What Xi's "kneecapping" of Ma's empire means for e-commerce & fintech in China, Biden “canvassing” allies for 2022 Olympic boycott, Japan & US issue joint statement on Taiwan-- China Boss News 4.19.21
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The Big Story in China Business
What Xi’s "kneecapping" of Ma's empire means for e-commerce & fintech in China
When you look at what has happened to Jack Ma over the past 6 months, it’s pretty clear that regulation is being used as a full on political attack against the powerful e-commerce and fintech tycoon in China:
After Ma’s blunt speech in Shanghai, in October 2020, where he compared China’s state banks to “pawn shops,” Financial regulators abruptly cancelled Ant’s $34 billion IPO leaving thousands of investors in the lurch
Anti-monopoly regulators (SAMR) fined Alibaba $75k in December and summoned him and his e-commerce rivals for a meeting where it told them they were under investigation for other abuses
China’s central bank publicly admonished Ant Group on December 27, 2020, and China’s banking and insurance regulator outlined a litany of risks in China’s fintech sector, December 31st
By Febury 2021, Ant had “agreed” to restructure into a financial holding company subject to similar capital requirements as traditional banks
Beijing asked Ma to sell his media assets, including the South China Morning Post, “because of growing concerns about the technology giant’s influence” according to Bloomberg
SAMR fined Alibaba $2.8 billion for anti-trust violations, and a “comprehensive, viable rectification plan” that overhauls Ant’s fintech services by subjecting them to traditional banking rules was finalized earlier this month
Authorities forced Hupan, Jack Ma’s prestigious business school, to stop accepting new students on April 08, 2021, signalling that he’s still the focus of attention.
Although there’s a tendency for business analysts and journalists to try to make sense of Ma’s situation with regulatory scrutiny - some even go so far as to suggest that China’s regulatory model is on the progressive edge and might support its bid to lead the world as a “technological superpower” - a basic legal assessment reveals that Beijing’s latest moves have more to do with jockeying for political power by President Xi and vested interests than with regulatory finesse.
Why? China lacks rule of law and an independent judiciary, and regulation, which is the implementation of law, is merely the tool of the party-state to wield political power with the appearance of legitimacy. This is not a cynical view of China. It is fact. The basic standard for a political system characterized by rule of law is a willingness on the part of the government to subject itself to limitations on its power over individuals, private companies, and organizations in civil society. In China, there are few legal cases where the government’s power has been curbed in such a way.
Take criminal cases, for instance. The state’s prosecutors have a 99% conviction rate. Let that sink in. It suggests that whenever a defendant is called to answer for some offense in a Chinese court, there is, essentially, a certainty that he or she will lose. It also means there is no recourse to be had against the ultimate deprivations of liberty - imprisonment or death - and no justice or way to fight back if the state is mistaken. Rather, the Chinese state has decided to punish, right or wrong.
In a similar vein, if China has singled out an individual, company, or industry for regulatory control, it is not because there is legal justification. Much of the “regulation” that China is using to take Ma down hadn’t even been enacted when authorities began throwing the book at him. Though ideas for some of the State Administration for Market Regulation's (SAMR’s) platform economy rules have been around for a year or so, the draft law was significantly tweaked and rushed into circulation for feedback right after Ma’s October speech, as was the Peoples Bank of China’s fintech regulation. So much for due process: China issued the rules months and, even, years after Ma’s “offenses,” and then applied them retroactively.
So, we can analyze China’s regulations in an attempt to understand what’s happening, and I have done that. But it will mean very little to the forecasting of business trends for investment purposes without assessing the out-sized role that politics plays, here, as well as in every major PRC government decision. For the umpteenth time, China is governed by a party-state. Accept it. Learn what politics with Chinese characteristics mean and factor them into every evaluation. Managers unwilling to do that shouldn’t be dealing with China-related business, as they are willfully disregarding the political risks to their and their investors’ interests.
Big Tech: E-commerce clampdown in China
There are enormous benefits for President Xi to clampdown on Big Tech in e-commerce, like Alibaba and Tencent, as well as fintech. Here’s a list of some of the political reasons for the party-state to regulate Big Tech e-commerce firms under the State Administration for Market Regulation (SAMR) :
The party-state wants access to Big Tech’s vast troves of consumer data and algorithms to improve the capabilities of its social credit system. The state had already tried to force Ma and his rivals to “share” some of these assets back in 2017 — which Ma did reluctantly. But, now, it appears to want more if not all.
