Welcome back to the 75th edition of Trade War. I hope you’ve all enjoyed a good few weeks of summer (for those in the northern hemisphere; winter, for those in the southern hemisphere.)
It’s certainly been a a busy few weeks in China news.
The crackdown on China’s big entrepreneurial tech companies continues, with ride-hailing giant Didi now in the crosshairs. Beijing reports strong second quarter GDP growth but domestic consumption is still a concern.
Biden warns U.S. companies of the risks of operating in Hong Kong while sanctioning more officials from the territory. And China seems to be ever more closing its doors to the world, with growing xenophobia, argues the Economist.
Bombshell investigation derails latest tech giant
Didi Global, China’s ride-hailing giant, is the latest technology company to be punished by Chinese regulators, coming immediately after its U.S. IPO, reports Reuters.
In early July China's internet regulator first announced it was investigating the company to protect "national security and the public interest,” then ordered “smartphone app stores to stop offering Didi Global Inc's app after finding that the ride-hailing giant had illegally collected users' personal data,” reports the news service.
“Stunned…They let it IPO and then hammered the company,” tweeted Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics.
Hammer blow to entrepreneurial elite
The news on Didi is the latest “hammer blow” to China’s entrepreneurial elite, report Bloomberg News Blake Schmidt, Coco Liu, and Venus Feng.
“The age of unfettered gains for China’s ultra-rich now appears to be coming to an abrupt end,” the journalists write.
“Even as the world’s 10 wealthiest people added $209 billion to their net worth in the first half of 2021, China’s richest tycoons in the Bloomberg Billionaires Index saw their combined fortunes shrink by $16 billion. Shares of their flagship companies sank by an average 13% during the period, the first time in at least six years they’ve recorded declines when the broader Chinese equity market was rising.”
Didi’s stock had fallen by 14% since its June 30 listing on the New York Stock Exchange, as of July 11, which led to an almost $800,000 drop in wealth for the ride-hailing company’s co-founders.
Along with concerns about anticompetitive behavior, financial stability, the misuse of personal data, and growing inequality, is “a not-so-secret desire to rein in the power of China’s tycoons, some of whom have amassed an enormous amount of influence over the $14 trillion economy.”
“As one government official familiar with the leadership’s thinking described it, Beijing wants to prevent its billionaires from becoming a force as strong as the family-run chaebol that dominate South Korea’s economy and many aspects of its politics.”
“Little Red Book” US IPO put on hold
Xiaohongshu or “Little Red Book,” a Chinese social media and e-commerce company, has put its plans for a U.S. offering on hold amidst the crackdown, reports Bloomberg News.
Under new rules, the company would likely have to undergo a cybersecurity review before listing overseas and it is now considering Hong Kong as an alternate location for its IPO.
“The fallout from the $4.4 billion U.S. IPO by China’s Didi Global Inc. has thrown many listing plans into disarray,” the financial news service writes, and will likely require companies with data on more than one million users to undergo a pre-offering review.
$45 trillion in lost capital flows by 2030
Deferred reforms could cost China as much as $45 trillion in lost capital flows by 2030, writes the Atlantic Council’s CEO Fred Kempe, citing a calculation by the Rhodium Group and the Council.
“This was a clarifying week for global investors — or for anyone concerned about authoritarian capitalism — of just how much the Chinese Communist Party (CCP) would be willing to pay to ensure its dominance,” writes Kempe, citing the crackdown on Didi.
“Chinese domestic companies, particularly of the tech and data-rich variety, will be more likely to shun Western capital markets and adhere to party preferences. Foreign investors, only too happy to accept risk for the long-proven upside of Chinese stocks, now must factor in a growing risk premium as Xi tightens the screws.”
China Q2 growth of 7.9%, but recovery unbalanced
After reporting 7.9 percent growth in the second quarter over a year earlier, China looks set to meet its 2021 full-year target of 6 percent even as risks remain in the economy, reports the Wall Street Journal’s Stella Yifan Xie.
“Despite a solid economic performance in the second quarter of the year, Chinese policy makers are expected to walk a fine line between supporting growth amid rising downside pressures and letting the economy run its course as they pivot to tackle longer-term challenges,” Xie writes.
While the monthly June numbers for fixed-asset investment, industrial output, urban unemployment, and retail sales all performed well, China’s "economic rebound also remains unbalanced, with domestic demand languishing while factory production and exports propel the economy.”
