Hi everyone, feels even more this week that there are so many things to discuss.
Three quick notes:
Yesterday I linked to a good explainer of the new five-year plan and fifteen year vision by Geoff Yu of BNY Mellon. I put in a bad link, apologies, this one to the PDF should work.
Yongcheng Coal and Electricity Holding Group Co. Ltd., which just last month got the highest possible rating from a domestic credit rating company, failed to repay an ultra-short-term bond that matured Tuesday, according to a statement posted by the Shanghai Clearing House.
“The wind has changed direction,” a senior bond market participant said. Under the pressure of debt replacement, many local governments may have more incentive to let debt-ridden LGFVs or state-owned enterprises go bankrupt and restructure, the market participant said.
How worried should we be, and how might regulators fix this? Michael Pettis posted some thoughts on it to Twitter:
Xi is on an inspection tour of Jiangsu. As noted in yesterday’s newsletter he visited an exhibition of the life of Zhang Jian, “a Chinese industrialist and educator in the late 19th century and early 20th century”.
There is a direct thread to this visit from the July 21 meeting (See Sinocism July 21) he held with entrepreneurs, in which he expounded on the dual circulation strategy, to the September “Opinion on Strengthening the United Front Work of the Private Economy in the New Era 关于加强新时代民营经济统战工作的意见” and the National Private Economy United Front Work Conference 全国民营经济统战工作会议 and Xi’s instructions to it (See Sinocism September 16).
First, I hope we will enhance our patriotic feelings. Enterprise marketing knows no borders, and entrepreneurs have their motherland. Excellent entrepreneurs must have a high sense of mission and a strong sense of responsibility for the country and the nation, and closely combine the development of their enterprises with the prosperity of the country, the prosperity of the nation and the happiness of the people, and take the initiative to bear the responsibility and share the worries for the country. Patriotism is the glorious tradition of excellent entrepreneurs in China in recent times. From Zhang Jian in the late Qing Dynasty to Lu Zuofu and Chen Jiageng during the war, and then to Rong Yiren and Wang Guangying after the founding of the new China [Bill: Rong and Wang “donated” all their businesses to the government], and so on, are all examples of patriotic entrepreneurs. Since the reform and opening up, a large number of patriotic entrepreneurs have emerged in China. Entrepreneurs' patriotism can take many forms, but the first and foremost is to run a first-class enterprise and lead it to strive and strive for the best, so as to achieve better quality, higher efficiency, greater competitiveness and greater influence.
The propaganda packaging and subsequent study sessions for Xi’s Jiangsu inspection tour will likely double down on the importance of “patriotic entrepreneurs”. A question one might ask about Jack Ma given his offending speech to regulators is whether or not Xi considers Ma a “patriotic entrepreneur”, and if he does not what might Ma need to do to change that view?
A recent NYT article says that 40% of global warming emissions come from China and the US, and if Pres. Biden really means to address climate change, widely recognized as the world’s greatest problem by far, he has to cooperate with China. Such a positive approach is incompatible with the climate change denial of a Washington largely obsessed with its anti-China crusade, though the subject of China lost traction as the presidential campaigns wound down, perhaps because the electorate and the rest of mankind have more important things to worry about.
A discussion thread below prompted this. Am fully prepared to be shouted down. Also, Economics and trades are separate. There, nothing replaces dogged bargaining and sticks&carrots.
What s taken for granted and the basis of many complicated handwringing these days is "China's attack on our liberal order" .
I suddenly find myself asking, on what and where has China attacked OUR liberal way of life? plenty of attacks, reactions, defensive petulance etc. against introducing liberalism into Chinese matters and way of life. Yes. But for the life of me I cannot think of incidences of Chinese attacks on Non-Chinese policies/matters regarding hot topics like immigration, gender, sexuality, abortion, religion, freedom of speech, race, ethical taxation, wealth/income inequality, privacy in the techno age, media.....Has there been any? Am I missing a chunk of reality all these years?
The recent nonsensical and horrendous attacks in Europe by religious fanatics against civilians has made me realise a mistake Europe has made, and I think it s at risk of being repeated on China: We, in Europe (America has done a lot better on this), so pumped up and proud of our liberalism, have simultaneously insisted on 1) pitting some of our individual rights against the core philosophy of life and meaning of life for the majority of Muslims (illiberal they might be but certainly not murderous) AND 2) bending over backwards to protect and tolerate the fringe and radical and indeed the murderous elements among them.
These two actions, caricatured as fighting the imperfect but human core while tolerating the anti-human intolerable fringe, is philosophically and ideologically consistent. Pleasing to the purist.
But it has a toxic self-reinforcing dynamic that inexorably leads to tragic consequences in Europe and in MENA and beyond. To the majority of Muslims (who would never harm anyone based on a cartoon), what Europe has been doing is to spit 'its superior liberalism' in their face and then shelter their 'criminals and heretics' just to double the effect. Seems fanatical to me...
Now on China, is there a danger of the same? Of justifying fighting against their majority/core based on immovable logical consistency, in exchange for losing our core interests, not to say life and limb (metaphorically speaking, and maybe literally).
The issues here, right now, are less stark. China is yet to produce violent radicals and movements, thank God. It s merely a matter of differentiating between core issues and theoretical niceties, and differentiating between attacks on our way of life and attacks against our 'attacks' on their way of life.
If your view is that our way of life is simply right, and theirs, wrong and without right of existence and resistance, it is still worth clarifying the nature and scope of their "attacks" and our "rights"....In order to understand the cost, benefit and the probability of success, of the various often contradictory and poorly defined objectives.
History has shown time and time again that it s always wrong to insist on a purist consistency on sociopolitical matters. Without exception.
Also Bill, I have been meaning to hire one of Pettis's students to tutor me more thoroughly on his ideas. Obviously I'm a big proponent of them and would like to be able to answer questions in an even more in-depth and specific way to tailor my responses exactly to the concerns of the people asking questions as I feel a better understanding of his ideas would really, really drive our trade, economic and inequality policies in a better direction. I've e-mailed him but of course he's swamped, would you happen to have any way to get in touch with him? Thank you! Sorry for reaching out on this platform but it seemed like it might not be a bad place to start for China expertise/contacts! Thanks, David
On the Yongcheng default, as someone who reads a lot of Pettis's stuff I will expound a bit on his tweet to give it more context for readers here--bond/debt defaults for SOE's, like any company, aren't great but why are they such a big deal? Shouldn't insolvent companies be allowed to go bankrupt so their assets can be repurposed to actually productive uses? The issue of course is these are state-owned companies we are talking about which are highly valued by Xi. If the changing winds in the bond market suddenly cause people to take a hard look at SOE's, and it turns out many are insolvent, will Beijing let them all go under? Of course the easy answer is no, but if it refuses to do so, how will it achieve lending discipline? To the extent that SOE's will default without bailouts, there is a financial or economic contradiction between SOE's and deleveraging/lending discipline/rebalancing etc.
Delving deeper, the growth target he refers to is achieved by ordering SOE's to do a certain amount of activity (whatever is needed above and beyond private sector growth to hit the target). This means building lots of big things, usually infrastructure, to employ more people and stimulate the economy to reach the target. The money to build these things is generally lent to the SOE's by banks, or else through bond issuances. For a long time, that was great as China needed infrastructure. And if that activity were still productive, there would be no problem and the debt could be retired. But at least in the case of Yongcheng (and likely in the case of many other SOE's as we will see), whatever it was doing was manifestly not productive.
In the Pettis analysis, this is THE major issue facing China economically--it wants to achieve a certain level of growth, and uses SOE's to do it, but that SOE activity is fundamentally unproductive (in many cases, as we can see with Yongcheng, and with the fact that total debt in China has been rising 12-15% a year for many years, partially because consumers are much more indebted but also because of lending to SOE's for infrastructure not being paid back but simply extended indefinitely) because China is already saturated with infrastructure to meet its current and foreseeable needs. So Beijing either lets a ton of SOE's go under, which means getting rid of the growth target and dealing with potentially higher unemployment, as well as losing control of a major patronage network, and pissing off the elite families (nationally and especially locally) who control them, or debt will continue to rise until the economy reaches the breaking point and must go through a forced, very long, ultra-painful process of deleveraging and redeploying those assets.