The state is trying get its digital currency up and running by the Winter 2022 Olympics, and wants to develop the e-yuan as an international currency. But before it can do that, it must squeeze out Alipay and WeChatpay - its biggest competitors in the online and brick-and-mortar retail space. For more, see my February update.
It’s becoming more and more apparent that President Xi, personally, feels threatened by Ma’s fame and power. Ma’s not from Shanghai, but his business and political network is. President Xi is a very insecure leader. In 2012, he ascended to power over others with a much larger and more influential political base due to a sequence of events that led to a severe crisis of faith in the Chinese Communist Party. The evidence tends to show that Xi remains fearful of his rivals: He has ramped-up “corruption” purges and significantly boosted surveillance around the country and abroad to stay a step ahead of his enemies. Increasingly paranoid, Xi “sees threats everywhere,” according to Bloomberg analysts.
Fintech clampdown in China
China is forcing Jack Ma’s Ant Group to restructure its business in a way that makes it more like a bank and less like a fintech company, with tougher bank-type regulatory oversight and capital requirements. What this means for Ant and its fintech rivals is a “value kneecapping” which translates into decreased interest among investors as several analysts told Reuters. Kevin Carter, founder of the Emerging Markets Internet & Ecommerce ETF, said:
There is no doubt a significant kind of kneecapping of the value of all of those businesses has occurred.
And William Huston, founder and director of institutional services at independent investment advisory firm Bay Street Capital Holdings said:
It is a significantly different opportunity now. There is no hurry to jump into investing in a bank.
In a nutshell, it appears that the fintech industry - at least where firms are slated to compete with traditional financial services on a regional or national scale in China- is disfavored. The political reasons why, so far as I can tell, are 1) vested interests of state banks and 2) Xi’s empowerment of conservative regulators who reject fintech as an industry:
The People’s Bank of China, which is China’s central bank, as well as local state owned-banks are some of China’s greatest vested interests. The leaders of these institutions have long resented the ways in which China’s new fintech firms, like Ant, have cut into and undermined their businesses. Ant’s cancelled IPO was a big win for them.
Economics, finance and business are outside President Xi’s comfort zone and, so, rather than micromanage as he might in other policy spheres, he empowers those he trusts to manage and administer. In the case of financial regulation, he has chosen the most conservative lot to deal with fintech. China’s financial policy has always been cautious, but there were also progressives who tried to pry it loose from rigid hands. Those reformers are out, and the old-schoolers who are wary of the fintech model are in. For more on this, see: “Jack Ma vs Xi Jinping: the future of private business in China” (Financial Times).
In sum, if you accept - as I do - that China’s anti-monopoly and financial regulation is being developed to serve the select political needs of President Xi and vested interests, then it is less likely that a Chinese anti-trust or fintech regulatory model will emerge for the world to follow. You might next try to figure out how these political interests will continue to shape Chinese e-commerce and fintech in the future. My guess is that - for as long as President Xi remains in control - anyone with powerful connections to the Shanghai group that could possibly be a rival will be regulated or penalized until the threat is diminished, and vested interests will continue to look for ways to exploit President Xi’s insecurities to strengthen their commercial positions.
Law and International Xi
Biden reportedly “canvassing” potential boycott of 2022 Beijing Olympics
US State Department spokesman Ned Price may have spilled the beans last week on the Biden Administration’s decision to “canvass” allies about a possible boycott of the 2022 Beijing Winter Olympics. Last week, when asked if the U.S. is considering a joint boycott with US allies, Price said:
It is something that we certainly wish to discuss. A co-ordinated approach will not only be in our interest but also in the interest of our allies and partners [...] These discussions are underway.
Later the same day, however, the State Department appeared to backtrack on Price’s statements with “clarification,” according to one Politico report. In separate remarks, another State Department official said:
Our position on the 2022 Olympics has not changed. We have not discussed and are not discussing any joint boycott with allies and partners. The State Department Spokesperson did not say we had, contrary to some reporting. As the Department said, we regularly discuss common concerns vis-à-vis the PRC with our allies and partners. We will continue to do so, cognizant that a shared approach will always be in our interest.
Still, some think the State Department is, indeed, taking the temperature of allies as to their position on a possible boycott.
