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Western finance is underestimating China's political risk?

Welcome to Foreign Policy's China Brief.

This week's highlights: Underestimating Western financial firms political risk in china is the communist party Tightening control at the grassroots level and newly empowered regulators are in place Blocking technology mergers.

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Didi's problems are not properly assessed

The ride-hailing company Didi Chuxing continues to face fines from the Chinese authorities after its listing on the New York Stock Exchange. The company has been forced to remove another 25 apps from stores and displace the “super apps” that are the main interface for tens of millions of users. Chinese officials are reportedly angry with Didi for believing she is offering public obeisance but private disobedience to Party's orders, and using language that reflects the condemnation of “two-faced officials” in Xinjiang and elsewhere for the party's betrayal be accused.

When Didi was listed, Western analysts were overwhelmingly optimistic about the outlook. That has now changed – and it has led to a certain amount of skepticism about Chinese listings as a whole. Didi's share price fell from $ 15 to just over $ 11 when news broke that Chinese regulators had banned the company from registering new users, but it has since rebounded somewhat to $ 12.75 per share.

I think that's a gross underestimation of the danger the company is in – and it's part of a long-standing pattern that overlooks political risk in China. Much more attention has been paid to Washington's moves on Chinese business because analysts can understand and speak openly about politics. The far greater impact and power of the Chinese party state, however, was neglected.

Dominick Donald, a UK-based geopolitical risk analyst and director at Autolycus Advisory, summed up the implications of the Didi news for me: “The canary has died. Get out of the mine shaft and tell your pals to do it too. ”But several other analysts from the US, UK and France have spoken to me about CEOs' unwillingness to hear bad news about China. One said they should downplay the risk because even mentioning it could lead customers to do business elsewhere. “The big catch with risk analysis is that China fees in one way or another underpin the corporate market – be it the due diligence commissioned for IPOs or the (indirect) effect of companies buying political risk analysis, because they don't want to hear anything bad. ”“ Donald said.

The long-term appeal of China continues to fascinate Western companies – even as the doors close. This is a dream that dates back to the 19th century when American missionaries and salespeople alike imagined hundreds of millions of untapped consumers craving for their products. In the 2000s and early 2010s that vision seemed to be paying off, but many companies seem to be ignoring the increasing decoupling.

Part of this may be because Chinese finance has been one of the few sectors that has been liberalized for foreign firms in recent years. But it's also because very specific skills – and connections – are required to identify political risk in China, especially in individual economic sectors, and most Western analyst firms have not invested in them. The people who own them in China are now mostly Chinese, which makes it difficult for them to speak honestly and directly for fear of political risks. (Think of Bloomberg employee Haze Fan, who is still in custody.)

US warning on supply chains in Xinjiang. The Biden government issued a new statement and business advisory service on human rights abuses in Xinjiang on Tuesday, stressing that the entire supply chain is contaminated by forced labor and urging U.S. companies to leave the region or to be at high risk in the future being exposed to legal action.

These risks go beyond Xinjiang itself. Many US companies do not fully understand their supply chain in China, and Beijing is making efforts to export Uyghur forced labor to other provinces and demanding that foreign companies join his propaganda or face boycotts and government measures. H & M's sales in China have declined 23 percent since it raised human rights concerns.

Fusions blocked. Beijing's ongoing crackdown on technology has enabled China's anti-monopoly regulators to block numerous mergers, reduce the power of internet giants, and avoid the development of more super apps – platforms like WeChat, which is an all-in-one Should be service.

A planned merger of streaming services, which would have given Tencent the dominance of the highly lucrative eSports market, is to be stopped last. Paradoxically, these moves, in part aimed at securing the party's own monopoly of power, can increase the diversity of Chinese businesses, which is likely to benefit consumers.

Credit boost. After reports earlier in the year that China tried to curb credit growth, the numbers unexpectedly rose again in June amid fears that the country's economic recovery could stall. As with many other countries, China's debt ratio is at its highest ever level thanks to the coronavirus stimulus.

While much has returned to normal, many sectors are still slowly recovering – for example, rail passenger transport, which halved in 2020, has only reached 77 percent of its pre-pandemic figure. However, export growth is increasing sharply – even if part of it could be due to higher prices.

