Happy Friday, I am a D.C. native and old enough to remember the Washington Capitals' first season. Congrats to the team for finally winning the Stanley Cup.
This newsletter will be on holiday June 15. See you June 22.
1 big thing: Putin meets Xi in Beijing
Russian President Vladimir Putin is on a state visit to China, which will include attending the 18th Shanghai Cooperation Organization (SCO) summit June 9-10.
What we're hearing: Chinese President Xi Jinping awarded Putin the inaugural friendship medal of the People's Republic of China and praised his "contribution and efforts to building a peaceful world." According to the Xinhua readout:
They are also expected to discuss North Korea and the upcoming summit between North Korean leader Kim Jong-un and President Trump.
Why it matters: Many Western observers dismiss the Xi-Putin bromance as a tenuous friendship that poses no real challenge to the West. There are many points of potential friction in the China-Russia relationship but it is risky to dismiss this renewed friendship too quickly as both Xi and Putin see massive opportunities from Trump's approach to foreign relations.
Separately, Trump just said he wants Russia invited back into the G-7.
2. Chinese lessons for ZTE
The details of the deal, per a report on the settlement by official news agency Xinhua (美国商务部与中兴公司达成新和解协议):
- Chinese firms with international business should have international standards and not be "giant babies...who use commercial interests to coerce the government."
- But Xinhua also details the process Beijing went through to save ZTE and states that "a powerful and self-confident government is a firm backup for the people."
Not stated by Xinhua, but clearly another big lesson for PRC firms from this case, is "don't get caught."
Why it matters: The ZTE mess was another wakeup call about China's vulnerability to foreign technology, but it may also be used as a negative educational example to improve compliance and global behavior by the increasing numbers of PRC firms going global.
What's next: Some members of U.S. Congress want to block the deal, but it appears unlikely they will succeed. And so far there are few details about the insertion into the company of a U.S. compliance team.
- The big questions: Who decides who's on that team, and will it end up being a huge payday for big U.S. law, consulting and accounting firms? Will Beijing assume that some or all of the members of the compliance team are working for U.S. intelligence?
- The arrangement sounds complicated in practice …
3. Increased scrutiny of U.S. ties to Huawei
Facebook came under fire earlier this week for deals it made with several PRC phone makers, and especially Huawei.
Now lawmakers are pressing Google for details of its deals with Huawei.
Quick take: These queries highlight the political and reputation risk to any American firm doing business with Huawei. Every U.S. company with a Huawei deal needs to weigh whether the upside is worth the increasingly inevitable backlash in this New Era of U.S.-China Relations...
4. Chinese tech can't escape party politics
Axios' Erica Pandey writes: China's biggest tech companies have thrived at home, easily beating out what little foreign competition they face and monopolizing several industries at once — but at a steep cost.
China's tech darlings have free rein, as foreign competitors like Amazon and Facebook face barriers to entry and regulations on Chinese domestic companies allow them to set up monopolies on the market.
But that free rein stops when they attract attention from the Communist Party in one of two ways, says Derek Scissors, an expert on China's economy at the American Enterprise Institute — they either get too big or enter strategic sectors.
The party has already demonstrated its willingness to go to lengths to maintain control over Chinese commerce.
- The chairman of Anbang, Wu Xiaohui, was swiftly charged with fraud and sentenced to 18 years in prison as part of a party crackdown on risky corporate spending.
- Chinese billionaire Wang Jianlin turned heads when he announced he was selling off international assets and focusing on domestic investments.
The bottom line: The Chinese government gives its corporate champions nearly unfettered access to the country's 770 million internet users, but that comes with the fear that Xi could make it disappear in an instant. And as China's tech giants get bigger and richer, the Communist Party gets more nervous.
5. Ant Financial raises $14 billion as new regs bite
Axios' Dan Primack reports in his Pro Rata newsletter: Ant Financial, the financial tech affiliate of China's Alibaba Group, raised $14 billion in Series C funding.
Why it matters: This is the largest single fundraise ever for a private company, and severely strains the terminology limits of "venture capital."