For its part, China appears to blame foreign media for the PR crisis it now finds itself in with respect to allegations of human rights abuses and genocide in Xinjiang. Lately, it has escalated attacks on independent journalism, using wolf warrior diplomats to directly pressure media outlets, as well as individual journalists. Last week, the Chinese Embassy in Canberra, Australia, held a special meeting for the press where it presented “highly-choreographed videos and testimony from Xinjiang residents” to counter criticism, according to SBS News.
But Tony Walker, Vice-chancellor's fellow, La Trobe University, thinks that China’s “global campaign against unfavorable reporting” will fail. Walker said:
Typical of the sort of criticism levelled at Western media is the following contribution to the nationalistic Global Times by a professor of international relations at Shanghai’s Fudan University.
What some media have done is exaggerate Chinese authorities’ fault in a bid to overthrow the Chinese system. Take the BBC. This British media outlet did not call on the British public to overthrow the British government even if it has miserably failed to effectively curb the spread of COVID-19. This is double standards.
This level of naivete is hard to credit, but it is revealing nevertheless of the gap that exists between Chinese views of the Western media and vice versa.
China’s bluster against Western media may play to nationalist sentiment at home, but it is hardly likely to be effective in neutralising foreign media criticism.
With less than a year to go until the 2022 Winter Games - which begin in February - Beijing’s strategy seems to be to silence foreign criticism long enough to host a successful event to impress its own citizens. It likely fears organized protests that could take place on social media or in-person during Olympic events, and is responding with heavier push-back to intimidate critics in advance.
Geopolitics
Japan and US issue historic joint statement reaffirming commitment to peace and stability in Taiwan Strait
Japanese Prime Minister Yoshihide Suga traveled to Washington last week for an official visit with U.S. President Biden at the White House, where the two subsequently issued a joint statement reaffirming commitment to democracy and a rules-based international order, as well as peace and stability in Taiwan Strait:
Together we pledge to demonstrate that free and democratic nations, working together, are able to address the global threats from COVID-19 and climate change while resisting challenges to the free and open rules-based international order.
The statement contains a long list of ways the two countries are determined to work together to counter China’s growing assertiveness in Asia. But here’s what it said overtly about China and support for the status quo in the region:
We will continue to work with each other based on universal values and common principles.
We also recognize the importance of deterrence to maintain peace and stability in the region.
We oppose any unilateral attempts to change the status quo in the East China Sea.
We reiterated our objections to China’s unlawful maritime claims and activities in the South China Sea and reaffirmed our strong shared interest in a free and open South China Sea governed by international law, in which freedom of navigation and overflight are guaranteed, consistent with the UN Convention on the Law of the Sea.
We underscore the importance of peace and stability across the Taiwan Strait and encourage the peaceful resolution of cross-Strait issues.
We share serious concerns regarding the human rights situations in Hong Kong and the Xinjiang Uyghur Autonomous Region.
It also expressly committed to working together with Australia and India within the context of the Quad. This is the first time that the two nations have published a statement referencing Taiwan since 1969 when Japanese Prime Minister Sato Eisaku and US President Richard Nixon held talks regarding the One China policy.
Prior to the historic announcement, Japanese officials met with their counterparts from Germany to discuss China’s “increasingly aggressive approach” in the region, according to the South China Morning Post.
Toshimitsu Shigemura, a professor of international relations at Tokyo’s Waseda University, told SCMP:
Japan is looking to develop new allies and alliances as it was concerned when the US military commitment to the region waned under the previous president and could again in the future. Tokyo is very much looking to Europe for new security allies.
The UK was the first to send warships to Japanese waters a couple of years ago and the French have followed suit more recently, with a German warship now due to sail to Japan in the summer.
Even if security ties with European nations fall short of a formal alliance, they will prove valuable as an extra layer of cooperation after the Quadrilateral Security Dialogue, or “Quad”, which unites Japan, the US, Australia and India. The US is also in favour of this approach as it will reduce the burden on its military.
Japan has been busy diversifying its supply chain away from China over the past year as policymakers became concerned about over-dependence. In December 2020, a Kyodo News survey indicated that 42 per cent of Japanese technology firms “said they have diversified or are considering diversifying their supply chains by moving to India and Southeast Asian countries,” according to SCMP.
The Week’s Best China Reads
Did China's former Premier just subtly criticize President Xi Jinping? (James Griffiths and Nectar Gan, CNN)
James Griffith is one of CNN’s seasoned Asia reporters. Great article.
