“Investors have to rethink the entire China structure,” David Kotok of Cumberland Advisers said last week. For Hong Kong, the One Country, Two Systems principle was “dead.” As for the crackdown on some of the nation’s tech giants, the Beijing government’s treatment of Alibaba “is not a one-off. Neither is DiDi. Everything China touches must be viewed with suspicion.”
Wait, you’re saying that investing in the other side in the early phase of Cold War II might have been a bad idea? You’re telling me that “long totalitarianism” was not a smart trade?
For the past three years, I have been trying to persuade anyone who would listen that “Chimerica” — the symbiotic economic relationship between the People’s Republic of China and the United States of America, which I first wrote about in 2007 — is dead. The experience has taught me how hard it can be for an author to kill one of his own ideas and replace it with a new one. The facts change, but people’s minds — not so much.
Chimerica was the dominant feature of the global economic landscape from China’s accession to the World Trade Organization in 2001 to the global financial crisis that began in 2008. (I never expected the relationship to last, which was why I and my co-author Moritz Schularick came up with the word: Chimerica was a pun on “chimera.”) At some point after that, as I have argued in Bloomberg Opinionpreviously, Cold War II began.
Unlike with a “hot” war, it is hard to say exactly when a cold war breaks out. But I think Cold War II was already underway — at least as far as the Chinese leader Xi Jinping was concerned — even before former President Donald Trump started imposing tariffs on Chinese imports in 2018. By the end of that year, the U.S. and China were butting heads over so many issues that cold war began to look like a relatively good outcome, if the most likely alternative was hot war.
Ideological division? Check, as Xi Jinping explicitly prohibited Western ideas in Chinese education and reasserted the relevance of Marxism-Leninism. Economic competition? Check, as China’s high growth rate continued to narrow the gap between Chinese and U.S. gross domestic product. A technological race? Check, as China systematically purloined intellectual property to challenge the U.S. in strategic areas such as artificial intelligence. Geopolitical rivalry? Check, as China brazenly built airbases and other military infrastructure in the South China Sea. Rewriting history? Check, as the new Chinese Academy of History ensures that the party’s official narrative appears everywhere from textbooks to museums to social media. Espionage? Check. Propaganda? Check. Arms race? Check.
A classic expression of the cold war atmosphere was provided on July 1 by Xi’s speech to mark the centenary of the Chinese Communist Party: The Chinese people “will never allow any foreign force to bully, oppress, or enslave us,” he told a large crowd in Beijing’s Tiananmen Square. “Anyone who tries to do so shall be battered and bloodied from colliding with a great wall of steel forged by more than 1.4 billion Chinese people using flesh and blood.” This is language the like of which we haven’t heard from a Chinese leader since Mao Zedong.
Most Americans could see this — public sentiment turned sharply negative, with three quarters of people expressing an unfavorable view of China in recent surveys. Many politicians saw it — containing China became just about the only bipartisan issue in Washington, with candidate Joe Biden seeking to present himself to voters as tougher on China than Trump. Yet somehow the very obvious trend toward cold war was ignored in the place that had most to lose from myopia. I am talking about Wall Street. Even as China was ground zero for a global pandemic, crushed political freedom in Hong Kong and incarcerated hundreds of thousands of its own citizens in Xinjiang, the money kept flowing from New York to Beijing, Hangzhou, Shanghai and Shenzhen.
According to the Rhodium Group, China’s gross flows of foreign domestic investment to the U.S. in 2019 totaled $4.8 billion. But gross U.S. FDI flows to China were $13.3 billion. The pandemic did not stop the influx of American money into China. Last November, JPMorgan Chase & Co. spent $1 billion buying full ownership of its Chinese joint venture. Goldman Sachs Group Inc. and Morgan Stanley became controlling owners of their Chinese securities ventures. Just about every major name in American finance did some kind of China deal last year.
And it wasn’t only Wall Street. PepsiCo Inc. spent $705 million on a Chinese snack brand. Tesla Inc. ramped up its Chinese production. There were also massive flows of U.S. capital into Chinese onshore bonds. Chinese equities, too, found American buyers. “From an AI chip designer whose founders worked at the Chinese Academy of Sciences, to Jack Ma’s fast-growing and highly lucrative fintech unicorn Ant Group and cash cow mineral-water bottler Nongfu Spring Co., President Xi Jinping’s China has plenty to offer global investors,” my Bloomberg opinion colleague Shuli Ren wrote last September.
Recent months have brought a painful reality check. On July 2, Chinese regulators announced an investigation into data security concerns at DiDi Global Inc., a ride-hailing group, just two days after its initial public offering. DiDi had raised $4.4 billion in the biggest Chinese IPO in the U.S. since Alibaba Group Holding Ltd.’s in 2014. No sooner had investors snapped up the stock than the Chinese internet regulator, the Cyberspace Administration of China, said the company was suspected of “serious violations of laws and regulations in collecting and using personal information.”
The cyberspace agency then revealed that it was also investigating two other U.S.-listed Chinese companies: hiring app BossZhipin, which listed in New York as Kanzhun Ltd. on June 11, and Yunmanman and Huochebang, two logistics and truck-booking apps run by Full Truck Alliance Co., which listed on June 22. Inevitably, this nasty news triggered a selloff in Chinese tech stocks. It also led several other Chinese tech companies abruptly to abandon their plans for U.S. IPOs, including fitness app Keep, China’s biggest podcasting platform, Ximalaya, and the medical data company LinkDoc Technology Ltd.
To add to the maelstrom, on Thursday Senators Bill Hagerty, a Tennessee Republican, and Chris Van Hollen, Democrat of Maryland, called on the Securities and Exchange Commission to investigate whether DiDi had misled U.S. investors ahead of its IPO. Also last week, U.S. tech companies such as Facebook, Twitter and Google came under increased pressure from Hong Kong and mainland officials over doxxing, the practice of publishing private or identifying information about an individual online.
For several years, I have been told by numerous supposed experts on U.S.-China relations a) that a cold war is impossible when two economies are as intertwined as China’s and America’s and b) that decoupling is not going to happen because it is in nobody’s interest. But strategic decoupling has been China’s official policy for some time now. Last year’s crackdown on financial technology firms, which led to the sudden shelving of the Ant Group Co. IPO, was just one of many harbingers of last week’s carnage.
The proximate consequences are clear. U.S.-listed Chinese firms will face growing regulatory pressure from Beijing’s new rules on variable interest entities as well as from U.S. delisting rules.
The VIE structure has long been used by almost all China’s major tech companies to bypass China’s foreign investment restrictions. However, on Feb. 7, the State Council’s Anti-Monopoly Committee issued new guidelines covering variable interest entities for the first time. Recognizing them as legal entities subject to domestic anti-monopoly laws has allowed regulators to impose anticompetition penalties on major VIEs, including Alibaba, Tencent Holdings Ltd. and Meituan. This new framework substantially increases risks to foreign investors holding American deposit receipts in the tech companies’ wholly foreign-owned enterprises. For example, Beijing could conceivably force VIEs to breach their contracts with their foreign-owned entities. In one scenario, subsidiaries of a Chinese variable interest entity that are deemed by Beijing to be involved in processing and storing critical data could be spun out from the VIE — just as Alibaba was reportedly forced to spin out payments subsidiary Alipay in 2010.
The stakes are high. There are currently 244 U.S.-listed Chinese firms with a total market capitalization of around $1.8 trillion, equivalent to almost 4% of the capitalization of the U.S. stock market.