Commentary
Three Chinese tech companies on Feb. 21 lost $33 billion in value in U.S. stock trading. Alibaba Group, JD.com, and PDD Holdings are finding it harder to expand internationally, and so have turned to cutthroat competition with each other for domestic markets that will likely demolish their prices and profits.
While within the past few months, Beijing signaled an end to its tech crackdown, canceled three-year COVID lockdowns, and claimed at Davos to be open for business again, the cheer for investors was wary, short lived, and followed by a hangover.
Foreign investors unwound from China after Beijing cracked down on the country’s most successful tech businesses and their leaders, most dramatically the disappearance of Jack Ma in 2020. The regime canceled his Ant Group’s initial public offering (IPO), expected to be the world’s most lucrative at more than $34 billion.
Didi, China’s top ride-hailing company, IPOed in the United States in 2021 for $4.4 billion. Days later, Beijing banned its app. The company was delisted from the New York Stock Exchange, lost about 70 percent of its value, and was investigated by the U.S. Securities and Exchange Commission (SEC).
Now, after all that bilking of international investors, Beijing is trying to court foreign money through IPOs again, but still without assured forms of shareholder ownership and robust corporate protections from taxes, overregulation, and arbitrary detention of company leadership.
In February, the Chinese Communist Party (CCP) apparently disappeared another billionaire tech titan named Bao Fan. There were no public charges, but his likely crime was a recent attempt to move some of his wealth to a family office in Singapore from China.
When foreigners invest in China stocks, they typically do so under increasingly strict regulatory control and variable interest entities (VIE), a “spider-web of contractual obligations” that doesn’t actually confer ownership in the Chinese company, according to Financial Times.
Investors have bought about $2 trillion worth of Chinese VIEs, thinking they own something more than a wish and promise dependent on Beijing’s continued indulgence of foreign capitalists. They ultimately have little legal protection—the communist regime rules by the personalistic power of Xi Jinping rather than established market principles.
Additionally, the SEC has failed to gain reporting compliance from Chinese companies for years. Accounting firms—such as KPMG, PwC, Deloitte, and EY—must now have access to the books of Chinese companies listed in the United States or the companies will be delisted from U.S. exchanges.
But actually acquiring the data requires unprecedented and continued pressure from U.S. authorities. A report on Feb. 22 revealed that Beijing is telling its state-owned companies that they should let contracts with these Big Four firms expire. It’s an unfriendly indicator of the value of even non-state-owned Chinese companies.
As the CCP continues down its adversarial path, economic countermeasures are increasing. Nowhere is evidence of this trend more apparent than in Xi’s attempts to sanction-proof his economy by moving away from the U.S. dollar and overcoming export controls through tech autarchy.
On Feb. 23, Treasury Secretary Janet Yellen warned Beijing that any help it gave to Russia in “systemic sanctions evasion” would result in “serious consequences.” Such consequences would likely involve secondary sanctions and increased export controls. In the long term, Beijing’s support of Moscow’s invasion of Ukraine also could lead to increased tariffs.
Beijing’s recent call for “dialogue and negotiations” between Russia and Ukraine shouldn’t be taken as progress. Russian leader Vladimir Putin will use negotiations to solidify his conquests in Crimea and the Donbas, empowering him for further conquest later. Appeasing Putin incentivizes and legitimates conquest, including of Taiwan by China.
That Xi is actively planning as much is indicated by his attempts to reorient China’s economy toward domestic consumers. However, that path is replete with transaction costs, as most of its exports currently go to the United States, European Union, Japan, South Korea, and India. None of these countries look kindly on Xi’s rule, and all could band together to increase sanctions.
The fundamental risks in China’s investment atmosphere have thus worsened. Xi is shackling the economy with throwback communist management, while simultaneously attempting to leverage it for the CCP’s planned takeover of Taiwan by 2049 and the dangerously ambitious goal of global hegemony to follow.
Both will be difficult for Beijing to achieve, to say the least. They entail a massive drain on China’s economy and increased risk to the political and economic stability of East Asia and beyond.