- The round includes an RMB tranche for Chinese investors and a U.S. dollar tranche for other investors.
- Investors in the dollar tranche include: GIC, Khazanah Nasional Berhad, Warburg Pincus, Canada Pension Plan Investment Board, Silver Lake, Temasek, General Atlantic, T. Rowe Price, The Carlyle Group, Janchor Partners, Discovery Capital Management, Baillie Gifford and Primavera Capital.
Ant likely needs the new capital as the company is to be regulated as a financial holding company, according to Caixin:
My thought bubble: Ant Financial is too big to fail but has expanded so quickly that the regulators have not kept up. A more mature and stable regulatory environment may actually be good for the company.
6. Xiaomi to be the first to list CDRs on exchange
Smartphone giant Xiaomi has submitted the first application to PRC regulators to list Chinese Depository Receipts (CDR) on the domestic A-share exchange at the same time it has its IPO in Hong Kong.
Background: The China Securities Regulatory Commission (CSRC) issued detailed rules earlier this week for the long-awaited CDR program which will for the first time offer PRC domestic investors onshore access to trading in shares of some of the country's biggest internet and tech firms.
Earlier this week regulators also approved six money managers to establish funds totaling nearly $50 billion to invest in the coming wave of tech unicorn CDRs.
The bottom line: A great wall of cash awaits these tech CDRs and PRC punters may drive their valuation multiples inside China far higher than those outside China, which should lead to all sorts of interesting arbitrage opportunities for savvy investors.
- Plus, the massive amounts of capital available to PRC tech entrepreneurs along with increasingly viable paths to liquidity inside China should help the country overcome much of the “innovation tax” that stems from the political controls.
7. U.S. Embassy in China issues health alert
In the wake of reports that U.S. officials working at the consulate in Guangzhou are coming down with the same mystery illness that afflicted officials and their families working at the embassy in Cuba, the U.S. Embassy in China issued a health alert:
Go deeper: Read How We Reverse Engineered the Cuban “Sonic Weapon” Attack by Kevin Fu, Wenyuan Xu and Chen Yan, a professor at University of Michigan–Ann Arbor, a professor at Zhejiang University and a Ph.D. student at Zhejiang University respectively.
8. China wants 2300 year-old manuscript back
Ian Johnson has a fascinating story in the Friday New York Times about the 2,300-year-old Chu Silk Manuscript that is now owned by the Arthur M. Sackler Foundation.
What's happening: A Chinese scholar has written a book tracing its provenance and the Chinese government wants the manuscript back. Johnson writes:
Buzz: Another New York Times journalist sees irony in the Sackler Foundation owning such an important Chinese work, given the depredations China once suffered from opium. (The Sackler family owned Purdue Pharma, which aggressively marketed OxyContin). NYT's Mike Forsythe tweeted:
Bonus: Worthy of your time
South China Morning Post — China may send fighter jet escort for Kim Jong-un when he flies to Singapore to meet Trump
NBC News — U.S. officials prepare to thwart Chinese spying at Singapore summit
Sinica Podcast — Bonnie Glaser talks China security, from North Korea to the South China Sea
The New York Times — Why Trump Might Cave to China: Iowa Soybean Farmers
Caixin — Under Pressure: Study Finds China Plagued by Hypertension
The New York Review of Books — One Decent Man - Geremie R. Barmé reviews "Simon Leys: Navigator Between Worlds"
The Washington Post — China increasingly challenges American dominance of science
The Atlantic — China Is Genetically Engineering Monkeys With Brain Disorders
China Media Project — Breaking the Grip of Western Newswires
TechNode — Jinri Toutiao apologizes for search engine ads ‘disrespectful to heroes’
The Washington Post — So how can China tame Trump? By cribbing from Japan. (opinion piece by Richard McGregor)
S&P Global Platts — Chinese government directs steelmakers to raise US coking coal imports
The Washington Post — China hacked a Navy contractor and secured a trove of highly sensitive data on submarine warfare
Recent issues of The Sinocism China Newsletter