The highlights this week: Western finance firms are underestimating political risk in China, the Communist Party is tightening control at the grassroots, and newly empowered regulators are blocking tech mergers .
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The highlights this week: Western finance firms are underestimating political risk in China, the Communist Party is tightening control at the grassroots, and newly empowered regulators are blocking tech mergers.
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Didi’s Problems Aren’t Being Priced Properly
Ride-hailing firm Didi Chuxing continues to be punished by the Chinese authorities in the aftermath of its listing on the New York Stock Exchange. The firm has been made to take down another 25 apps from stores, as well as being forced off the “super-apps” that are the main interface for tens of millions of users. Chinese officials are reportedly furious at Didi for offering, as they see it, public compliance but private defiance of the party’s orders, using language that echoes condemnations of “two-faced officials” in Xinjiang and elsewhere accused of betraying the party.
When Didi listed, Western analysts were mostly bullish on its prospects. That’s changed now—and it has led to some skepticism about Chinese listings as a whole. Didi’s stock price fell from $15 to just over $11 on the initial news that Chinese regulators had banned the company from signing up new users, but it has since recovered somewhat to $12.75 a share.
I think that’s a severe underestimation of the danger the company is in—and it’s part of a long-standing pattern of overlooking political risk in China. Much more attention has been paid to the moves by Washington on Chinese business, because analysts understand and can talk openly about the politics involved. The far greater impact and power of the Chinese party-state, on the other hand, has been neglected.
Dominick Donald, a United Kingdom-based geopolitical risk analyst and director at Autolycus Advisory, summed up the impact of the Didi news to me: “The canary has died. Get out of the f—ing mine shaft and tell your mates to leg it too.” Yet several other analysts from the United States, U.K., and France have spoken to me of the unwillingness of CEOs to hear bad news about China, with one saying they were told to play down the danger because even mentioning it might cause clients to take their business elsewhere. “The huge snag with risk analysis writ large is that China fees underpin the corporate market, one way or another—whether it’s the due diligence commissioned for IPOs, or the (indirect) effect of firms buying political risk analysis not wanting to hear bad things,” Donald said.
The long-term appeal of China continues to enthrall Western businesses—even as the doors close. That’s a dream going back to the 19th century, when American missionaries and salesmen alike imagined hundreds of millions of untapped consumers eager for their products. In the 2000s and early 2010s, that vision seemed to be paying off, but many firms seem to be too eager to ignore the growing decoupling.
In part, that may be because Chinese finance has been one of the only sectors to undergo liberalization for foreign firms in recent years. But it’s also because a very specific set of skills—and connections—are needed to read political risk in China, especially in individual business sectors, and most Western analyst firms haven’t invested in those. The people who possess them in China, meanwhile, are mostly Chinese, which can make it hard for them to talk honestly and directly out of fear of political risk themselves. (Consider Bloomberg staff member Haze Fan, still in detention.)
Tech and Business
U.S. warning on Xinjiang supply chains. The Biden administration issued a new statement and business advisory on human rights abuses in Xinjiang Tuesday, emphasizing that the entire supply chain is tainted by coerced labor and calling on U.S. businesses to exit the region or face a high risk of legal action in the future.
These risks extend beyond Xinjiang itself. Many U.S. businesses don’t have a full understanding of their supply chain in China, and Beijing is making efforts to export forced Uyghur labor into other provinces and to demand that foreign firms sign up to its propaganda or face boycotts and government action. H&M’s China sales have dropped by 23 percent since it raised human rights concerns.
Mergers blocked. Beijing’s ongoing tech crackdown has empowered China’s anti-monopoly regulators to block numerous mergers, reducing the power of the internet giants and avoiding the creation of more super-apps—platforms like WeChat that aim to be an all-in-one service.
A proposed merger of streaming services that would have given Tencent dominance of the highly lucrative esports market is the latest to be halted. Paradoxically, these moves aimed in part at ensuring the party’s own monopoly of power may increase the diversity of Chinese businesses, likely to the benefit of consumers.
Credit boost. After reports earlier in the year that China was trying to slow credit growth, numbers unexpectedly bumped up again in June amid fears that the country’s economic recovery was faltering. As with many other countries, China’s debt-to-GDP ratio is at its highest ever, thanks to coronavirus stimulus.
While much has returned to normal, many sectors are still recovering slowly—passenger rail traffic, for instance, which halved in 2020, has returned only to 77 percent of pre-pandemic numbers. Export growth, however, is soaring —though part of that may be because of higher prices.
