China’s ‘wolf warrior diplomacy’ has come to Wall Street

Xi jinping at CCP 100th anniversary
Chinese President and Chairman of the Communist Party Xi Jinping appears on a large screen as performers dance during a mass gala marking the 100th anniversary of the Communist Party on June 28, 2021 at the Olympic Bird’s Nest stadium in Beijing, China.

  • China’s assertive, nationalistic behavior – known as “wolf warrior diplomacy” – has come to the financial markets.
  • This week Beijing punished a Chinese tech company that listed on the New York Stock exchange, and announced rules to govern all Chinese companies listed abroad.
  • Consider this part of the Chinese Communist Party tightening its grip on power at home, and closing its doors power from abroad.
  • This is an opinion column. The thoughts expressed are those of the author.
  • See more stories on Insider’s business page.

It was only a matter of time before Beijing’s heightened nationalism came to Wall Street.

This week, Chinese authorities punished Didi, a ride sharing company, for its June 30 public debut on the New York Stock Exchange. Shortly after the Didi crackdown, Beijing announced new measures that could restrict Chinese companies going public abroad.

What all this is telling us is that Beijing is no longer going to tolerate its tech stars making foreigners rich on foreign exchanges. And it is further evidence that China is closing its society and economy to the West.

Bring it all back home

In order to more freely list on foreign stock exchanges, Chinese companies create something called a “variable interest entity.” In such an arrangement, a Chinese company creates another company in a tax haven like the Cayman Islands where foreigners can invest. The Chinese company then signs an agreement that gives control and profits to the Cayman entity, from which money is distributed to shareholders and the company back in China. For years, Beijing generally looked the other way when it came to VIEs.

Now, according to Bloomberg, Beijing’s new regulations are designed to limit the ability of Chinese companies to set up these entities. The proposed rules would govern what data can and can’t be shared abroad, target “illegal securities activities,” and set up extra-national laws Chinese companies would have to follow regardless of where they are listed.

Didi shares are down around 20% since it’s IPO, in part because Beijing announced these measures, and in part because it has become a target for authorities at home. On July 2, the Cyberspace Administration of China announced it was investigating Didi. Two days later China’s app stores were ordered to stop allowing users to download Didi. The CAC claims that Didi was illegally collecting user data.

And perhaps that’s true. But it’s also likely that this is a signal that “wolf warrior” aggression – a kind of Chinese diplomacy named after a hyper-nationalistic film- has come to financial markets. Two other Chinese tech companies listed in the US – Kanzhun and Full Truck Alliance – also had their downloads halted by Chinese regulators. The almost 250 Chinese companies worth $2 trillion in market cap listed on major US exchanges should all be watching their backs.

China is closing

There are two main reasons for this seemingly sudden crackdown – one is China’s increasing antagonism with the West, and the other is the Chinese Communist Party’s own desire for power and self-preservation. Together they amount to the reality that China is once again closing its doors to the world, reversing the opening that began in the 1970s.

As part of a larger crackdown on civil society, the Chinese Communist Party has been tightening its control over any sources of power that might challenge it at home. That includes tech billionaires like Alibaba founder Jack Ma, who has recently been publicly brought to heel by Beijing. And it includes tech companies, like Tencent and Pinduoduo, another e-commerce giant.

Targeting tech companies that list abroad also puts pressure on Chinese companies to consider an IPO to list in Shanghai or Hong Kong instead. It is no secret that China’s encroachment into Hong Kong prompted an exodus of financial firms from the city. Making it the new landing place for Chinese tech companies to go public could help it maintain its status as a global financial center.

It is also no secret that the US and China are at risk of what some call “decoupling”– essentially breaking ties and creating a world with separate US or China-centric technologies and financial centers. In some ways, because the two powers have become so antagonistic, this is already happening. Domestically, Beijing has been investing in technological advancements with the hopes making the country a techno-superpower by 2025. Now it’s calling its companies home.

What’s doubly important is that none of the above is primarily about making China rich. It’s all about hoarding power for the CCP. Under President Xi Jiinping that has become Beijing’s motivation above all else, and we should all expect it to act accordingly – even when it means hurting its own domestic companies.