This has nothing to do with China "collapsing" or having a "financial crisis," it's just an analysis of how it is deploying around 25% of it's economic resources (the state-owned part) and the constraints it faces around that 25%
Well said, and if you take it a step further, China is likely going to be stuck in a state of stagnant growth for an extended period - possibly as long as 20 years or so similar to Japan. China will likely ensure that no financial crises take down the system, but at the cost of debt levels that continue skyrocketing upwards. Coupled with the use of leverage to hit GDP targets with non-productive investment, China will probably hit a wall of growth draining debt fairly soon.
The danger is this goes faster and worse than expected, and nationalism and aggressive actions are used to deflect attention
Hi LC, Thanks for the nice comment and I completely agree with this analysis (of course)! Also agree that it will likely lead to nationalism and aggressive actions to deflect attention, unfortunately (and Xi is probably driven by some of this already, consciously or not).
One reason I feel it's important to try and spread knowledge of the constraints China faces is it will inform our policy--we of course can't control their SOE/deleveraging policy, but we CAN understand that lack of domestic demand is their biggest handicap and use that as leverage. Sitting across the negotiating table, we can say something like, "If we cut off access to our market, which elite family's assets in Beijing, or local families in Shanghai or Chengdu or Guangzhou, do you plan to redistribute to your people to replace the demand we are taking away?"
Being able to negotiate at such a precise level of understanding of their system would level the scales, for they have such knowledge of us, but we rely on "you have to understand in China" which is shorthand for "please address our concerns and we will do nothing to address yours because you have to understand in China."
Thanks - this is a really helpful summary of the quandary facing Chinese policy makers. It doesn’t give much cause for the optimism espoused by Ray Dalio and other financial titans; indeed, instead it raises the spectre of foreigners (probably unwitting pensioners) holding ever-bigger bags of Chinese bad debt the longer this economic model is perpetuated. But perhaps I just don’t understand the latest 5 and 15-year plans well enough, and would appreciate some counter-intuitive feedback.
Thanks Anthony! That was what I was going for and really glad it was helpful to you!
Agreed on Dalio and the financial guys--to speak frankly, I tend to agree with the camp that says the financialization of our economy, and Wall Street in general, have basically profited by selling off our countries jobs and production abroad for fees. That's fine and you can't blame the young ambitious guys trying to make it on Wall Street, it's an awesome and demanding industry and they work their assess off and are mostly super smart, but these big-time investor guys especially, it's sort of nauseating, a little pathetic, and in some aspects enraging that they just sit there after everything horrible that's happened to the middle-class in the USA over the past generation or two and say that we all still "just don't understand how the economy works" and they are the really virtuous ones who have earned their money and we need to get with the program and let the CCP do whatever it wants so that they can continue to make their fees.
(and again to speak frankly I also profited off of China getting rich, though not on Wall Street, so I don't blame anyone for following the incentives, we just need to change our frickin' policy so that the individual incentives align more with the national interest/reducing suffering in the USA and other countries)
I also would like to see some counter-intuitive feedback, Pettis, Sester, Krugman, Martin Wolf and many of the other top guys who see it the way I summarized (it's their views I was summarizing more or less) do address many of the arguments of the perpetual China bulls and I really haven't seen anything that makes sense or will work beyond rebalancing, which has proven politically impossible.
The rebalancing and the debt problem are actually the same problem. It s an idea am working on. To solve that problem they need to attract internal and external private bottom up investments, and that only happens if they loosen up. That s the bet of the century, sort of speak. They ve got a winning set up there but do they know it? Can Chicom bite the bullet and allow it to happen?
For sure rebalancing and debt are the same problem--debt comes from investing too much in unproductive projects, so they need to invest less and consume more, which is what rebalancing is, right.
Anyone seen anything interesting on the RCEP deal to be signed, supposedly this sunday? Seen little reporting and analysis. Asean s already China's largest trading partner. The deal more or less binds that part of the pacific rim together. Including Australia, oddly enough. Been many years in the making. Lost track of what s been diluted etc. Does it still have the significance it once had?
India is out, which leaves Australia as the only deficit country in the trading bloc. By definition then every single other country in the bloc is producing more than it is consuming and so will be looking to export the surplus to... Australia. It's not super sustainable.
I think the idea is that China would be the End Importeur. Not sure about the latest, but Japan Korea and ASEAN all have had surplus with China....so overall a balanced pattern at least. That Goal would need to go hand in hand with internationalising the currency and securing steady flow of inbound DIRECT investments. Both aspects represent huge leverage for the international community to shape chinese policies.
Sure, but that's only because the US and EU have bought up all of China's surplus... given that the US at least (and likely the rest of Europe outside of German industry) will certainly be reducing the deficit with China, where is the rest of China's surplus going to go?
Am not sure i follow. I doubt Asean Japan Korea buy the same stuff as the EU for example. Overall, isnt the policy direction now one of stimulating internal development and moving away from export dependency? That s a relief for the rest of the players.
The've been sailing in the "policy direction" of increasing domestic demand/consumption since... at least 2007 (Wen Jiabao's famous speech), and their own internal economists have been talking about it since around 2000 (Wu Jianlian, Mr. Market from the past generation). Yet the policy has utterly failed, they've only been able to increase "dual circulation" (rebalancing by another name, increasing consumption, increasing domestic demand, whichever term on prefers I list them so the non-macro people can understand they're the same) by about 0.5% a year over the past decade (consumption has moved from 33% to 38% of GDP over the past decade). That's far too slow for China to suddenly reverse a massive trade surplus/change the entire structure of its economy and become a net importer from the RCEP nations/the globe.
The reason they have failed is because "dual circulation" is short-hand for "take a ton of money and power away from politically powerful CCP families, both in Beijing and local governments, and just give it to average Chinese people." Specifically which families and SOE's and industries is irrelevant because the macro numbers tell the story--they've been unable to do it.
As for import composition, it doesn't really matter since the overall surpluses/deficits tell the story, although as a matter of fact Japan imports a ton of machinery and manufactured goods from China (I'd have to look up the exact number but I'm not wrong), which is what the EU overwhelmingly imports from China (like 97% of EU imports from China or so). Everyone imports a lot of manufactured goods from China. While it is the fact of the matter, it's not really pertinent though, because even in a world where Japan imported 0 of the same products, once the EU and US reduce the deficit with China via political means, China either a) just shuts down all that production and enters recession, b) transfers the excess surplus to other nations with whom it has entered into FTA's (RCEP, for instance), or c) transfers all the party wealth from SOE's to the general population so it can consume all of it itself. A) they are unlikely to accept, and they've been trying C) for 13 years, so that leaves B, but with Australia the only nation in the RCEP running a deficit, it will be difficult for China to unload economic surpluses on a bunch of nations who are trying to do the exact same thing to China. Hence the difficulty of the RCEP.
I should add, I'm analyzing this from China's macro perspective of trying to have a thriving economy, the RCEP will not live up to their hopes because it won't solve China's fundamental problem (lack of domestic demand), hence it is bound to become politically difficult for all nations, either China if it turns out it has a trade deficit within RCEP if for instance they aren't importing any of the stuff the EU and US rejected, so China is just not exporting to the EU/US as much but continues importing from the RCEP in which case it has exacerbated not helped China's fundamental issue of overproduction/underconsumption at home, or China somehow succeeds in forcing deficits on the RCEP nations (for instance, through its patented combo of market protection at home and export subsidy abroad) in which case the RCEP nations will find it politically unpopular as their unemployment increases at home and they run deficits. Again, it all points back to China's lack of domestic demand and the failure of "dual circulation," forgive me "rebalancing" since at least 2007.