What We’re Following
Xi, Xi, Xi. The Chinese leader’s ideological cult is being strengthened, with a new “Student Reader on Xi Jinping Thought on Socialism With Chinese Characteristics in the New Era” being issued for mandatory use in all schools from the elementary level up this fall. The book promises to be as thrilling as its title. Political classes have traditionally bored Chinese students rigid, but it’s unlikely that we’ll see the photos that were once spread with amusement online of napping kids and weary teachers; posting such pictures is far too risky at this stage.
Hagiography of Xi has become vital throughout Chinese media and academia, with even physics and biology papers praising Xi Jinping Thought at the start. There are now 18 Xi Jinping Thought Research Centers throughout the country. It’s easy to make the comparisons with Mao Zedong, but Xi’s cult is of a very different order.
It’s much more systematized and integrated with the renewed push for party indoctrination, rather than Mao’s creation of an individualized cult. And it’s far less dramatic—the acts of individual devotion expected for Mao, or for North Korean leaders, are absent. Nobody is expected to sacrifice their life for a Xi Jinping portrait, even in propaganda, or to sing his poems with quasi-erotic fervor. It’s a performance driven by power, not personality.
Ground-level governance tightened. Enormous amounts of ground-level power in China rest in the hands of country-level party secretaries. The central government has issued new plans to tighten the monitoring of “primary-level governance,” incorporating even closer surveillance and ideological control at the grassroots level over the next decade.
In essence, it doubles-down on the vision, promulgated since Xi took power, where the party tightly watches the party, the party tightly controls the public, and the public has no oversight of the party. Holly Snape has a fine summary over at Sinocism.
While these visions of control are frightening, it’s important to remember they also come with costs: Local officials have complained repeatedly in private since 2013 of the intense burdens the renewed ideological work places on them, often to the neglect of their existing duties. Those costs tend to be passed down, creating more painful bureaucratic work and necessary ideological performances for everyone, from students to businesspeople.
Japan signals on Taiwan again. Japanese Deputy Prime Minister Taro Aso stated last week that Japan might come to Taiwan’s aid in the event of a Chinese attack, a statement that was passed off as a slip of the tongue from a gaffe-prone 80-year-old, but that, as William Sposato argued in FP, is more likely to be a deliberate signal of a changing Japanese position. That’s been reinforced by another quiet Japanese move: including Taiwan in an annual defense report for the first time.
Signaling that a military invasion of Taiwan would be a calamity for China might seem unnecessary, but rising authoritarian powers are also prone to dangerous miscalculations about the supposed lack of will of their opponents, and to distorted visions of easy victory promoted by yes-men.
China’s last large-scale military action, Deng Xiaoping’s invasion of Vietnam in 1979, both failed to achieve Beijing’s military goals—forcing Vietnam to withdraw from China’s client state Cambodia—and cost the lives of thousands of Chinese soldiers.
Company Brief
This is the first in a new occasional China Brief feature highlighting interesting Chinese companies.
Haier (2019 revenue: $27.7 billion)
Between 2008 and 2018 (when it was overtaken by another Chinese firm, Midea), Haier was the largest appliance manufacturer in the world. Although the firm is barely known in the United States, its goods, especially fridges, are common throughout China, India, and Africa.
Haier started as a joint venture between a nearly bankrupt state-run refrigerator factory in Shandong, China, and the German fridge giant Liebherr. That gave the firm its name—a Chinese transliteration of the last part of “Liebherr.” It also gave it a powerful brand in a country where foreignness was seen as a guarantee of high-quality—especially for German companies. Haier’s original, weird logo, showing two underpants-wearing toddlers, one Chinese and one German, was based on this partnership.
The company’s CEO, Zhang Ruimin, built on that reputation in a famous publicity stunt in 1984 where he had dozens of poor-quality refrigerators smashed with hammers, symbolizing the firm’s move away from the shoddy products of the past into the gleaming world of Germanic efficiency.
That more than paid off; between 1984 and 2005, Haier grew at an average 68 percent a year. And during that time, large household appliances went from being a luxury to a norm in Chinese homes; in 1985 there were just 4 million fridges in the country, by 1992 there were 39 million, and today the government has stopped keeping track—but the figure is likely in the hundreds of millions. Haier also had political clout; many other formerly state-owned factories were handed over to the firm by the local government.
General Electric attempted to acquire Haier in 1992 and reportedly vowed vengeance on the firm when it was rejected. In 2016, instead, Haier acquired GE’s appliances division for $5.4 billion—a sign of the growing clout of Chinese multinationals. Zhang still heads the firm. Haier remains one of the least dramatic, and most successful, Chinese multinationals.