China’s social credit program creeps into Canada (The Sunday Guardian Live)
A manager with a famous Chinese hot pot franchise has told TSG Live that his Vancouver restaurant has “over 60 surveillance cameras…with two cameras assigned to each table.” The restaurant’s location is just a stone’s throw away from Huawei executive Meng Wanzhou’s mansion, and in a prime location where high profile persons gather and live.
The manager also said that data from the cameras is being forwarded to China, but “the reason for this was ‘secret.’” Love it. The biggest nonsecret about PRC secrets is how everybody talks so candidly about them to the press.
Middle Kingdom Surreal
China Has Trademarked the Entire South China Sea
Radio Free Asia (RFA) reports that one of its affiliates has discovered that China “has taken the unusual step of registering trademarks over hundreds of land features scattered throughout those disputed waters,” and that other countries who dispute China’s claims in the region aren’t happy about it.
The claims were filed seven years ago by Sansha City, which itself is another surreal effort by the Chinese government to lay claim to the South China Sea. The “city” was built for the sole purpose of administering China’s efforts to exercise control over the South China Sea. According to Bloomberg:
Sansha City was founded by China in 2012 and is the world’s largest city by area, covering 800,000 square miles of the South China Sea within the “nine-dash line” that China claims for itself.
…Most of Sansha City is salt water, although it includes the Paracel Islands, which Vietnam and Taiwan claim, and the Spratly Islands, various of which are claimed by Vietnam, Taiwan, the Philippines, Malaysia, and Brunei.
“Once a remote outpost, Woody Island [the administrative seat] has become a bustling hub of activity,” says the 57-page, heavily footnoted report, which was written by China expert Zachary Haver for the War College’s China Maritime Studies Institute. “The island now boasts expanded port infrastructure, seawater desalination and sewage treatment facilities, new public housing, a functioning judicial system, 5G network coverage, a school, and regular charter flights to and from the mainland.”
Emphasis added. RFA says Sansha has “filed thousands of domestic trademark applications covering 281 specific rocks, reefs, shoals, and other contested features as well as entire regions of the South China Sea,” and that “[e]ach of these trademarks is composed of the feature’s name in stylized Chinese calligraphy and is categorized under one of 45 international trademark classes, which cover everything from musical instruments to legal services.”
Experts say the idea is to use the trademarks as a form of “lawfare” to advance China’s position in its ongoing legal claim to the South China Sea.
Per RFA:
The 281 features trademarked by Sansha City largely match the list of 287 features that China named and claimed in 1983, which was expanded in April 2020.
For example, the city trademarked the Paracel Islands, an archipelago also claimed by Vietnam and Taiwan; the Crescent Group and Amphitrite Group, which form the two main halves of the Paracel Islands; the Qilian Islets, which is a sub-region within the Amphitrite Group; and Tree Island, which is part of the Qilian Islets.
It trademarked numerous rocks and reefs in the Spratly Islands too, including features controlled by other claimant states like Taiwan-occupied Itu Aba, Philippines-occupied Thitu Island, and Vietnam-occupied Sin Cowe Island.
As you can imagine, China’s attempt to use trademark registration to control how others refer to and use the features in official and commercial statements angers Taiwan, the Philippines, and Vietnam - all countries with their own claims to the trademarked areas. But that didn’t stop Sansha officials from telling Chinese state media that the designation is equivalent to “declaring sovereignty” over the them under China’s Trademark Law.
But Julian Ku, a professor at Hofstra University, told RFA that China’s claim was dubious under international law, and, even, “questioned whether such geographical locations can even be trademarked”:
Trademarks are legal protections for the use of names or logos for commercial purposes,” which means that “trademarks would not generally be understood to bolster a country’s sovereignty claims under international law.
[Moreover,] trademarks are generally recognized first under domestic law and you have to register for a trademark country-by-country … each country still has the right to reject the trademark registration for domestic legal reasons.
There are protections in U.S. and in international law for geographical indications when associated with (typically) food products such as ‘Champagne’ but trademarking the land feature without any particular product is new to me and I think somewhat uncertain under most countries’ trademark laws.
Nevertheless, Ku added that “the these trademarks could still be useful for the Chinese government” and permit it to “block unapproved commercial use of South China Sea branding by Chinese companies” and discourage “foreign companies from using South China Sea branding” with mere threats of litigation.
Greatest Hits (most popular posts)
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Enjoy your week.