Again, not a call for collapse, but an analysis of the consequences of China's ultra-low consumption as a % of GDP. It just doesn't consume enough to make it an attractive trade partner at this point.
One small follow-up re Bill's newsletter comment on Tuesday.
> These firms are too big and powerful, but these proposed rules may be less about asserting more control over these tech oligopolies than it is about making things better for the consumers and businesses that rely on them. These massive companies have been repeatedly caught engaging in fairly egregious practices that harm consumers and small businesses.
The same can be said about state-owned enterprises, if not in a more serious way, yet it appears that the PRC anti-monopoly law rarely, if ever, applies to them. If consumer welfare and business competition really are the top priorities for the CCP leadership, wouldn't it make more sense to target SOEs first?
Totally agree, when living in China it's quite noticeable how private companies take advantage of ubiquitous access to your personal information to spam you with advertiser phone calls, intrude on your online activity, and generally make a nuisance of themselves. Identity scams involving social media accounts are also widespread, which is extra scary in China as you often have all your financial data consolidated onto those platforms as well. This is not even getting into scams involving shadow lending, gambling, and pretty much any other kind of off-the-books service that is provided via systems like Wechat which do little if anything to protect your personal information.
I'm not even talking about the Chinese government and surveillance here, this is purely big data being abused by companies for profit with little to no consumer rights or advocacy!
So that being said, I can see why the government would perceive there to be a need to tamp down on some of these practices. SOEs as always are a special case where the rules don't apply for most of the same reasons they are immune to market fundamentals and basic managerial principles.
Agree with the sentiment that perhaps too much has been made of domestic political power plays explaining events regarding China's big tech. China has been refining its competition rules for awhile to catch up with antitrust principles that are more established in the US and, to a lesser degree, the EU. In this regard the rule-setting is actually quite progressive for economic and industry structure in the longer-run. Interestingly, they have somewhat leapfrogged to complex competition issues related to two-sided platforms and business models that are based on network effects... the very same constructs that the DoJ/FTC has been grappling with for quite a few years now.
Agreed that rule-setting is at a different pace from enforcement actions. That being said, the objectives of PRC anti-monopoly law may still differ from the established antitrust principles in the US. For example, in addition to "protecting the consumer’s interest" and "safeguarding and promoting the order of market competition", Article 1 of the AML has a "protecting the public interest" provision that may include national/state security issues.
Hi, fair point, though on some soe monopoly areas, like telecoms, the state has repeatedly forced the operators to reduce prices/improve service, and I’d take Unicom of china mobile over att or version any day
Switching directions a bit ... This Newsweek story on United Front activities struck me as well researched and pretty thorough.
https://www.newsweek.com/2020/11/13/exclusive-600-us-groups-linked-chinese-communist-party-influence-effort-ambition-beyond-1541624.html For some of us, this report is nothing new. But it is good to get this sort of information into the mainstream media, all in one piece. A good number of my Chinese government students in Chicago in the period 2003-2011 were from United Front or related organizations - maybe 10-15% of them. All of the government students - including doctors, lawyers, professionals and midlevel bureaucrats of all disciplines - were in the US for a year, sponsored by the Chinese government, to learn about markets and US management and culture. I don't have the idea that we faculty members were dupes in a much larger game that we didn't fully understand. A lot of our students went home after a year with knowledge and good relationships in the US. And pre-2012 was a different time. It seems United Front has really taken a turn as the "magic weapon" Xi promoted and that Anne Marie Brady describes in her research (a result of which was apparently break-ins to her home and office) - https://www.wilsoncenter.org/sites/default/files/media/documents/article/magic_weapons.pdf I have my own views about the benefits of our teaching and relations. Just wondering about thoughts from any of you here.
100%, really glad to see the understanding of the UF become more widespread. I don't think we are quite there yet, but we are pretty close to the point where any American businessperson who sees an ad for the "Fujian-American Business Association Annual Gala" or whatever recognizes that the leader such a crucial organization is unfortunately... certainly a Chinese intelligent agent (United Front division). I really wish I could say that were an exaggeration, and it doesn't mean Xiamen doesn't kick ass as a city, it just means Beijing has politicized all these orgs and there's no way the leadership can not "volunteer" to help the party-state, so just be aware you're dealing with an intelligence agent and of course for almost every American that means it's simply a no go.
The Biden campaign is starting to publish information about their immigration platform, several detailed articles published yesterday in multiple outlets. The articles mention that most, if not all, of the tent-pole initiatives vis a vis refugees, travel bans, and asylum changes made during the Trump administration are on the chopping block. Notably missing are any mention of:
Just thought it was noteworthy that even though Trump's immigration and China agendas dovetailed quite often on the policy front few if any of the immigration measures targeted at China are on track for reversal.
Aren't the Biden immigration policies described in these articles somewhat different from the China ones?
These reversals seem mostly focused on Trump's most xenophobic and racist policies. The China policies are mostly addressing national security issues like espionage. Not saying Trump's policies are right, I just wouldn't expect them to be grouped in with Biden's broader immigration agenda.
Also, the EVUS program was implemented under Obama/Biden, right?
Please let me know if I'm reading this wrong, genuinely curious.
I think all of these policies were the subject of xenophobia accusations at various points, though those concerning China may have been more cynically applied. In addition, all were put forth by the administration as related to "national security", though again for the China related ones that may have been more grounded in reality.
Correct, ESTA was technically put into place by the Obama admin in late 2016, though it was more a reaction by various parts of the federal government at the administration's misfeasance in granting Chinese travelers a 10 year visa then a conscious effort by the admin to step up monitoring of Chinese travelers. In other words, it fit nicely into Trump's agenda upon inauguration.
Don’t expect reversals from the Biden team. Expect a seemingly softer approach but one that comes wrapped in coalitions and alliances. Of all things, the Chinese leadership hates multi-lateral negotiations the most. Look for groups including Japan, Korea, India, Vietnam, Germany, Australia, Canada, Brazil, Mexico, and the US (of course with others) to start forming working groups on various topics China won’t be excluded but it’s voice is one of many. Done correctly this is the most powerful way to bring bring standards and guidelines together. Making China one of many - it’s the way forward
I'm not sold. All the language used here (multilateral, one voice among many, etc) applies equally to the WTO which was a disaster. The part that really got my guard up was not excluding China from the working groups. If they're involved, they will use political pressure from the outset to prevent there being any real teeth in any mechanism designed to enforce liberal values.
No, unfortunately I think the path forward is things like the TPO, liberal/free trading blocs (with smaller illiberal partners who don't threaten the order ok, this is a national power issue and we need to play hardball) where the enforcement mechanisms are entirely in free hands and have massive, real teeth in them. THEN allow China to trade with the TPO if it abides by its rules, which it won't, and then we have the moral high ground, it's clear to everyone what our values are, and no problem China, go your own way but stop undermining us, just do your own thing with Cambodia, North Korea, Iran, Russia etc, no probs :).
So multilateralism, yes, but get our house in order with rules and enforcement FIRST, THEN invite China to abide by them. Our house, our rules. If you don't like them, go play in your house, we won't stop you, no problem, and oh by the way no whining. There's no crying in baseball.
Hard to get the rest of the world to play by US house rules. And I don’t get the fear of China gaming the system. It’s only in our absence that happens.
With respect, I have been a leading U.S. trade official as well as a long time international business leader. It is not only in our absence that China games the system. We are all in the WTO and China has gamed the WTO system from start to now. Would be happy to discuss directly if you like.
I mean, the "rest of the world" (basically the EU) and the US were "playing by US house rules" just fine pre-China WTO entry. So that doesn't make any sense to me.
Not sure that Germany or the EU will go along wit that. I suspect that they forge their own ideas and plans for China and indeed Russia regardless of what America plans. The EU is restructuring itself to be an independent third power.