A chilling effect

Last year Congress passed the Holding Foreign Companies Accountable Act, which requires foreign companies listed on US stock exchanges to be audited by the Public Company Accounting Oversight Board’s. If they refuse for three years in a row they can be delisted. Last month, the Senate passed a law that would shorten the time frame to two years in a row.

The problem with this is that so far, Chinese regulators will have absolutely none of it.

This is a stare down. If Chinese companies listed here in the US do not comply they will be delisted. If they do comply Beijing could come down hard on these companies at home. In the meantime recriminations are flying. GOP Sen. Marco Rubio of Florida called the Didi IPO “reckless and irresponsible” weeks before Beijing clamped down on the company, arguing that Didi is a black box.

Rubio and Democratic Sen. Senator Bob Casey of Pennsylvania introduced a bill in May that would prohibit companies from going public on US exchanges if they do not comply with US regulators and submit to an audit from the Public Company Accounting Oversight Board.

All of this pressure from Beijing and Washington will, without a doubt, have a chilling effect on Chinese companies listing here in the United States. So yes, this is another form of decoupling – and it’s coming from both sides of the Pacific.

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This was one of the worst weeks for China on the world stage in a while

China's President Xi Jinping rubs his eyes
Chinese President Xi Jinping rubs his eye as he arrives for the seventh plenary session of the first session of the 13th National People’s Congress (NPC) at the Great Hall of the People in Beijing.

  • It was a bad week for China on the world stage.
  • President Biden is getting a warm reception in Europe rallying our democratic allies in the G7, the EU and NATO.
  • And at home, our squabbling US Senate somehow managed to pass a $250 billion bill countering China.
  • This is an opinion column. The thoughts expressed are those of the author.
  • See more stories on Insider’s business page.

This week the leaders of the Western world turned their eyes toward China, and as a result it was one of the worst weeks for Beijing on the world stage in some time.

In Washington, Democrats and Republicans in the Senate set aside their differences to pass a $250 billion industrial policy bill aimed at preparing US commerce and government for competition with Beijing. And while on a diplomatic trip to Europe, President Joe Biden is reinvigorating our ties to our allies in Europe, the G7 group of nations, and NATO. On the top of the agenda in these meetings is the question of how to counter an aggressive, totalitarian China on the rise.

This comes as every indication points to China moving farther and farther away being an open, even remotely democratic society.

Earlier this week Amnesty International published an in-depth look at life for Muslims living in the Xinjiang Uyghur Autonomous Region, calling it a “dystopian hellscape” where Muslims are terrorized and arbitrarily forced into labor camps as part of “part of a larger campaign of subjugation and forced assimilation.” The Times also reported the Chinese government is seizing Uyghur Muslims who flee abroad.

On the economic front, the Chinese legislature rushed through a bill expanding the government’s means and methods to retaliate against foreign sanctions including the ability to seize foreign companies’ Chinese assets, deny visas, and block the ability to do deals in China. Foreign businesses in the country were caught flat-footed.

At the heart of China’s bellicose behavior is the belief, held among many elites in the Chinese Communist Party, that the US and its partners in the West are in a state of decline. This idea took root during the 2008 financial crisis, and then was reaffirmed by the European debt crisis, the election of Donald Trump and his agression towards our European allies, and the United State’s handling of the coronavirus pandemic.

To the CCP, our way of life looks like chaos – a cacophony of voices sometimes forcefully pulling our discourse to the right then back to the left. They’ve convinced themselves that we can no longer organize and unify our societies to do the ambitious things that need to be done to win the future. This week the West showed China signs that – when it comes to countering a strengthening totalitarian power – that may not be the case.

A matter of trust

China squandered a massive opportunity over the last four years. As president, Donald Trump snubbed America’s traditional allies and made overtures to the world’s thugs and petty dictators. That could have been a moment when China cozied up to Europe as a more stable alternative, instead China wound up alienating the continent with its overbearing behavior.

For example, at the beginning of this year it seemed certain that the European Union and China would sign a trade deal, against the wishes of the United States. But in March, when the EU sanctioned China over its treatment of Uyghur Muslims, Beijing – in keeping with its policy of aggressive “Wolf Warrior” diplomacy – responded by sanctioning members of EU Parliament. This put the EU-China trade deal on an indefinite hold.

