Welcome to the 80th edition of Trade War.
Xi Jinping calls for curbs on “excessive wealth” and touts “common prosperity.” Chinese companies start hiring regulators to help in navigating the crackdown on private enterprise and China bull Ray Dalio takes a hit.
Biden names a US ambassador to China. The SEC gets tougher on Chinese companies. And China may use Afghanistan for propaganda purposes both at home and abroad including in Taiwan.
Xi calls for wealth redistribution
In what is being seen as a major speech to top Chinese officials, party secretary Xi Jinping pushed for wealth redistribution, reports CNBC’s Evelyn Cheng.
According to a translation of state media by CNBC, the finance and economics meeting held in Beijing called for the “reasonable adjustment of excessive incomes and encouraging high income groups and businesses to return more to society.”
“Elaborating on the ‘common prosperity’ objective, China has affirmed its effort to rebalance the economy toward labor, tackling social inequality with redistribution, social welfare, taxes and inclusive education,” a recent Morgan Stanley report says, noting as a target, “to increase the middle-income group’s share of the economy.”
“Income inequality among China’s 1.4 billion people has increased over the last few decades,” reports CNBC. Noted inequality expert Thomas Piketty and a team found in 2019 that the top 10 percent of China’s population earned 41 percent of national income in 2015, up from 27 percent in 1978. Meanwhile, the bottom half saw their share fall to 15 percent, down from 27 percent, over the same years.
A ‘chilling message’ to tech entrepreneurs
Along with the rolling regulatory crackdown, Xi is leading what is now becoming a full on assault on China’s tech billionaires aimed at creating a more equitable society, reports the Guardian’s Vincent Ni.
“The recent regulatory crackdowns also send a chilling message to enterprising Chinese business people, whose contributions to the economy are far bigger than many state-owned firms,” Dexter Roberts, senior fellow at Atlantic Council’s Scowcroft Center for Strategy and Security, told the Guardian’s weekend paper Observer. .
“Chinese economists have long wondered whether the tech sector would be Xi’s next move in addressing the issue of wealth distribution,” said Roberts, who is also the author of The Myth of Chinese Capitalism. “In this sense, it’s unsurprising that this is now happening. After all, these tech firms are the symbol of excessive wealth in China.”
“Since his ascent to power in 2012, Xi has discussed the issue of inequality on several occasions. Early this year, he told his provincial ministerial-level cadres that achieving common prosperity was ‘not just an economic issue, but a significant political one that matters to the party’s basis to rule’,” reports Ni.
“Under Deng Xiaoping, people remember the catchphrase ‘to get rich is glorious’; but Deng also said that, ultimately, China will have to achieve common prosperity,” Yang Li, a China researcher at the Paris School of Economics’ World Inequality Lab, told the Guardian.
“Now that China has reached middle-income status, Xi thinks it’s time to deliver the latter part of Deng’s mantra: to ultimately achieve common prosperity.”
Xi’s 3rd term adds urgency to common prosperity push
Xi aims to promote a more equitable society even at the expense of economic growth, report the Wall Street Journal’s Keith Zhai and Stella Yifan Xie.
“In a major meeting on financial and economic affairs Tuesday, President Xi described the wider goal of ‘common prosperity’ as an ‘essential requirement of socialism,’” write Zhai and Xie.
“Xi Jinping is seeking to rebrand the Communist Party’s image domestically and internationally” by reducing income gaps and shifting to higher-quality development, Bill Bikales, a former economist for the United Nations in China, told the Journal. “He wants this to demonstrate that socialism is better than Western capitalism in caring for all the population.”
When Xi’s premier Li Keqiang announced that more than 600 million people or 40 percent of the population lived on less than $140 a month, it created a stir across China with “many Chinese [complaining] privately about the sway of rich business tycoons.”
“The end of Mr. Xi’s second term in office—and his expected push for a third term in a power reshuffle next year—may be adding some urgency to the ‘common prosperity’ push, especially with growth now starting to slow,” reports the business paper.
China bull Ray Dalio takes a hit on crackdown
China bull Ray Dalio’s fund Bridgewater has taken a hit in the crackdown, reports the South China Morning Post’s Josh Ye.
“Bridgewater Associates, the world’s biggest hedge fund, took some knocks on investments in Chinese education and technology stocks last quarter, before the market sold off in July,” the Hong Kong-based English language paper notes.
Bridgewater held shares in at least 37 Chinese firms, including Alibaba, Pinduoduo, JD.com, NIO and Baidu, the fund’s “five biggest by market value.”
“Its holdings in New Oriental Education and Technology, TAL Education, Gaotu TechEdu, JD.com and Pinduoduo recorded some of the biggest declines in value, according to its latest 13F quarterly filing with the Securities and Exchange Commission,” Ye writes.
By contrast, Bridgewater’s stakes in three Chinese electric vehicle companies “paid off handsomely,” the Post writes. “It bought more shares in Li Auto and Xpeng while trimming its stake in NIO, three of the biggest challengers to Tesla’s dominance in the mainland’s electric vehicle market. The surge in their stock prices helped keep the firm’s overall China play in net gain.”
Investors will have to wait until the hedge fund’s next filing to know how the July sell-off has affected Bridgewater. Writing on LinkedIn last month, Dalio asked that investors look at China’s decades of market reforms and not let recent developments “scare you away.”
