China vs. capitalism
China's leadership is deeply suspicious of the international financial system, and wants to ensure that the Chinese Communist Party remains the absolute power in the land, unthreatened by fast-growing corporate giants.
What's new: That lesson was learned the hard way this week by Didi, but the repercussions are likely to be much larger. Already, Chinese fitness app Keep has decided to scrap its planned $500 million IPO in New York.
Why it matters: The core paradox of modern China — that it is a hypercapitalist success story while remaining a Communist dictatorship — is resolving itself in favor of the latter. China's moguls — and foreign shareholders — should expect a lot more turbulence ahead.
Driving the news: China cracked down on Chinese ride-hailing giant Didi immediately after it went public in New York last week, hitting the newly-public company with a long-weekend triple whammy.
- On Friday, China blocked Didi from adding new users, citing cybersecurity worries; on Sunday, it forced Chinese app stores to delete the app altogether; and on Monday, it leaked to the WSJ the explosive news that it had urged Didi to delay its IPO, but the company had gone ahead with the listing anyway.
- In case anybody didn't get the message, China on Tuesday then announced “a system for extraterritorial application of capital market laws,” with the stated purpose of avoiding “illegal securities activities.”
- In the crosshairs: The loophole that allows Chinese companies to go public in New York. Matt Levine has the best explainer. (American politicians, too, are often critical of this system.)
By the numbers: Didi's shares closed at $11.91 on Wednesday, 15% below the $14 IPO price and 34% below the $18 at which they started trading a week previously.
- The total market capitalization of Chinese companies listed on U.S. exchanges is more than $2 trillion, although much less than that is actually owned by U.S. investors.
The big picture: The current crackdown should not come as a surprise to observers of Ant, or even Hong Kong, where hometown billionaire Jimmy Lai has been imprisoned for speaking out against the Chinese regime.
- Hong Kong and much of the West spent decades convinced that the riches of capitalism were a tide that would carry freedom and democracy into China. We were wrong.
- King Canute might not have been powerful enough to turn back the tide, but Xi Jinping is.
How it works: A happy, prosperous society is good for China — and if a market economy can help achieve that, great. But when an individual's wealth starts to become a rival power base, or when foreigners start owning Chinese property, Beijing will have no compunctions asserting its primacy.
The bottom line: When economics meets politics, politics always wins.
America Inc.'s evaporating Chinese dreams
American companies have long coveted access to the world's largest market, but they're also feeling the effects of China's crackdown.
Driving the news: The positions tech giants are contorting themselves into can be seen in the painfully polite seven-page letter sent by the Asia Internet Coalition — led by Apple, Amazon, Google, and Facebook — to the Privacy Commissioner for Personal Data in Hong Kong.
- For all its conciliatory language, the letter makes clear, at the bottom of page six, that proposed new anti-doxxing rules in the territory could cause the U.S. giants to "refrain from investing and offering their services in Hong Kong."
- It's not at all clear whether anybody in the Chinese government is likely to consider that a threat, or whether they'd actually welcome it.
U.S. investors, similarly, have to be worried that their Chinese investments could be voided at the stroke of a technocrat's pen.
- How it works: Companies like Alibaba and Didi don't list their shares directly on New York exchanges. Instead, investors buy into Cayman Islands shell companies that are understood to have contractual rights to corporate profits. Good luck litigating that in a Chinese court.
The one industry where foreigners still seem to be welcome is fashion. Giants like LVMH and Hermès (both of which are French, rather than American) present no threat to the Politburo.