That brings us to Biden and his current trip to Europe, where the president is trying to rebuild trust among nations. His administration is working on undoing the tariffs the Trump administration put on its EU partners with an aim to lift them by the end of the year. He is encouraging unity on the European continent, urging UK Prime Minister Boris Johnson to settle his differences with the EU over Brexit and keep the peace on the Ireland-Northern Ireland border. Biden also announced that the US would donate 500 million doses of Pfizer’s COVID-19 vaccine to over 100 countries “no strings attached.”

Trump’s betrayal of our allies left commentators around the world wondering if US-led groups like the G7 would be able to cooperate enough to do hard things again. This week we’re seeing signs that they can and will. The first sign was Treasury Secretary Janet Yellen’s momentous announcement that the G7 had come to an agreement on an international minimum corporate tax to stop the race to the bottom in taxing the world’s richest companies.

And now it appears Biden is also rallying our allies to counter China. Before he left for Europe, Biden met with NATO Secretary-General Jens Stoltenberg at the White House. Addressing the press after their meeting Stoltenberg said China “doesn’t share our values.” Biden will attend a NATO summit on Monday, and it will produce the strongest statement in its history on NATO’s stance on China, according to the Wall Street Journal.

From the comfortable primeval mud

Legendary American diplomat George Kennan – known for outlining the US policy of containing the USSR during the Cold War – used to say that the US people are always about 10 years behind its diplomats when it comes to seeing danger from abroad. Lecturing back in 1950 he compared democracies to a giant prehistoric monster “with a body as long as this room and a brain the size of a pin” that needs to be directly confronted with a problem before it awakens from the “comfortable primeval mud.” But when a challenge does gain our attention, Kennan said, the country lashes out with “such blind determination that he not only destroys his adversary but largely wrecks his native habitat.”

Perhaps the US has learned something from Kennan. Consider the Senate’s passage of a 2,400 page bill aimed at shoring up the US as an economic and technological superpower. The size and scope of the bill shows that our leaders are trying to meet a challenge before it’s an emergency.

The bill allocates $52 billion to building up the semiconductor industry in the US in order to decrease our dependence on semiconductors from China and Taiwan. The bill also funds major research, allocating $81 billion to the National Science Foundation from 2022 to fiscal 2026 and $120 billion into technologies like artificial intelligence and quantum computing.

There are also diplomatic and intelligence measures. It bars US diplomats from attending the Olympics in Beijing, and requires the intelligence community to produce a report about China’s efforts to influence international bodies like the World Bank, International Monetary Fund, World Trade Organizations and United Nations. It passed the fractious US Senate – sometimes sardonically referred to as Mitch McConnell’s “legislative graveyard” – on a vote of 68 to 32.

China responded to the bill saying that it “slanders China” and is “full of Cold War mentality and ideological prejudice.”

In a time when the leaders of the richest country in the world are squabbling amongst themselves over whether or not to fund the building of roads and bridges, this bill is a heartening sight. The most important ways the US can counter China are by strengthening itself domestically and by preparing for the worst with its allies. If the giant prehistoric monster hasn’t awakened, this week shows that it now at least has one eye open.

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Republicans and Democrats are teaming up to take a ‘huge step’ in the US’s battle against China

Chuck Schumer
  • Top Democrats are partnering with Republicans on a bill to counter China’s economic influence.
  • Co-sponsor Rep. Ro Khanna said in an interview lawmakers “hit the sweet spot” with the plan.
  • The legislation will be a test of whether Democrats and the GOP can still work together in Congress.
  • See more stories on Insider’s business page.

A group of Republicans and Democrats are putting forward a new plan aimed at bolstering the nation’s economic competitiveness against China. It represents a big test of whether Republicans and Democrats can still collaborate on key issues in Congress.

Senate Majority Leader Chuck Schumer along with Republican Sen. Todd Young introduced legislation on Wednesday to pour federal money into industries like semiconductors and artificial intelligence. Other co-sponsors included Democratic Rep. Ro Khanna of California and GOP Rep. Mike Gallagher of Wisconsin.

The package would also expand the National Science Foundation, providing $100 billion over five years to fund a new research and development agency. It also allocates $10 billion to build regional hubs across the US to boost domestic manufacturing and create new companies as well.