Tencent shrinks by $400 bill, is downgraded
Tencent’s market cap has fallen by over $400 billion from its peak in February, “an amount equivalent to the size of [French luxury brand] LVMH,” tweets the South China Morning Post’s Josh Ye.
“Hong Kong stocks declined after a publication run by the Xinhua News Agency slammed internet gaming addiction, heightening concerns that the industry could become the next target of Beijing’s regulatory wrath,” reported the Hong Kong paper. Meanwhile, JP Morgan has downgraded Tencent, citing the impact of new regulations.
Chinese companies seek officials to navigate crackdown
Chinese companies are turning to former regulators to help them navigate the crackdown, reports Bloomberg News.
“Officials at watchdogs in charge of the financial system, and those from ministries overseeing commerce, industry and information are the most sought after, with pay packages in some instances approaching half a million dollars, about 60 times the average for civil servants, according to headhunters,” reports Bloomberg.
“Deng Ge, the former spokesperson at the China Securities Regulatory Commission, was named president of Guosen Securities Co. last year. Another CSRC official, Guo Xudong, joined Wuhan Dangdai Science & Technology Industries (Group) Co. last year as vice chairman. A vice president at online market place JD.com Inc., Zeng Chen, is a former Commerce Ministry official, according to People’s Daily.”
Still, a former regulator may not always have the power to deal with the new challenges when an industry or company is targeted, given the high profile nature of the ongoing push to rein in private enterprise.
“When the storm comes, it falls more on the executives than a person in government affairs to turn the tide,” said Jackie Yang, a director of fintech recruitment at Shanghai Brightway Consulting Co. “In some situations, even for the top heads, the room to maneuver is very limited.”
SEC warns again on Chinese companies
The head of the U.S. Securities Exchange Commission has made his strongest warning yet of the risks of investing in Chinese companies, reports Bloomberg News.
U.S. Securities and Exchange Commission Chair Gary Gensler said in a video message that American investors are facing a serious lack of information about Chinese companies listed on U.S. stock exchanges, reports the financial news service.
“His remarks come just weeks after the regulator halted initial public offerings of Chinese companies until they boost disclosures and warned investors may not be aware that they are actually buying shares of shell companies instead of direct stakes in Chinese businesses,” reports Bloomberg.
A US ambassador to China
After months of speculation the Biden administration has finally named its candidate for U.S. ambassador to China, former career foreign service official Nicholas Burns, according to a White House press release.
Burns, who now serves as a professor in diplomacy and international relations at Harvard’s Kennedy School of Government, is not a Chinese speaker but is fluent in French and knows some Arabic and Greek.
“During his State Department career, Burns served as Under Secretary of State for Political Affairs, Ambassador to NATO and to Greece, State Department Spokesman, and on the National Security Council staff on Soviet and Russian Affairs,” the release notes. “As Under Secretary, he worked with the Chinese government on issues as diverse as Afghanistan, United Nations Sanctions against Iran, North Korea ,and U.S. policy in the Indo-Pacific.”
How China might profit from the Taliban’s takeover
Although China faces major challenges in Afghanistan with the U.S. pullout, Beijing will aim to use the situation to achieve a propaganda victory both at home and abroad, writes Brooking Institution senior fellow Ryan Hass.
“The principal means through which China may seek to profit from America’s withdrawal might be its efforts to advance a narrative of American decline,” writes Hass. “Chinese propaganda officials likely will seek to exploit tragic images of America’s abandonment of Afghan partners as proof points of American unreliability and incompetence.”
For Chinese at home, “Beijing’s message will be that the United States is not an object of worship. Unlike Washington, Beijing will not intervene in other country’s civil wars, spill blood, and leave messes behind.”
By contrast, Beijing will aim internationally to project the message that “America’s best days are behind it. Afghanistan is but another way station on America’s path of decline. China’s rise is the story of the future.”
China will also likely seek “to undermine the psychological confidence of the Taiwan people in their own future. Beijing would like to advance a narrative inside Taiwan that the United States is distant and unreliable, Taiwan is isolated and alone, and Taiwan’s only path to peace and prosperity runs through Beijing.”
Notable/In depth
China may have opened a secret detention facility in Dubai that is holding at least two Uyghurs, reports the Associated Press.
This fascinating in depth piece shows how Alibaba’s Jack Ma made the critical mistake of forgetting China has only one leader, report the Wall Street Journal’s Keith Zhai, Lingling Wei, and Jing Yang.
Xi Jinping is trying to overcome inequalities in China’s “gilded age,” what has become “one of the most unequal societies on earth,” writes the Financial Time’s James Kynge.
“Having spent four decades creating one of the most unequal societies on Earth, Beijing is now seized by a mantra of “common prosperity” — or redistributing spoils to hundreds of millions of have-nots,” writes Kynge. “Moutai, which is drunk in shot glasses and can cost thousands of dollars a bottle, has been a pungent symbol of China’s ‘gilded age’.”
China’s ambitious plans to create a new economic model
I spoke to Bloomberg Radio’s Carol Massar and Tim Stenovec about the crackdown on private enterprise and how it fits into China's ambitious plans to create a new economic model (starts at 18:06).
Why China’s leaders need to deal with the wealth gap
Why China's leaders need to deal with the wealth gap and why the whole world should be thanking China's migrant workers were both part of my discussion (in Chinese) with 鏡好聽 Mirror Voice about my book 《低端中國》.
Montana wilderness
Here’s a view looking towards the Rattlesnake Wilderness.
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