Vanguard exits China's funds market; PLA accuses US warship of twice entering territorial waters & Germany's Christian Democrats reverse Merkel’s China policy -- China Boss News 3.27.23

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The Big Story in China Business

Vanguard "completely exits" China market after heavy losses in fintech industry

US fund management giant Vanguard Group is completely exiting China's 27 trillion yuan funds market by "shutting its main Shanghai office and exiting from a joint venture with Ant Group," Reuters reported last week. The decision "will end its six-year presence in the world's second largest economy," the news agency said.

Reuters:

The planned exit contrasts with expansions in China by U.S. rivals BlackRock (BLK.N) and Fidelity in recent years. In addition, the bank asset management arms of JPMorgan (JPM.N) and Morgan Stanley (MS.N) each received approval to take full ownership of their existing China operations earlier this year.

Bloomberg reported that the "complete retreat" comes two years after an earlier "surprise move” in which the firm “scrapped plans for a mutual-fund management license in China to focus on the BangNiTou tie-up with Ant."

BangNiTou, which means “Help You Invest” in Mandarin, is a robo-advisory firm that was seeing some success in the Chinese market. By March 2021, BangNiTou had a million users and had “become the most popular fund investment advisory service in China based on user number,” Bloomberg said at the time. “Assets under management for BangNiTou jumped 60% to 6.9 billion yuan” in 2020, leading Ant management to forecast “rapid growth” for the fintech industry, but that was before Beijing stepped up its harsh tech crackdown which began in late 2020.

Although CNN reported in January that China's central bank Communist Party boss said "[t]he crackdown on fintech operations of more than a dozen internet companies is 'basically over,'" many funds were left sore from heavy losses which, China Boss thinks, probably accelerated Vanguard’s decision to leave the Chinese market. Some investors who were also associated with Ant left China for India as early as 2021, Financial Times said, and even China bulls thought Beijing’s regulatory hit was “capricious and would compel many investors to reassess the risks and rewards endemic to investing in a large, fast-growing but authoritarian state,” especially after investors lost hundreds of billions that same year, according to the Wall Street Journal.

WSJ (2021):

“A private industry was just wiped out in a short time period,” said Ms. Thurston, portfolio manager of William Blair & Co.’s China A shares strategy, referencing China’s crackdown on tutoring companies. “We global investors probably need to rethink and reassess our framework and approach related to China investments in light of this development.”

For the rest of Reuters report, Vanguard to exit China funds JV with Ant, close Shanghai office - sources, click here. For Bloomberg’s report, Vanguard Said to Shutter Business in China, Exit Ant Venture, click here, and for its 2021 report on the BangNiTou venture with Ant, Vanguard-Backed Robo Adviser Hits 1 Million Users in China, click here. For FT’s 2021 report, Investors pivot to India after China’s tech crackdown, click here. For WSJ’s 2021 report, Investors Lost Hundreds of Billions on China in July, click here.

Law and International Xi

Congress “closer to TikTok ban or forced sale” after CEO’s testimony

TikTok CEO Shou Chew failed to reassure lawmakers on Thursday that TikTok was independent from Chinese firm Bytedance in his testimony before the U.S. House of Representatives last week. Chew had trouble formulating his responses to rapid-fire questions on everything from how his employees handled American citizens’ data to censorship and his personal views on China’s persecution of the Uyghurs, an ethnic minority in Xinjiang.

Slate’s Big Technology writer Alex Kantrowitz said that “[s]ound testimony from Chew” might have “cooled” tensions with officials, but when the “embattled app’s CEO appeared before a bloodthirsty Congress … [h]e did not appear to actually be in charge.”

Kantrowitz, Slate:

From the hearing’s first minutes, Chew made it clear that his power at the helm of TikTok is limited. He could not say definitively that TikTok wouldn’t promote messages supporting Chinese hostilities toward Taiwan. He could not commit that TikTok wouldn’t sell its data. He couldn’t even clearly answer questions about who helped him prepare for the hearing.

On Sunday, Rep. Mike Gallagher from Wisconsin told ABC News that Chew’s testimony "increased the likelihood that Congress will take some action.” Gallagher, who chairs the House select committee on U.S. competition with China, and Illinois Democrat Raja Krishnamoorthi are co-sponsoring a total ban.

ABC News:

Chinese officials have called such proposals overreach and unfair -- though China heavily restricts the use of the internet in its country -- and said they would resist a sale. Critics of the scrutiny say it hasn't applied to similar social media platforms.

But Gallagher and Krishnamoorthi, appearing together on "This Week," told Raddatz that the risks warranted such moves.

Separately, House Speaker Kevin McCarthy tweeted Sunday that the chamber would be "moving forward with legislation" on TikTok.

CNN Business analyst Laura He said that Beijing would likely “prefer a ban to a forced sale” because the Chinese government “views TikTok’s [algorithm] technology as sensitive and has taken steps since 2020 to ensure it can veto any sale by its Beijing-based owner, ByteDance.” China also announced on Thursday that it would “firmly” oppose a forced sale.

He, CNN:

A sale or divestiture of TikTok would involve the export of technology, so it would need obtain a license and approval from the Chinese government, according to a commerce ministry spokeswoman.

The Chinese government considers some advanced technology, including content recommendation algorithms, to be critical to its national interest. In December, Chinese officials proposed tightening the rules that govern the sale of that technology to foreign buyers.

For the rest of Kantrowitz’ report in Slate, So What Will Happen to TikTok Now?, click here. For ABC’s interview with Rep. Mike Gallagher, Congress closer to a TikTok ban or forced sale after CEO's concerning testimony, Gallagher says, click here. For He’s update in CNN Business, China may prefer TikTok to be banned than fall into US hands, click here.

Geopolitics

Chinese military says US warship “illegally entered” its waters near the Paracel Islands (top left) a day after the Philippines announced four US bases will be strategically placed to help defend Luzon, which is its northernmost island closest to Taiwan. Image taken from Google Maps.

China accuses US warship of twice entering territorial waters in SCS as Philippines’ Marcos announces American bases facing Taiwan