That's definitely true but its values are still far more aligned with America's (for the moment...) than China's or Russia's. The main issue is that the interests of German industry are completely misaligned with the values of 70-80% of the EU.
Good point, and I'm encouraged to see that they are treating the China portion of the immigration agenda (or the immigration portion of the China agenda?) as a special case.
Regarding your point, what might that look like in practice? A central database of all military affiliated Chinese international students shared across the five-eye countries? Sharing of EVUS data with friendly countries? A unified messaging on travel advisories across NATO and East Asian ally countries? As other countries in Europe and Asia are beginning to compile entity-list type policies (especially re: Huawei) it'd be great to see everyone come together at the WTO as a "United Front" (heh).
An entrepreneur such as Jack Ma even if bursting with patriotism might feel that Xi's preference for a "wolf" China has made it difficult for himself and other like him to act outside China & now regulators want to erect obstacles to action inside China.
If, by the way, the PRC acts against its own digital monopolies, I hope the US will be shamed to act against its own
The challenge for us, I submit to assembled sages, is not to bust up or punish or tech giants but rather to subtly reposition them as part of the American technology sphere as it confronts a Chinese technology sphere. We need to gradually persuade them to become better USA team players. Microsoft, for example, is responsible for training some of China's best AI scientists, according to the new book, China's Quest for Foreign Technology. Threatening our tech giants with dismemberment would not create the right climate to get them to recalibrate their behavior.
Well, Facebook and Google don't have that many because they've essentially been kept out. But Microsoft, Intel, AWS, Apple, Cisco and others helped build the Great Firewall and have contributed mightily to China's technological emergence and employ, directly or indirectly, hundreds of thousands of people in China.
On Ant's failed IPO, Mark Mobius said this morning on Fox Business that he thinks the IPO failed because of valuation. He said he received a call in Singapore from a Chinese banker to offer him an allocation, which he has never received in his 50 or so years investing in emerging markets.
I also heard that before the IPO was pulled, Wilbur Ross received a call to inform him. While this was before the US election, I think US regulators antennae were up regarding the valuation, suspicious financials, and CCP insider elements of the supposedly 33x oversubscribed transaction.
Finally, a notable anonymous China hawk penned the following which I found pretty damning.
My view is that like everything else in China, if the CCP could have taken the IPO money with no repercussions, they would have. Thus, when they realized that the IPO wouldn't go off at the advertised price, they made a decision to kneecap Ma and scapegoat him.
Mark is wrong. This IPO was the most over-subscribed IPO in exchange history. Price was not the issue. If the regulators were changing the rules post IPO then ANT ran the risk of a huge hit in price and Jack would not risk that. It was a combination of many things but price was not close to a determining factor.
Yeah, also not sure if US regulators had anything to do with Ant since it was going to be listed on STAR and HK. If there were financial, accounting or insider discrepancies known to them, they never voiced it and frankly had no jurisdiction anyway.
Yeah deepthroat has been hammering BABA for years, I have actually learned a lot about finance in general from reading his absurdly detailed dissections of their earnings calls and such. I have never seen another accountant or financial analyst provide a reasonable (any?) rebuttal of the main points of his critique of BABA specifically.
That being said, it's not like we haven't had U.S. companies engaged in similar practices over the years, though perhaps the half-life on such scams is shorter in the United States due to marginally better oversight.
Hi Bill, do you think the US decision to prevent investment into companies that have links to the Chinese military is a first step that will inevitably be widened to, say, Alibaba and Tencent?
Anyone have any sense on how this Exec Order is meant to be implemented? It feels superficial and ill-conceived. Preventing the trading of existing securities only hurts existing shareholders, not the underlying companies themselves as much. If the order were driven by preventing capital raising on US exchanges or from US sources, that makes more direct sense. However, telling an American investor or fund manager that they are no longer allowed to hold their shares of a chinese telco only forces them to divest, potentially at a loss, to those investors.
It seems we are headed down the slippery slope of a technology dis-engagement. If you add up all the threads, it seems both governments are organizing themselves to prevent each other's companies and enterprises from sharing too much technology or too much investment. The Americans want "clean" networks, which implies they will have to build them to exclude Huawei, Zoom and TikTok (and maybe WeChat). Huawei already has built communications networks in dozens of countries, so the Americans will have to create a separate Internet that is walled-off. Today's news that the U.S. administration will block U.S. investments in entities supporting the PLA could be the beginning of something much bigger. In view of China's "civil-military," every Chinese "civilian" entity engaged in semiconductors, cameras, AI, etc. will be suspect. I don't think American technology company CEOs can stop this and I don't think they understand what is happening. They're still trying, desperately, to play both sides. What are anyone else's opinions?
The U.S. ban on investment in Chinese military related companies is just the beginning. The logic inexorably extends beyond strictly military producers. Think of the contradiction. Apple deletes Hong Kong map apps from its app store at Beijing's command. This makes it easier for Xi to erase free speech and rule of law from Hong Kong. Apple helped Xi. We call Apple an American company but it really is a hostage of Beijing. In view of China's policy of military-civilian convergence, any foreign investment in China is, in principle, contributing to strengthening a China that effectively has declared war on free world values. You cannot escape the logic.
The western companies are lap dogs of the CCP. This is the price of “access” to the Chinese market. When you trade principles for money you usually wind up with neither.
Clyde while your logic frames the debate in a very one sided way it also puts quite a burden on corporations to support and promote American values when we have not taken care of our own business at home. Given Brazil’s raping of the rain forests and India’s assault on Muslim rights and...you get the point. Hard to draw that line. If Apple starts firing employees based on political views for example then I will move closer to your camp. American companies are often the best ambassadors we have. ESP the last 4 years. The fact they have to make business decisions doesn’t mean they are agents of the Party or the State.
The best ambassadors we have??? The Chinese might agree. American companies are basically telling the CCP no matter how outrageously you behave we will continue to pay you. Chinese care about three things; education, money and the freedom to travel. To get them to really listen you must deny them these. Mere talking will have no effect.
Hi Gary. Thanks for your comment. I have been in the trenches for a long time on both the business and government sides. I think you are correct in the sense that business cannot be expected to promote American values when it operates within markets ruled by opposite values. In the case of China, the non complimentary values of the U.S. and China put business in the position of being very politically powerful in Washington while being on its knees in Beijing. The corporations become hostages of the CCP. We cannot expect them to act otherwise on their own initiative. Believe me I know from personal experience. But, if the major corporations are hostages of Beijing and powerful in Washington at the same time, it is difficult to see how we avoid discounting our own values or essentially being guided by the CCP. So, the only alternative, it seems to me, is the establishment of a different set of incentives for business. The government must defend free world values by recovering control of the corporations from Beijing. This may sound over the top, but we must remember that the corporation owes its life to the state. By licensing it to incorporate the state grants the corporation limited liabilty. This is a huge gift to investors. We take it for granted today, but it is nevertheless a huge gift. The government makes that grant because it expects the corporation to do something good for the society over which the government presides. If the corporation is, in effect, undermining the government that licenses it or the values of the society that has created that government, then the government and the society have not ony the right, but the duty to rearrange the whole corporation deal such that the corporation is indeed operating for the benefit of the society and not just that of the CEO and a few shareholders whose timeframe is much shorter than that of the society.
American companies can be good ambassadors. I like to believe that I was such when I was in busines wiht Scott Paper Company and American Can Company. But they can only be good ambassadors to the extent that the society in which they operate enables them to be such. China does not do that.
Gary, just because we are doing a bad job of embodying liberal values at home does not mean it is right when others do an even worse job abroad. And there is no God of justice who will enforce liberal values on the world. We have to support them when and where we can. If you think Beijing is not using economic coercion and UF activities to force foreign companies to fight against liberal values, you haven't been paying attention (or reading Bill's newsletter!). The era of "business decisions" ended 8 years ago, and we aren't the ones who ended it.