“There is no obvious driver from the domestic economy to power growth ahead,” Betty Wang, senior China economist at ANZ, told the Journal. “An unstable job market for China’s lower-wage earners and higher property prices have prompted an increase in precautionary savings, which has hit overall spending,” said Shen Jianguang, an economist at JD.com.
Reduced consumption targets suggests challenges
China’s commerce ministry has released its five-year plan, highlighting the need for import diversification in farm products and energy, and a closer eye on foreign investment, writes the South China Morning Post’s Orange Wang.
The 42-page plan, which covers the years from 2021 to 2025 notes that “the opportunities and challenges facing commerce development in the 14th five-year period are unprecedented, but in general the opportunities outweigh the challenges.”
While the plan calls for strengthening domestic consumption as part of Beijing’s “dual-circulation” strategy, it sets a target of only five percent growth in retail sales, below the “around 10 percent” target in the previous five-year plan.
“Beijing seems to have become much less ambitious about the pace of consumption rebalancing – in fact 5% growth in consumption (from 10% not so long ago) basically means little to no rebalancing over the next few years,” writes Peking University finance professor Michael Pettis in a tweet thread.
“This is probably because they've realized that the pace of rebalancing is largely determined by the pace at which the household share of GDP increases, and there are substantial political constraints to increasing the household share (and so reducing the government share).”
Biden warns US companies in Hong Kong
Biden has warned U.S. companies of the risks of operating in Hong Kong as well as issued new sanctions on Chinese officials operating in the territory, write the Financial Times’ Demetri Sevastopulo and Primrose Riordan.
“The US issued a “business advisory” about threats ranging from China’s ability to gain access to data stored on servers in Hong Kong to a new Chinese law that allows sanctions to be imposed on anyone who helps foreign nations enforce sanctions against Chinese companies and officials,” the paper reports.
“This new legal landscape . . . could adversely affect businesses and individuals operating in Hong Kong,” the advisory said. “They should be aware of potential reputational, regulatory, financial, and in certain cases legal risks associated with their Hong Kong operations.”
Former U.S. consul-general in Hong Kong Kurt Tong described the move as a “mixture of denunciatory political rhetoric aimed at China” and consular advice to businesses.
“The prospect of the advisory had not been well received by US business in Hong Kong, with concerns that it could foster a backlash against American companies operating in the city,” the Financial Times reports.
“Extremely rude” and with “despicable intention”
China’s foreign ministry branch in Hong Kong responded to the move angrily, calling it “extremely rude” and with “despicable intention,” reports Reuters.
"(U.S.) worries about Hong Kong's business environment is fake; its attempt to destroy Hong Kong's prosperity and stability, endanger China's national security, and hamper China's development is real," the Commissioner of China's Ministry of Foreign Affairs in Hong Kong in a statement.
Notable/In Depth
As China keeps it borders closed with a “zero tolerance” policy towards the virus, it is also turning inward and seeing rising nationalism, writes the Economist’s David Rennie.
“The outside world stands for chaos. Propaganda outlets stress that new cases involve arrivals from abroad. State media describe foreigners, notably Americans, as too selfish, science-scorning and obsessed with individual rights to control the virus. Images of mask-less Westerners on crowded beaches or rampaging at anti-lockdown protests are a staple of Chinese news coverage.”
“Chinese history has seen many cycles of opening and turning inward. Anecdote by anecdote, evidence is mounting that foreigners, whether suspected of bearing dangerous germs or ideas, are becoming less welcome.”
“The Chinese Communists did the right thing”
“The Chinese Communists did the right thing - they just called in [Alibaba’s] Jack Ma and said ‘you aren’t going to do it sunny,’” Berkshire Hathaway’s Charlie Munger said in a recent interview on CNBC.
Mike Forsythe 傅才德 @PekingMike
Charlie Munger: “I don’t want all of the Chinese system but I certainly would like to have the financial part of it in my own country.” H/t @isaacstonefish https://t.co/dFddsZyaRGCCP 100th anniversary book review
A review of the Chinese edition of my book 《低端中國》that came out on July 1, the 100th anniversary of the CCP, from Taiwan’s United Daily News.
Another Party speech..
In July 1 speech at the Chautauqua Institution, “author Dexter Roberts examines Chinese wealth gap between urbanites, rural migrant workers; delves into country’s economic future,”writes Nick Danlag in the Chautauquan Daily.
New York, New York
A picture of the morning sky over midtown Manhattan from my recent visit to the city.
And some Fourth of July fireworks..
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