“This legislation will enhance American competitiveness with China and other countries by investing in American innovation, building up regions across the country to lead in the innovation economy, creating good-paying American manufacturing and high-tech jobs, and strengthening America’s research, development, and manufacturing capabilities,” Schumer said in a statement.

Khanna of California, a top House progressive, said in an interview that the broad coalition reflected deep backing for the measure. He believes lawmakers “hit the sweet spot” with a package aimed at countering China’s economic influence, a rare area of bipartisan agreement in Congress.

“I think it is a huge step in that direction in terms of improving our competitiveness, improving our job creation and improving our support of critical industries,” Khanna said in an interview with Insider. “It’s a key area.”

The White House released a statement supporting the package, though signaling it could still change.

“We look forward to working with Congress to further shape this legislation to renew America’s global leadership in science and technology and to make sure we develop and manufacture the technologies of the future,” White House press secretary Jen Psaki said in a statement.

China’s economic ascent has prompted a groundswell of Republican and Democratic calls for the government to invest more money into research and development in recent years. The pandemic also exposed the reliance of the US on global supply chains that originate in China.

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When it comes to China, the US need to figure out which fights are principled, and which fights are petty

Biden and Xi Jinping
Then Vice President Biden met with Chinese President Xi Jinping at a California meeting aimed at strengthening Chinese investment in the state. China has now the lead in 5G infrastructure, but experts say don’t count Silicon Valley out yet.

  • John Kerry was in China this week discussing climate change and some people are upset about it.
  • They think cooperation on that issue could stop the US from being aggressive with Beijing about a host of other issues.
  • They’re delusional.
  • This is an opinion column. The thoughts expressed are those of the author.
  • See more stories on Insider’s business page.

President Joe Biden’s special envoy on climate, John Kerry, went to Shanghai this week to discuss how best the two largest economies in the world can address the threat of climate change. Despite the meeting being pretty standard stuff, it still has some US-China watchers completely losing their minds.

This freak out crew would prefer to have cordial relations between the two countries end tomorrow and instead have the US put maximum pressure on the Chinese Communist Party. They would prefer a world completely split in two, divided by a “digital iron curtain” with the US and fellow democracies on one side, and China, Russia, and their allies on the other. Economic ties would be cut, the flow of people would slow to a trickle, and the prospect of war would heighten across the world.

To them, Kerry and his message of cooperation on climate change could derail that future. That’s a false choice, but despite it’s absurdity the idea has become pervasive. Over at the Brookings Institution they decided that Kerry could go rogue, becoming a one-man wrecking ball for the entire government’s more muscular China policy. This is ridiculous on its face. Ultimately it is President Biden who will decide the direction of our China policy – and, as one former Obama administration Asia hand told me dismissing this theory, “John Kerry is no panda hugger.”

This is a delicate moment. The boundaries of the US-China relationship are being redrawn. We are watching trust rapidly dissipate between world powers in real time, and we shouldn’t waste what little trust we have now on empty antagonism. There will likely come a time when we wish we had that trust back.

A bomb and the time bomb

In the 1950s and 1960s the end of human civilization was staring its destruction in the face in the form of the nuclear bomb. The bomb was getting bigger and deadlier; spreading to more countries; and had already laid waste to cities and contaminated populations.

And so in 1963 during some of the most frigid times of the Cold War between the United States and USSR, the key nuclear powers of the time (which also included the United Kingdom), signed the Limited Testing Ban Treaty. The treaty regulated how and where countries could test their bombs, and it set up an emergency line of communication between powers to avert disaster – “the hotline.”

This all amounted to one critical thread of cooperation between the US and USSR during an otherwise entirely uncooperative period. The Cold War went on, but the prospect of nuclear winter shrank.

Today the threat facing human civilization is climate change, and the two countries that most need to work together to solve it – the US and China – are on the verge of another conflict that will force the planet to choose sides. In both countries there are people who are calling for a cessation of cooperative interactions. To them, every cooperative meeting is a Trojan Horse, during which one side will magically convince the other to forget every other issue pulling them apart.

But what we learned from the Cold War is that the US and an adversarial superpower are perfectly capable of sustaining fierce competition, while also cooperating enough to keep the world from destroying itself. When it comes to the US and China today, not only are we not in as dark a place as we were with the USSR in 1963, but we also have far more economic and business ties to break before we get there.