I would agree with Gary though that walking the talk strengthens our argument over whose political system is better. And not doing so weakens it. A lot of countries are buying the CCP argument. Going forward we will be judged by what we do, not what we say. We need to raise our game.
So help me draw the line. I lived in Japan for 5 years and China fir 12. Lots of bad behavior particularly in China recently. But then I watch Brazil take out millions of acres of rainforest. India put 200m Muslims at a significant social disadvantage to speak nothing of their treatment of women in rural areas. Haven’t even gotten to the Middle East yet. So while it’s easy to say walk away from China it’s much more difficult to do and I have never found ignoring a competitor or disengagement to make me better or smarter.
A recent NYT article says that 40% of global warming emissions come from China and the US, and if Pres. Biden really means to address climate change, widely recognized as the world’s greatest problem by far, he has to cooperate with China. Such a positive approach is incompatible with the climate change denial of a Washington largely obsessed with its anti-China crusade, though the subject of China lost traction as the presidential campaigns wound down, perhaps because the electorate and the rest of mankind have more important things to worry about.
A discussion thread below prompted this. Am fully prepared to be shouted down. Also, Economics and trades are separate. There, nothing replaces dogged bargaining and sticks&carrots.
What s taken for granted and the basis of many complicated handwringing these days is "China's attack on our liberal order" .
I suddenly find myself asking, on what and where has China attacked OUR liberal way of life? plenty of attacks, reactions, defensive petulance etc. against introducing liberalism into Chinese matters and way of life. Yes. But for the life of me I cannot think of incidences of Chinese attacks on Non-Chinese policies/matters regarding hot topics like immigration, gender, sexuality, abortion, religion, freedom of speech, race, ethical taxation, wealth/income inequality, privacy in the techno age, media.....Has there been any? Am I missing a chunk of reality all these years?
The recent nonsensical and horrendous attacks in Europe by religious fanatics against civilians has made me realise a mistake Europe has made, and I think it s at risk of being repeated on China: We, in Europe (America has done a lot better on this), so pumped up and proud of our liberalism, have simultaneously insisted on 1) pitting some of our individual rights against the core philosophy of life and meaning of life for the majority of Muslims (illiberal they might be but certainly not murderous) AND 2) bending over backwards to protect and tolerate the fringe and radical and indeed the murderous elements among them.
These two actions, caricatured as fighting the imperfect but human core while tolerating the anti-human intolerable fringe, is philosophically and ideologically consistent. Pleasing to the purist.
But it has a toxic self-reinforcing dynamic that inexorably leads to tragic consequences in Europe and in MENA and beyond. To the majority of Muslims (who would never harm anyone based on a cartoon), what Europe has been doing is to spit 'its superior liberalism' in their face and then shelter their 'criminals and heretics' just to double the effect. Seems fanatical to me...
Now on China, is there a danger of the same? Of justifying fighting against their majority/core based on immovable logical consistency, in exchange for losing our core interests, not to say life and limb (metaphorically speaking, and maybe literally).
The issues here, right now, are less stark. China is yet to produce violent radicals and movements, thank God. It s merely a matter of differentiating between core issues and theoretical niceties, and differentiating between attacks on our way of life and attacks against our 'attacks' on their way of life.
If your view is that our way of life is simply right, and theirs, wrong and without right of existence and resistance, it is still worth clarifying the nature and scope of their "attacks" and our "rights"....In order to understand the cost, benefit and the probability of success, of the various often contradictory and poorly defined objectives.
History has shown time and time again that it s always wrong to insist on a purist consistency on sociopolitical matters. Without exception.
Also Bill, I have been meaning to hire one of Pettis's students to tutor me more thoroughly on his ideas. Obviously I'm a big proponent of them and would like to be able to answer questions in an even more in-depth and specific way to tailor my responses exactly to the concerns of the people asking questions as I feel a better understanding of his ideas would really, really drive our trade, economic and inequality policies in a better direction. I've e-mailed him but of course he's swamped, would you happen to have any way to get in touch with him? Thank you! Sorry for reaching out on this platform but it seemed like it might not be a bad place to start for China expertise/contacts! Thanks, David
On the Yongcheng default, as someone who reads a lot of Pettis's stuff I will expound a bit on his tweet to give it more context for readers here--bond/debt defaults for SOE's, like any company, aren't great but why are they such a big deal? Shouldn't insolvent companies be allowed to go bankrupt so their assets can be repurposed to actually productive uses? The issue of course is these are state-owned companies we are talking about which are highly valued by Xi. If the changing winds in the bond market suddenly cause people to take a hard look at SOE's, and it turns out many are insolvent, will Beijing let them all go under? Of course the easy answer is no, but if it refuses to do so, how will it achieve lending discipline? To the extent that SOE's will default without bailouts, there is a financial or economic contradiction between SOE's and deleveraging/lending discipline/rebalancing etc.
Delving deeper, the growth target he refers to is achieved by ordering SOE's to do a certain amount of activity (whatever is needed above and beyond private sector growth to hit the target). This means building lots of big things, usually infrastructure, to employ more people and stimulate the economy to reach the target. The money to build these things is generally lent to the SOE's by banks, or else through bond issuances. For a long time, that was great as China needed infrastructure. And if that activity were still productive, there would be no problem and the debt could be retired. But at least in the case of Yongcheng (and likely in the case of many other SOE's as we will see), whatever it was doing was manifestly not productive.
In the Pettis analysis, this is THE major issue facing China economically--it wants to achieve a certain level of growth, and uses SOE's to do it, but that SOE activity is fundamentally unproductive (in many cases, as we can see with Yongcheng, and with the fact that total debt in China has been rising 12-15% a year for many years, partially because consumers are much more indebted but also because of lending to SOE's for infrastructure not being paid back but simply extended indefinitely) because China is already saturated with infrastructure to meet its current and foreseeable needs. So Beijing either lets a ton of SOE's go under, which means getting rid of the growth target and dealing with potentially higher unemployment, as well as losing control of a major patronage network, and pissing off the elite families (nationally and especially locally) who control them, or debt will continue to rise until the economy reaches the breaking point and must go through a forced, very long, ultra-painful process of deleveraging and redeploying those assets.
This has nothing to do with China "collapsing" or having a "financial crisis," it's just an analysis of how it is deploying around 25% of it's economic resources (the state-owned part) and the constraints it faces around that 25%
Well said, and if you take it a step further, China is likely going to be stuck in a state of stagnant growth for an extended period - possibly as long as 20 years or so similar to Japan. China will likely ensure that no financial crises take down the system, but at the cost of debt levels that continue skyrocketing upwards. Coupled with the use of leverage to hit GDP targets with non-productive investment, China will probably hit a wall of growth draining debt fairly soon.
The danger is this goes faster and worse than expected, and nationalism and aggressive actions are used to deflect attention
Hi LC, Thanks for the nice comment and I completely agree with this analysis (of course)! Also agree that it will likely lead to nationalism and aggressive actions to deflect attention, unfortunately (and Xi is probably driven by some of this already, consciously or not).
One reason I feel it's important to try and spread knowledge of the constraints China faces is it will inform our policy--we of course can't control their SOE/deleveraging policy, but we CAN understand that lack of domestic demand is their biggest handicap and use that as leverage. Sitting across the negotiating table, we can say something like, "If we cut off access to our market, which elite family's assets in Beijing, or local families in Shanghai or Chengdu or Guangzhou, do you plan to redistribute to your people to replace the demand we are taking away?"
Being able to negotiate at such a precise level of understanding of their system would level the scales, for they have such knowledge of us, but we rely on "you have to understand in China" which is shorthand for "please address our concerns and we will do nothing to address yours because you have to understand in China."
Thanks - this is a really helpful summary of the quandary facing Chinese policy makers. It doesn’t give much cause for the optimism espoused by Ray Dalio and other financial titans; indeed, instead it raises the spectre of foreigners (probably unwitting pensioners) holding ever-bigger bags of Chinese bad debt the longer this economic model is perpetuated. But perhaps I just don’t understand the latest 5 and 15-year plans well enough, and would appreciate some counter-intuitive feedback.
