early this year, he told his provincial ministerial-level cadres that achieving common prosperity was “not just an economic issue, but a significant political one that matters to the party’s basis to rule”.
In the four decades since Xi’s predecessor Deng Xiaoping enabled economic liberalisation, booms in manufacturing and technology have allowed a select few in China to amass vast fortunes. But the tables are turning, with Beijing’s regulators mounting almost daily attacks on private power bases, in particular the technology titans, whose influence has begun to stretch far beyond Asia.
Since February, close to $1 trillion has been wiped off the value of Chinese companies. The Nasdaq Golden Dragon index, which tracks the largest of about 250 Chinese firms listed in New York, was down more than 50% from its February peak last week. Investors fear a standoff between regulators on both sides of the Pacific could eventually lead to the delisting of Chinese stocks from US markets.
From London to New York, investors are wondering what lies ahead. Is Xi simply redressing the balance between corporations and citizens, or is he set on bringing China’s private sector back under state control?
Last Monday, another week of actions began with a vow by top cadres to “regulate excessively high incomes and encourage high-income groups and enterprises to return more to society”. A high-level meeting concluded that while the party had allowed some people to “get rich first”, it was now time to prioritise “common prosperity for all”.
“Under Mao Zedong, everyone in China was poor. Under Deng Xiaoping, people remember the catchphrase ‘to get rich is glorious’; but Deng also said that, ultimately, China will have to achieve common prosperity,” said Yang Li, a China researcher at the Paris School of Economics’ World Inequality Lab, who has co-authored papers with Piketty. “Now that China has reached middle-income status, Xi thinks it’s time to deliver the latter part of Deng’s mantra: to ultimately achieve common prosperity.”
The strategy served another purpose, he said: shoring up popular support for the party’s continued rule.
China Inc braces for fallout from Didi data probe (Edward White, Sun Yu, Tabby Kinder and Kana Inagaki, Financial Times)
Read to get a sense of the chaos that’s currently descending upon Didi, China’s ride hailing app that has ten million more drivers than Uber. This latest, very aggressive campaign is chilling China’s internet and platform economy. It also risks undermining the true engines of job growth in the Middle Kingdom.
White, Yu, Kinder and Inagaki, Financial Times:
In New York, lawyers have filed a class-action lawsuit on behalf of Didi’s investors alleging they were misled by the company and its executives over its prior dealings with Chinese regulators.
Questions over whether Didi accurately disclosed the pressure it faced from the CAC have also led to scrutiny of the banks that underwrote its listing, which included GoldmanSachs and MorganStanley.
Didi and its banks had assurances from their legal counsel in China that “it was fully compliant”, an executive at one of the WallStreetbanks running the process said shortly after the ride-hailing group’s shares tumbled last month.
For SoftBank, Didi’s biggest shareholder with a 20.1 per cent stake, the investigation could prove pivotal to determining the future of the Japanese group’s investments in China’s tech sector.
SoftBank founder Masayoshi Son has said he would cut investments in Chinese start-ups until the extent of Beijing’s regulatory crackdown became clear.
...Uncertainty over which regulators have ultimate oversight over the tech industry has been exacerbated by the presence of at least seven state organs in the Didi probe.
As well as the CAC, officials from China’s espionage agency, its natural resources and transport ministries, as well as tax and police officials and the competition watchdog have descended on the company’s headquarters.
“The big question mark for us was the tax bureau — that seemed incredibly unrelated,” said Schaefer. “Was that because they decided to bundle a tax review into this, or will the tax department be involved in cyber security reviews going forward?”
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Here are a few photos from our vacay on the French Riviera. I’ve really enjoyed the rosé here, and my husband loves the heftier “man salads.” :) We’re leaving Antibes soon for another week of sun and food in Provence. After that it’s back to Belgium, where China Boss will resume regular postings in early September.
Cheers!