Friday open thread: Hong Kong; Beidaihe; Arm China

For today’s open thread I have three questions to seed a discussion but please weigh in with anything you want. I will be in and out throughout the day. Thanks

1. Carrie Lam announced that the Hong Kong Legco elections will be delayed a year from their originally scheduled date of September 6. Lam blamed the pandemic for the delay. This move has been rumored for days and was presaged by the scheduling earlier this week of the next NPC Standing Committee meeting for August 8. The South China Morning Post has more details:

Lam said she was invoking the colonial-era Emergency Regulations Ordinance to push the elections back from September 6 this year to September 5 next year, and her decision was fully supported by the central government.

Under the city’s mini-constitution, the Basic Law, each Legco term could only last for four years, the chief executive noted, and that would raise legal questions.

To resolve them, she had submitted an emergency report to the State Council in Beijing, which informed her that the central government would ask China’s top legislative body, the National People’s Congress Standing Committee (NPCSC), to make a decision on the outstanding legal and constitutional issues.

This comes after the arrest of several kids for online posts and the disqualification of 12 opposition candidates earlier this week. Given how rigged the election already is, why would they need to delay it for a year? Or is the reason given-the pandemic-legitimate? How will the UK/US/EU et al governments react to this move? Should we expect the US to announce financial sanctions soon?

2. Assuming precedent holds Xi will disappear from public view in the next few days to head to Beidaihe, to reappear sometime in the third week of August. There is continuing debate about what really happens at Beidaihe, including whether they are more on vacation or having serious political meetings, how many leaders go and how long they stay, and what role retired senior officials still play. We know for example that if Li Zhanshu does go he will have to be back in Beijing for August 8-11 NPCSC meeting.

My understanding of Beidaihe in the Xi Era at least is that the influence of the elders has been dramatically undercut and that while there is some work at Beidaihe it tends to be meetings/seminars about high-level, strategic themes, like for example the US-China relationship. “Understanding” is perhaps too strong a term, as it is all whispers and rumors.

The announcement earlier this week of an October date for the 5th Plenum may indicate Xi will be having a relatively relaxed time at Beidaihe, with an emphasis on “relatively”. There has certainly been less apparent political fervent than there was this time in 2018, in spite of China’s difficult year so far (See Sinocism August 19, 2018).

There have been chatter (hopes?) from some quarters that there might be some sort of an “intervention” to push Xi to back off some of the policies that are causing friction with the US and other countries. I am not sure who would do the intervening and how they would do it and so tend to see that as wishful thinking. But there is no question that some senior officials, retired and current, may be very uncomfortable with the trajectory of US-China relations given some of their family members’ financial and in some cases personal interests with the US.

We all talk a lot about US-China decoupling, we should not forget that for some senior members of the CCP elite there may also need to be personal decoupling. That is an area where targeted US actions, rather than blanket measures against all CCP members, might both cause distress and also gain support from a lot of PRC citizens. In spite of the nationalism I would not expect many to feel bad for corrupt officials penalized for assets they shouldn’t have.

In the absence of anything more than speculation about Beidaihe, including mine above, what do we think happens at Beidaihe, and what, if any, outcomes may there be this year?

3. The other topic I am dying to learn more about is the saga at Arm China. The board discovered CEO Allen Wu engaged in all sorts of shady practices and fired him in June (FT). But he was able to take the official corporate chop and registration documents before the board got them under control, so he remains the legal representative and is able to say he is still the CEO. Wu is fighting attempts to have regulators in Shenzhen invalidate the seals and let the board make new ones.

Nikkei had the latest on this mess Wednesday - Arm China Asks Beijing to Intervene in Row With U.K. Parent - Nikkei Asian Review

In a statement released on Tuesday and signed by over 200 of its employees, Arm China said it “is a Chinese-controlled joint venture that should abide by the Chinese laws and fulfill the social responsibility in China. We plead with the government to pay attention to the turbulence Arm China is facing now, and intervene to protect this strategic asset.” The statement was posted on the company’s official WeChat account...

The statement further accuses Arm and Hopu Investment Management, one of Arm China’s investors, of “harassing” its employees and coercing clients in an attempt to replace Arm China’s chairman...

“Arm China is devoted to empowering the foundation of China’s semiconductor industry. This joint venture plays a strategic role in China’s chip industry in the past two years amid the dynamics of the international chip competition landscape,” it added…

Regarding the spat over the unit’s chairman, Arm China claimed that, “Hopu and some of Arm’s board of directors even started to send people frequently contacting the joint venture’s clients. They even threatened to revise or cancel the existing contracts with the joint venture. Moreover, some of the board of directors harassed and threatened employees at the joint venture.”

Hopu is a well-known Chinese venture capital firm. Arm’s other Chinese investors include state-backed entities such as the Silk Road Fund, sovereign wealth fund China Investment Corp. and Shenzhen government-owned conglomerate Shum Yip Group.

It is a bad look for the central government to allow this dispute to fester. Yes it is a foreign company, yes the fired-but-won’t-leave-or-return-the-chop CEO is an American citizen, but it is such a seemingly lawless situation that if senior policymakers really want to give foreign investors and investors confidence they should get it resolved.

I am scratching my head over the lack of resolution given that one of the big Arm China investors is the sovereign wealth fund CIC and another is Fang Fenglei’s Hopu Investment Management Company. Fang is a very savvy and connected person; Goldman Sachs would not have picked him as their partner for many years to hold their China JV license if he were not able to navigate the CCP political system at very high levels. So the fact that he so far appears unable to get the Shenzhen authorities to act against American citizen CEO Allen Wu is very interesting.

Whatever is going on, it is another grim reminder of the perils of doing business in China, even for very experienced investors and corporations.

Thanks, and of course feel free to weigh in with anything else you would like to discuss.

Reminder: The newsletter will be on holiday next week, returning to normal publication sometime during the week of August 10.