Thanks Anthony! That was what I was going for and really glad it was helpful to you!
Agreed on Dalio and the financial guys--to speak frankly, I tend to agree with the camp that says the financialization of our economy, and Wall Street in general, have basically profited by selling off our countries jobs and production abroad for fees. That's fine and you can't blame the young ambitious guys trying to make it on Wall Street, it's an awesome and demanding industry and they work their assess off and are mostly super smart, but these big-time investor guys especially, it's sort of nauseating, a little pathetic, and in some aspects enraging that they just sit there after everything horrible that's happened to the middle-class in the USA over the past generation or two and say that we all still "just don't understand how the economy works" and they are the really virtuous ones who have earned their money and we need to get with the program and let the CCP do whatever it wants so that they can continue to make their fees.
(and again to speak frankly I also profited off of China getting rich, though not on Wall Street, so I don't blame anyone for following the incentives, we just need to change our frickin' policy so that the individual incentives align more with the national interest/reducing suffering in the USA and other countries)
I also would like to see some counter-intuitive feedback, Pettis, Sester, Krugman, Martin Wolf and many of the other top guys who see it the way I summarized (it's their views I was summarizing more or less) do address many of the arguments of the perpetual China bulls and I really haven't seen anything that makes sense or will work beyond rebalancing, which has proven politically impossible.
The rebalancing and the debt problem are actually the same problem. It s an idea am working on. To solve that problem they need to attract internal and external private bottom up investments, and that only happens if they loosen up. That s the bet of the century, sort of speak. They ve got a winning set up there but do they know it? Can Chicom bite the bullet and allow it to happen?
For sure rebalancing and debt are the same problem--debt comes from investing too much in unproductive projects, so they need to invest less and consume more, which is what rebalancing is, right.
Anyone seen anything interesting on the RCEP deal to be signed, supposedly this sunday? Seen little reporting and analysis. Asean s already China's largest trading partner. The deal more or less binds that part of the pacific rim together. Including Australia, oddly enough. Been many years in the making. Lost track of what s been diluted etc. Does it still have the significance it once had?
India is out, which leaves Australia as the only deficit country in the trading bloc. By definition then every single other country in the bloc is producing more than it is consuming and so will be looking to export the surplus to... Australia. It's not super sustainable.
I think the idea is that China would be the End Importeur. Not sure about the latest, but Japan Korea and ASEAN all have had surplus with China....so overall a balanced pattern at least. That Goal would need to go hand in hand with internationalising the currency and securing steady flow of inbound DIRECT investments. Both aspects represent huge leverage for the international community to shape chinese policies.
Sure, but that's only because the US and EU have bought up all of China's surplus... given that the US at least (and likely the rest of Europe outside of German industry) will certainly be reducing the deficit with China, where is the rest of China's surplus going to go?
Am not sure i follow. I doubt Asean Japan Korea buy the same stuff as the EU for example. Overall, isnt the policy direction now one of stimulating internal development and moving away from export dependency? That s a relief for the rest of the players.
The've been sailing in the "policy direction" of increasing domestic demand/consumption since... at least 2007 (Wen Jiabao's famous speech), and their own internal economists have been talking about it since around 2000 (Wu Jianlian, Mr. Market from the past generation). Yet the policy has utterly failed, they've only been able to increase "dual circulation" (rebalancing by another name, increasing consumption, increasing domestic demand, whichever term on prefers I list them so the non-macro people can understand they're the same) by about 0.5% a year over the past decade (consumption has moved from 33% to 38% of GDP over the past decade). That's far too slow for China to suddenly reverse a massive trade surplus/change the entire structure of its economy and become a net importer from the RCEP nations/the globe.
The reason they have failed is because "dual circulation" is short-hand for "take a ton of money and power away from politically powerful CCP families, both in Beijing and local governments, and just give it to average Chinese people." Specifically which families and SOE's and industries is irrelevant because the macro numbers tell the story--they've been unable to do it.
As for import composition, it doesn't really matter since the overall surpluses/deficits tell the story, although as a matter of fact Japan imports a ton of machinery and manufactured goods from China (I'd have to look up the exact number but I'm not wrong), which is what the EU overwhelmingly imports from China (like 97% of EU imports from China or so). Everyone imports a lot of manufactured goods from China. While it is the fact of the matter, it's not really pertinent though, because even in a world where Japan imported 0 of the same products, once the EU and US reduce the deficit with China via political means, China either a) just shuts down all that production and enters recession, b) transfers the excess surplus to other nations with whom it has entered into FTA's (RCEP, for instance), or c) transfers all the party wealth from SOE's to the general population so it can consume all of it itself. A) they are unlikely to accept, and they've been trying C) for 13 years, so that leaves B, but with Australia the only nation in the RCEP running a deficit, it will be difficult for China to unload economic surpluses on a bunch of nations who are trying to do the exact same thing to China. Hence the difficulty of the RCEP.
I should add, I'm analyzing this from China's macro perspective of trying to have a thriving economy, the RCEP will not live up to their hopes because it won't solve China's fundamental problem (lack of domestic demand), hence it is bound to become politically difficult for all nations, either China if it turns out it has a trade deficit within RCEP if for instance they aren't importing any of the stuff the EU and US rejected, so China is just not exporting to the EU/US as much but continues importing from the RCEP in which case it has exacerbated not helped China's fundamental issue of overproduction/underconsumption at home, or China somehow succeeds in forcing deficits on the RCEP nations (for instance, through its patented combo of market protection at home and export subsidy abroad) in which case the RCEP nations will find it politically unpopular as their unemployment increases at home and they run deficits. Again, it all points back to China's lack of domestic demand and the failure of "dual circulation," forgive me "rebalancing" since at least 2007.
Again, not a call for collapse, but an analysis of the consequences of China's ultra-low consumption as a % of GDP. It just doesn't consume enough to make it an attractive trade partner at this point.
One small follow-up re Bill's newsletter comment on Tuesday.
> These firms are too big and powerful, but these proposed rules may be less about asserting more control over these tech oligopolies than it is about making things better for the consumers and businesses that rely on them. These massive companies have been repeatedly caught engaging in fairly egregious practices that harm consumers and small businesses.
The same can be said about state-owned enterprises, if not in a more serious way, yet it appears that the PRC anti-monopoly law rarely, if ever, applies to them. If consumer welfare and business competition really are the top priorities for the CCP leadership, wouldn't it make more sense to target SOEs first?
Totally agree, when living in China it's quite noticeable how private companies take advantage of ubiquitous access to your personal information to spam you with advertiser phone calls, intrude on your online activity, and generally make a nuisance of themselves. Identity scams involving social media accounts are also widespread, which is extra scary in China as you often have all your financial data consolidated onto those platforms as well. This is not even getting into scams involving shadow lending, gambling, and pretty much any other kind of off-the-books service that is provided via systems like Wechat which do little if anything to protect your personal information.
I'm not even talking about the Chinese government and surveillance here, this is purely big data being abused by companies for profit with little to no consumer rights or advocacy!
So that being said, I can see why the government would perceive there to be a need to tamp down on some of these practices. SOEs as always are a special case where the rules don't apply for most of the same reasons they are immune to market fundamentals and basic managerial principles.
Agree with the sentiment that perhaps too much has been made of domestic political power plays explaining events regarding China's big tech. China has been refining its competition rules for awhile to catch up with antitrust principles that are more established in the US and, to a lesser degree, the EU. In this regard the rule-setting is actually quite progressive for economic and industry structure in the longer-run. Interestingly, they have somewhat leapfrogged to complex competition issues related to two-sided platforms and business models that are based on network effects... the very same constructs that the DoJ/FTC has been grappling with for quite a few years now.
