July 08, 2021
Thanks for all the emails about concrete! Next week I'll try to write a bit about potential solutions to the problem.
- In this week's newsletter, I focus mainly on China and fintech, but I do find space for a fabulous junk-bond chart that was inspired by my colleague Kate Marino. The word count comes to 1,690, which makes it a 6.5-minute read.
1 big thing: China vs. capitalism
“Among the richest men in China, few have good endings.”— Alibaba founder Jack Ma
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. 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.
2. 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.
3. The world's largest regulatory arbitrage
Nearly all financial innovation involves some kind of regulatory arbitrage, but cryptocurrency was conceived as an anarcho-libertarian dream of trustless, decentralized finance.
Why it matters: Crypto exchange Binance has emerged as the biggest player in the game, and so far it has successfully managed to exist in a kind of regulatory limbo.
By the numbers: Binance is enormous. It had $662 billion of volume in June alone, and generally trades about three times as much crypto as Coinbase, its U.S. rival.
Driving the news: Both the Department of Justice and the IRS are investigating criminal activity on Binance's platform. It also faces trouble in the UK, Germany, Japan, Thailand, and many other jurisdictions.
- What they're saying: "Compliance is a journey," writes Binance founder Changpeng Zhao. "We hope to clarify and reiterate our commitment to partner with regulators."
- Between the lines: Binance doesn't have a single primary regulator, and seems more interested in telling regulators what it thinks they should do than it is in simply following the law in any given country.
The big picture: International finance is a globe-spanning collective action problem. Capital tends to flow to where it is least regulated, upsetting all large national authorities while providing irresistible opportunities for tax havens and offshore shenanigans.
The bottom line: The explosive growth of Binance is proof that international coordination, when it comes to crypto regulation, remains far behind the realities of the billions changing hands every day.
4. The hazards of hypergrowth
Show me a fast-growing fintech, whether in crypto or anywhere else, and I'll show you a company struggling to scale its compliance operation.
Driving the news: Robinhood, fresh off last week's $70 million FINRA fine, is planning to pay another eight-figure fine to the New York State Department of Financial Services, for violating cybersecurity and anti-money-laundering regulations.
What we're reading: ProPublica has a deep dive into the way in which hundreds of customers of Chime, the most valuable American neobank, have been locked out of their accounts.
- The culprit: Chime's algorithms don't seem able to be able to reliably tell the difference between benefits fraud and genuine payments.
What's next: Crypto giant Circle is planning to go public via SPAC, at a valuation of $4.5 billion. The risk factors in its deal sheet include ongoing investigations by both the SEC and OFAC, the Office of Foreign Assets Control.
- Also cited: "The uncertain regulatory status" of Circle's flagship USDC stablecoin, as well as the fact that Circle relies on third parties for complying with know-your-customer regulations.
The bottom line: Fintechs learn from their mistakes. If you're dealing with a startup, you have to expect mistakes — and if it's growing fast, you shouldn't expect that you'll be able to reach a human who can help solve the problem.
5. AMC learns the new rules of the game
The share price of AMC — currently at about $45, up from around $7 pre-pandemic — makes very little sense when viewed through a classical corporate-finance lens. But meta-game theory might help.
Why it matters: AMC CEO Adam Aron has embraced the Reddit army that has 🚀 his stock to the 🌙 — at least up to a point. But he has also tried to take advantage of them by selling as much new equity as he can.
- Driving the news: That plan failed this week, when Aron announced he was no longer going to ask shareholders for permission to issue new shares.
- Part of the problem is that AMC's retail investor base simply isn't playing the same game that public-company CEOs are playing. Retail investors rarely vote their shares in any shareholder vote. So in this case, just getting a quorum would be extremely difficult.
The big picture: Institutional investors like to work with CEOs to maximize shareholder value. In the case of meme stocks, by contrast, the game is to effectively hack the stock market and create value out of thin air.
What they're saying: Drew Austin of Kneeling Bus writes that "anything arrogant enough to pretend it’s not a game, such as the stock market, simply entices the masses to expose the fallacy all the more aggressively."
- Like "speedrunners" who hack glitches in videogames, meme-stock traders deliberately ignore the established rules of the game, and compete according to their own rules instead.
The bottom line: It's silly for Robinhood to deny that it is gamifying stock trading. We're in a world where anything can be gamified. Aron, for one, understands that he now has to play by new rules.
6. A new junk-bond record
When a bond has a credit rating of CCC or lower, that's considered "very speculative," with considerable doubt that all principal and interest will be paid in full.
- Such bonds rarely trade at a yield of less than 10%; during the 2008 financial crisis their yields spiked as high as 45%.
- They're now trading at just 6.5% — easily the lowest yield of all time.
7. Coming up: Soho House goes public
Soho House is expected to go public next Thursday on the New York Stock Exchange, writes Axios' Hope King, even though, according to Nimrod Kamer at Air Mail, it has completely lost its cool factor.
- The yet-to-be-profitable 26-year-old members club chain wants to continue expanding globally and introduce a new digital-only membership option, according to the S-1 filing.
8. Building of the week: South Norwood library
The South Norwood library in South London, designed by Croydon borough architect Hugh Lea in 1968, is known on Twitter as @BrutalistLib and by the hashtag #ToughMiesian.
- The Brutalist part of the library is relatively small — really just the second-floor cantilever. But it undoubtedly adds a toughness to the International Style glass exterior of the rest of the building.
- The library is endangered: The local council is threatening to close it and move it to a smaller location nearby. Preservationists worry that if that happens, the existing building will end up being demolished. They've started a petition to save it here.