Xi, Xi, Xi. The ideological cult of the Chinese leader will be strengthened with a new “Student Reader on Xi Jinping Thought on Socialism with Chinese Characteristics in the New Era”, which will be made compulsory in all schools from elementary school this fall. The book promises to be as exciting as its title. Political education has traditionally bored Chinese students, but we are unlikely to see the amused photos once circulated on the Internet of sleeping children and tired teachers; Posting such pictures is far too risky at this point.

Xi's hagiography has become critically important in the Chinese media and academia, with even physical and biological essays initially praising Xi Jinping Thought. There are now 18 Xi Jinping Thought Research Centers across the country. It is easy to make comparisons with Mao Zedong, but Xi's cult is very different.

It is much more systematic and integrated into the renewed drive for party indoctrination than Mao's creation of an individualized cult. And it's far less dramatic – the acts of individual devotion expected of Mao or North Korean leaders are missing. Nobody is expected to sacrifice their life for a portrait of Xi Jinping, not even in propaganda, or to sing his poems with quasi-erotic fervor. It is an achievement driven by power, not personality.

Ground-level governance has been tightened. Tremendous amounts of down-to-earth power in China rests in the hands of party secretaries at the country level. The central government has released new plans to step up oversight of "primary governance," which over the next decade will see even tighter surveillance and ideological scrutiny at the grassroots level.

In essence, it doubles the vision proclaimed since Xi came to power, in which the party closely monitors the party, the party tightly controls the public, and the public has no oversight over the party. Holly Snape has a good summary at Sinocism.

These control visions are frightening, but they also come with costs: since 2013, municipal officials have repeatedly complained privately about the high burdens that the renewed ideological work has placed on them, often neglecting their previous tasks. These costs tend to be passed on, which requires more painful bureaucratic work and necessary ideological achievements for everyone from students to business people.

Japan signals Taiwan again. Japanese Deputy Prime Minister Taro Aso said last week that Japan could come to the rescue of Taiwan in the event of a Chinese attack, a statement passed as a slip of the tongue by an 80-year-old who is prone to slip-ups. as William Sposato argued in FP, is more of a conscious signal of a changing Japanese position. This was compounded by another quiet move by the Japanese: Taiwan was included in an annual defense report for the first time.

Signaling that a military invasion of Taiwan would be a disaster for China may seem unnecessary, but rising authoritarian powers are also prone to dangerous misjudgments about the supposed lack of will of their opponents and distorted visions of easy victory promoted by yes men.

China's last large-scale military operation, Deng Xiaoping's invasion of Vietnam in 1979, missed Beijing's military goals – forcing Vietnam to withdraw from China's customer state, Cambodia – and killed thousands of Chinese soldiers.

This is the first part of a new occasional China Letter feature highlighting interesting Chinese companies.

Haier (2019 revenue: $ 27.7 billion)

Between 2008 and 2018 (when it was overtaken by another Chinese company, Midea), Haier was the largest device manufacturer in the world. Although the company is little known in the United States, its goods, especially refrigerators, are distributed across China, India, and Africa.

Haier began as a joint venture between an almost bankrupt state refrigerator factory in Shandong, China, and the German refrigerator giant Liebherr. That gave the company its name – a Chinese transliteration of the last part of "Liebherr". It also gave it a strong brand in a country where the foreign was seen as a guarantee of high quality – especially for German companies. Haier's original, weird logo, showing two toddlers wearing underpants, one Chinese and one German, is based on this partnership.

The company's CEO, Zhang Ruimin, built on that reputation in a famous publicity stunt in 1984 in which he had dozens of inferior refrigerators smashed with hammers, marking the company's move from the shabby products of the past to the glitzy world of the Germanic Symbolized efficiency.

It was more than worth it; Between 1984 and 2005, Haier grew an average of 68 percent per year. And during that time, large appliances were moving from luxury to the norm in Chinese households; In 1985 there were only 4 million refrigerators in the country, down from 39 million in 1992, and today the government stopped keeping track – but the number is likely in the hundreds of millions. Haier also had political influence; many other formerly state-owned factories have been handed over to the company by the local government.

General Electric attempted to acquire Haier in 1992 and reportedly swore revenge on the company when it was rejected. In 2016, Haier instead acquired GE's appliance division for $ 5.4 billion – a sign of the growing influence of Chinese multinationals. Zhang is still running the company. Haier remains one of the least dramatic and most successful Chinese multinationals.

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