Agreed that rule-setting is at a different pace from enforcement actions. That being said, the objectives of PRC anti-monopoly law may still differ from the established antitrust principles in the US. For example, in addition to "protecting the consumer’s interest" and "safeguarding and promoting the order of market competition", Article 1 of the AML has a "protecting the public interest" provision that may include national/state security issues.
Hi, fair point, though on some soe monopoly areas, like telecoms, the state has repeatedly forced the operators to reduce prices/improve service, and I’d take Unicom of china mobile over att or version any day
Unicom is solid
Switching directions a bit ... This Newsweek story on United Front activities struck me as well researched and pretty thorough.
https://www.newsweek.com/2020/11/13/exclusive-600-us-groups-linked-chinese-communist-party-influence-effort-ambition-beyond-1541624.html For some of us, this report is nothing new. But it is good to get this sort of information into the mainstream media, all in one piece. A good number of my Chinese government students in Chicago in the period 2003-2011 were from United Front or related organizations - maybe 10-15% of them. All of the government students - including doctors, lawyers, professionals and midlevel bureaucrats of all disciplines - were in the US for a year, sponsored by the Chinese government, to learn about markets and US management and culture. I don't have the idea that we faculty members were dupes in a much larger game that we didn't fully understand. A lot of our students went home after a year with knowledge and good relationships in the US. And pre-2012 was a different time. It seems United Front has really taken a turn as the "magic weapon" Xi promoted and that Anne Marie Brady describes in her research (a result of which was apparently break-ins to her home and office) - https://www.wilsoncenter.org/sites/default/files/media/documents/article/magic_weapons.pdf I have my own views about the benefits of our teaching and relations. Just wondering about thoughts from any of you here.
100%, really glad to see the understanding of the UF become more widespread. I don't think we are quite there yet, but we are pretty close to the point where any American businessperson who sees an ad for the "Fujian-American Business Association Annual Gala" or whatever recognizes that the leader such a crucial organization is unfortunately... certainly a Chinese intelligent agent (United Front division). I really wish I could say that were an exaggeration, and it doesn't mean Xiamen doesn't kick ass as a city, it just means Beijing has politicized all these orgs and there's no way the leadership can not "volunteer" to help the party-state, so just be aware you're dealing with an intelligence agent and of course for almost every American that means it's simply a no go.
The Biden campaign is starting to publish information about their immigration platform, several detailed articles published yesterday in multiple outlets. The articles mention that most, if not all, of the tent-pole initiatives vis a vis refugees, travel bans, and asylum changes made during the Trump administration are on the chopping block. Notably missing are any mention of:
1) Trump's Chinese researcher ban - https://www.whitehouse.gov/presidential-actions/proclamation-suspension-entry-nonimmigrants-certain-students-researchers-peoples-republic-china/
2) Trump's entity list visa restrictions (which collectively include big portions of the workforce at several large SOEs) - https://www.state.gov/briefing-with-senior-state-department-and-commerce-officials-on-state-department-visa-restrictions-placed-on-individuals-from-the-peoples-republic-of-china-and-commerce-department-restri/
3) The EVUS program - https://www.cbp.gov/travel/international-visitors/electronic-visa-update-system-evus/frequently-asked-questions
4) The level 3 travel advisory for China (which includes mention of Hong Kong and Xinjiang) - https://travel.state.gov/content/travel/en/traveladvisories/traveladvisories/china-travel-advisory.html
Here are a few articles about the immigration platform:
https://www.cbsnews.com/news/biden-immigration-policy-agenda-trump-reversal-deportation-asylum/
https://www.washingtonpost.com/opinions/2020/11/12/biden-is-already-signaling-big-moves-immigration-that-bodes-well/
Just thought it was noteworthy that even though Trump's immigration and China agendas dovetailed quite often on the policy front few if any of the immigration measures targeted at China are on track for reversal.
Aren't the Biden immigration policies described in these articles somewhat different from the China ones?
These reversals seem mostly focused on Trump's most xenophobic and racist policies. The China policies are mostly addressing national security issues like espionage. Not saying Trump's policies are right, I just wouldn't expect them to be grouped in with Biden's broader immigration agenda.
Also, the EVUS program was implemented under Obama/Biden, right?
Please let me know if I'm reading this wrong, genuinely curious.
I think all of these policies were the subject of xenophobia accusations at various points, though those concerning China may have been more cynically applied. In addition, all were put forth by the administration as related to "national security", though again for the China related ones that may have been more grounded in reality.
Correct, ESTA was technically put into place by the Obama admin in late 2016, though it was more a reaction by various parts of the federal government at the administration's misfeasance in granting Chinese travelers a 10 year visa then a conscious effort by the admin to step up monitoring of Chinese travelers. In other words, it fit nicely into Trump's agenda upon inauguration.
Don’t expect reversals from the Biden team. Expect a seemingly softer approach but one that comes wrapped in coalitions and alliances. Of all things, the Chinese leadership hates multi-lateral negotiations the most. Look for groups including Japan, Korea, India, Vietnam, Germany, Australia, Canada, Brazil, Mexico, and the US (of course with others) to start forming working groups on various topics China won’t be excluded but it’s voice is one of many. Done correctly this is the most powerful way to bring bring standards and guidelines together. Making China one of many - it’s the way forward
I'm not sold. All the language used here (multilateral, one voice among many, etc) applies equally to the WTO which was a disaster. The part that really got my guard up was not excluding China from the working groups. If they're involved, they will use political pressure from the outset to prevent there being any real teeth in any mechanism designed to enforce liberal values.
No, unfortunately I think the path forward is things like the TPO, liberal/free trading blocs (with smaller illiberal partners who don't threaten the order ok, this is a national power issue and we need to play hardball) where the enforcement mechanisms are entirely in free hands and have massive, real teeth in them. THEN allow China to trade with the TPO if it abides by its rules, which it won't, and then we have the moral high ground, it's clear to everyone what our values are, and no problem China, go your own way but stop undermining us, just do your own thing with Cambodia, North Korea, Iran, Russia etc, no probs :).
So multilateralism, yes, but get our house in order with rules and enforcement FIRST, THEN invite China to abide by them. Our house, our rules. If you don't like them, go play in your house, we won't stop you, no problem, and oh by the way no whining. There's no crying in baseball.
Yes, this is a refreshingly realistic approach
Hard to get the rest of the world to play by US house rules. And I don’t get the fear of China gaming the system. It’s only in our absence that happens.
With respect, I have been a leading U.S. trade official as well as a long time international business leader. It is not only in our absence that China games the system. We are all in the WTO and China has gamed the WTO system from start to now. Would be happy to discuss directly if you like.
Clyde we met when I was in Japan. Great respect. Hard to type all the complete ideas on a cell phone. 🙂. Would enjoy a direct discussion.
I mean, the "rest of the world" (basically the EU) and the US were "playing by US house rules" just fine pre-China WTO entry. So that doesn't make any sense to me.
You need to include Japan, South Korea, India (world's fifth largest economy) as well.
Not sure that Germany or the EU will go along wit that. I suspect that they forge their own ideas and plans for China and indeed Russia regardless of what America plans. The EU is restructuring itself to be an independent third power.
That's definitely true but its values are still far more aligned with America's (for the moment...) than China's or Russia's. The main issue is that the interests of German industry are completely misaligned with the values of 70-80% of the EU.
Good point, and I'm encouraged to see that they are treating the China portion of the immigration agenda (or the immigration portion of the China agenda?) as a special case.
Regarding your point, what might that look like in practice? A central database of all military affiliated Chinese international students shared across the five-eye countries? Sharing of EVUS data with friendly countries? A unified messaging on travel advisories across NATO and East Asian ally countries? As other countries in Europe and Asia are beginning to compile entity-list type policies (especially re: Huawei) it'd be great to see everyone come together at the WTO as a "United Front" (heh).
An entrepreneur such as Jack Ma even if bursting with patriotism might feel that Xi's preference for a "wolf" China has made it difficult for himself and other like him to act outside China & now regulators want to erect obstacles to action inside China.