Until we’re serious about breaking those ties entirely (we’re not yet), we shouldn’t act like we are. That’s called posturing, and the United States ought to be above that.

That doesn’t mean we aren’t aggressive regarding issues that concern us – like Xinjiang, Hong Kong, North Korea, and Taiwan. It does not mean we aren’t aggressive when China bullies our allies, like Australia, or engages in cyber hacking. It does not shrink our commitment to democracy. But it does mean finding ways to cooperate where we can and keeping lines of communication open.

I mean my God, even in 1963 they had the hotline.

Cooperation

Here’s how I know we’re not serious about cutting commercial and social ties with China just yet. Right now the Senate Foreign Relations Committee is working on a sweeping bipartisan bill to address China’s rising power. In it there’s hundreds of million of dollars for defense and programs to country China’s telecommunications rise. But for companies that want to move their operations and supply lines out of China there’s just $15 million. The US government loses $15 million in the couch cushions. That is not serious money.

But what people who do business in China will tell you is that getting public data, or having the mobility and access to interview customers to do business there, is getting harder. On March 19, Anne Stevenson-Yang, founder of China-focused investment firm J Capital Research Ltd testified before the US-China Economic and Security Review Commission on Capitol Hill.

She told attendees that more and more of China is state run – that it’s not opening it’s economy anymore, that it’s closing it. Public economic data that used to be easy to get started evaporating back in 2015, shortly after Chinese President Xi Jinping took power. This back pedaling does not just make Chinese society more brittle, she argued, but it also creates incentives in the Chinese economy that put investors and multinational corporations at risk. The solution, in some of those instances, is more cooperation – not less.

“The practical remedy for faked data, for example, on a corporate, industrial, and macroeconomic level, is to grant American researchers unfettered access to conduct surveys, interview individuals, and review financial records of all sorts in a legal proceeding, including tax records, audit papers, invoices, and communications,” she said. “A key impediment to such data collection is China’s law forbidding independent surveys. Survey teams need to be able to access respondents within a framework of privacy law but not one of data supervision.”

Achieving that requires cooperation, but that doesn’t mean Stevenson-Yang isn’t realistic about where it is not possible. For example, she recommends treating Huawei, ZTE, and other Chinese network gear as spyware and supports technology export restrictions.

If China closes and gradually makes itself a terrible place to do business, that is on China. It is on the US government to ensure that our multinational corporations are ethical, transparent, and consider our domestic interests at the center of their business. In the meantime the most productive thing to do is engage with China to protect investors and US businesses as best we can.

Besides, this is America and we do capitalism. If you want to do business in China and don’t mind the uncertainty of having your product randomly barred from military complexes and personnel; or you want to deal with your company being harassed and boycotted for not endorsing cotton from Xinjiang or whatever, knock yourself out.

Separating the principled from the petty

In this fragile moment, there is a danger of confusing the principled with the petty. When that happens, any slight can lead to a stand off.

There are petty new features of this more antagonistic relationship we all just have to get used to rolling off our backs. For example, China forced the world to get used to its hyper-aggressive “Wolf Warrior” diplomacy, and now it has to get used to a US strategy that it dislikes – US led multilateralism. To China, when we rally our allies to make joint statements about things like human rights abuses in Xinjiang, that’s bullying.

Too bad. When the US is run correctly, that’s how we do things. Beijing will have to get over it.

This is to make space for the issues that Beijing and Washington cannot get over, most of which was discussed between President Biden and Japanese Prime Minister Yoshihide Suga on Friday. Suga will be the first foreign leader to visit the White House since Biden took office. It is a sign of the gravity of the matters they have to discuss – like North Korea, Taiwan and a maintaining “free and open Indo-Pacific.”

Perhaps it’s a coincidence that Kerry’s and Suga’s meetings fall at the same time, perhaps it’s not. Both are meant to address exigent situations that demand cooperation at highest levels of government and both must be had. Until the day comes when we are serious about ending the US-China relationship – and that day very well may come – we should continue to seek cooperation where it benefits the people and institutions of the United States of America. Anything else is an exercise in fantasy, or worse – just posturing.

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