If, by the way, the PRC acts against its own digital monopolies, I hope the US will be shamed to act against its own
The challenge for us, I submit to assembled sages, is not to bust up or punish or tech giants but rather to subtly reposition them as part of the American technology sphere as it confronts a Chinese technology sphere. We need to gradually persuade them to become better USA team players. Microsoft, for example, is responsible for training some of China's best AI scientists, according to the new book, China's Quest for Foreign Technology. Threatening our tech giants with dismemberment would not create the right climate to get them to recalibrate their behavior.
I wonder how many tens of thousands of engineers MS, Google , FB etc. have in China, directly employed and contracted?
Well, Facebook and Google don't have that many because they've essentially been kept out. But Microsoft, Intel, AWS, Apple, Cisco and others helped build the Great Firewall and have contributed mightily to China's technological emergence and employ, directly or indirectly, hundreds of thousands of people in China.
On Ant's failed IPO, Mark Mobius said this morning on Fox Business that he thinks the IPO failed because of valuation. He said he received a call in Singapore from a Chinese banker to offer him an allocation, which he has never received in his 50 or so years investing in emerging markets.
I also heard that before the IPO was pulled, Wilbur Ross received a call to inform him. While this was before the US election, I think US regulators antennae were up regarding the valuation, suspicious financials, and CCP insider elements of the supposedly 33x oversubscribed transaction.
Finally, a notable anonymous China hawk penned the following which I found pretty damning.
http://www.deepthroatipo.com/
My view is that like everything else in China, if the CCP could have taken the IPO money with no repercussions, they would have. Thus, when they realized that the IPO wouldn't go off at the advertised price, they made a decision to kneecap Ma and scapegoat him.
Mark is wrong. This IPO was the most over-subscribed IPO in exchange history. Price was not the issue. If the regulators were changing the rules post IPO then ANT ran the risk of a huge hit in price and Jack would not risk that. It was a combination of many things but price was not close to a determining factor.
Yeah, also not sure if US regulators had anything to do with Ant since it was going to be listed on STAR and HK. If there were financial, accounting or insider discrepancies known to them, they never voiced it and frankly had no jurisdiction anyway.
Yeah deepthroat has been hammering BABA for years, I have actually learned a lot about finance in general from reading his absurdly detailed dissections of their earnings calls and such. I have never seen another accountant or financial analyst provide a reasonable (any?) rebuttal of the main points of his critique of BABA specifically.
That being said, it's not like we haven't had U.S. companies engaged in similar practices over the years, though perhaps the half-life on such scams is shorter in the United States due to marginally better oversight.
Hi Bill, do you think the US decision to prevent investment into companies that have links to the Chinese military is a first step that will inevitably be widened to, say, Alibaba and Tencent?
Anyone have any sense on how this Exec Order is meant to be implemented? It feels superficial and ill-conceived. Preventing the trading of existing securities only hurts existing shareholders, not the underlying companies themselves as much. If the order were driven by preventing capital raising on US exchanges or from US sources, that makes more direct sense. However, telling an American investor or fund manager that they are no longer allowed to hold their shares of a chinese telco only forces them to divest, potentially at a loss, to those investors.
It seems we are headed down the slippery slope of a technology dis-engagement. If you add up all the threads, it seems both governments are organizing themselves to prevent each other's companies and enterprises from sharing too much technology or too much investment. The Americans want "clean" networks, which implies they will have to build them to exclude Huawei, Zoom and TikTok (and maybe WeChat). Huawei already has built communications networks in dozens of countries, so the Americans will have to create a separate Internet that is walled-off. Today's news that the U.S. administration will block U.S. investments in entities supporting the PLA could be the beginning of something much bigger. In view of China's "civil-military," every Chinese "civilian" entity engaged in semiconductors, cameras, AI, etc. will be suspect. I don't think American technology company CEOs can stop this and I don't think they understand what is happening. They're still trying, desperately, to play both sides. What are anyone else's opinions?
"civil-military fusion"
The U.S. ban on investment in Chinese military related companies is just the beginning. The logic inexorably extends beyond strictly military producers. Think of the contradiction. Apple deletes Hong Kong map apps from its app store at Beijing's command. This makes it easier for Xi to erase free speech and rule of law from Hong Kong. Apple helped Xi. We call Apple an American company but it really is a hostage of Beijing. In view of China's policy of military-civilian convergence, any foreign investment in China is, in principle, contributing to strengthening a China that effectively has declared war on free world values. You cannot escape the logic.
The western companies are lap dogs of the CCP. This is the price of “access” to the Chinese market. When you trade principles for money you usually wind up with neither.
Clyde while your logic frames the debate in a very one sided way it also puts quite a burden on corporations to support and promote American values when we have not taken care of our own business at home. Given Brazil’s raping of the rain forests and India’s assault on Muslim rights and...you get the point. Hard to draw that line. If Apple starts firing employees based on political views for example then I will move closer to your camp. American companies are often the best ambassadors we have. ESP the last 4 years. The fact they have to make business decisions doesn’t mean they are agents of the Party or the State.
The best ambassadors we have??? The Chinese might agree. American companies are basically telling the CCP no matter how outrageously you behave we will continue to pay you. Chinese care about three things; education, money and the freedom to travel. To get them to really listen you must deny them these. Mere talking will have no effect.
Hi Gary. Thanks for your comment. I have been in the trenches for a long time on both the business and government sides. I think you are correct in the sense that business cannot be expected to promote American values when it operates within markets ruled by opposite values. In the case of China, the non complimentary values of the U.S. and China put business in the position of being very politically powerful in Washington while being on its knees in Beijing. The corporations become hostages of the CCP. We cannot expect them to act otherwise on their own initiative. Believe me I know from personal experience. But, if the major corporations are hostages of Beijing and powerful in Washington at the same time, it is difficult to see how we avoid discounting our own values or essentially being guided by the CCP. So, the only alternative, it seems to me, is the establishment of a different set of incentives for business. The government must defend free world values by recovering control of the corporations from Beijing. This may sound over the top, but we must remember that the corporation owes its life to the state. By licensing it to incorporate the state grants the corporation limited liabilty. This is a huge gift to investors. We take it for granted today, but it is nevertheless a huge gift. The government makes that grant because it expects the corporation to do something good for the society over which the government presides. If the corporation is, in effect, undermining the government that licenses it or the values of the society that has created that government, then the government and the society have not ony the right, but the duty to rearrange the whole corporation deal such that the corporation is indeed operating for the benefit of the society and not just that of the CEO and a few shareholders whose timeframe is much shorter than that of the society.
American companies can be good ambassadors. I like to believe that I was such when I was in busines wiht Scott Paper Company and American Can Company. But they can only be good ambassadors to the extent that the society in which they operate enables them to be such. China does not do that.
Gary, just because we are doing a bad job of embodying liberal values at home does not mean it is right when others do an even worse job abroad. And there is no God of justice who will enforce liberal values on the world. We have to support them when and where we can. If you think Beijing is not using economic coercion and UF activities to force foreign companies to fight against liberal values, you haven't been paying attention (or reading Bill's newsletter!). The era of "business decisions" ended 8 years ago, and we aren't the ones who ended it.
I would agree with Gary though that walking the talk strengthens our argument over whose political system is better. And not doing so weakens it. A lot of countries are buying the CCP argument. Going forward we will be judged by what we do, not what we say. We need to raise our game.
So help me draw the line. I lived in Japan for 5 years and China fir 12. Lots of bad behavior particularly in China recently. But then I watch Brazil take out millions of acres of rainforest. India put 200m Muslims at a significant social disadvantage to speak nothing of their treatment of women in rural areas. Haven’t even gotten to the Middle East yet. So while it’s easy to say walk away from China it’s much more difficult to do and I have never found ignoring a competitor or disengagement to make me better or smarter.