Following on-going news headlines regarding geopolitical scuffles between China and the United States, this article by Nader Di Michele explores how the new Biden Administration has continued America’s aggressive stance towards Chinese economic ambitions and how this has led to China responding with its own set of laws, particularly around Chinese firms operating internationally. Ultimately, the article concludes that once again, geopolitical spats such as this always leave a clear loser; global markets.
Political optimists long hoped and predicted that China’s integration into the global economy would make it a “responsible stakeholder” and bring political reform to the country. However, Former President, Donald Trump, attacked this as a weak approach which increased geopolitical tensions between the two countries. Now, with a new administration in charge of the White House, many hoped the U.S. rhetoric would shift back to a more dovish approach as seen under Barack Obama. However, while President Biden and his administration have little common ground with the previous Trump administration, China is a policy element that has not seen significant change. Ever since entering the White House in January, President Biden has made working with allies to restrain China his number one foreign policy goal. This is based on his administration’s belief that China is “less interested in coexistence and more interested in dominance”1. Ultimately this means that while the U.S. will work with China in areas of common interest, like climate change, it will counter Chinese ambitions elsewhere, especially in the economic and financial sphere.
Biden’s Policy Response
Biden has publicly admitted that the U.S. will be in strategic competition with China in the long term2. Consequently, the President has been attempting to re-focus the global coalition, with Beijing being its main focus3. Biden set the tone of this project at the Munich Security Conference by stating that Europe, Asia, and the U.S. had to “push back against the Chinese government’s economic abuses and coercion”4. While such a stance has found a rather positive reception with countries such as South Korea and Japan, his approach to Europe will probably require more nuance.
His current policy stance has included new legislation which expands the restrictions of American investments in 59 Chinese companies with alleged ties to the country’s military and surveillance infrastructure5. Such sanctions will build on previous sanctions on 14 Chinese companies put in place on July 19th of this year due to allegations of involvement in human rights abuses in China’s Xinjiang province. This is also in addition to the U.S. Public Oversight Board proposal of a draft rule that would speed the implementation of a Trump-era law, forcing publicly traded Chinese companies to delist from U.S. bourses in three years if they fail to share their audits for review6. Thus, we see clear evidence of Joe Biden following in the steps of former President Donald Trump concerning its approach to Chinese relations.
Moreover, to compete with China, the White House has introduced the Innovation and Competition Act, that if passed by the House, will look to increase investment in key domestic industries, following Biden’s protectionist approach to China7. Similar policies, such as the Biden Administration’s trade strike force, aimed at preventing the “hollowing out” of American industry, have thus been viewed as representing a continuation of aggressive American industrial policy aimed at countering China’s economic influence. In fact, while the American economy is expected to grow at a rate of 2 per cent per year over the next 5 to 10 years, China is expected to continue to grow at a rate of 5-6 per cent annually, entailing a narrowing of relative bilateral strength8.
The European Reaction
Meanwhile, it is yet to be seen if Europe will follow Biden’s attempts to restrain China. The U.S. posture towards China, despite the new Biden administration, has remained very different compared to its European partners. European countries have increasingly found themselves in China’s economic and financial orbit, with Germany being a significant proponent of a China-EU trade deal as well as the fact that it sees China as its biggest trading partner, with Angela Merkel urging for the deal to not be scrapped9. As such, Merkel has resisted attempts to push Germany in a confrontational stance towards China, with this being evident in her address at the Munich Security Conference earlier this year, where an obvious gap in rhetoric could be noticed between her and Biden over China. Moreover, Merkel was also the main influence behind the EU’s decision to accept Chinese overtures in late 2020 and subsequent rush through the previously stalled China Investment Agreement a month before Biden was to be inaugurated, with the deal working to improve the framework conditions for economic relations and solve existing challenges between China and Europe. For example, some goals of the agreement include transparency requirements for subsidies in the service sector, the ban on forced technology transfer, and the requirement that state-owned companies must behave in line with the market10. In addition, the German Chancellor is not alone in opposing American attempts at economic fracturing between the EU and China. For example, Luliu Winkler, a Romanian MEP and member of the centre right EPP group, has strictly opposed any notions of a “binary choice” between the U.S. and China.
Consequently, while stressing the benefits of deeper co-operation, EU officials complain that they have seen little evidence of concrete U.S. proposals for specific outcomes from the summits. Moreover, they have also highlighted a continued tendency from Washington to announce initiatives without prior consultation of EU members. One example being Biden’s unexpected decision to advocate a waiver of intellectual property rights for Covid-19 vaccines11. Thus, Biden will have to deal with the awkward reality that Europe holds different strategic and economic priorities compared to the U.S., and that these could lead to the creation of further divisions.
The Impact of Regulation on Chinese Companies
Thus, China is increasingly concerned about its domestic companies’ listings in the US, considering the ongoing power struggle between two of the world’s largest economies, as the U.S. threatens to delist Chinese companies over accounting regulations. This has resulted in a tightening approach from the Chinese government regarding Chinese firms operating internationally12. For example, Ant Group Co., the financial-technology giant controlled by Chinese billionaire Jack Ma, will have to apply to become a financial company supervised by China’s central bank. This will require the company to overhaul its business for it to adapt to the new and stricter era of regulation, following the company’s IPO suspension after a new set of regulations aimed at curtailing the company’s lending business ultimately blocked what would have become the world’s most valuable IPO (estimated valuation of $300 billion13). This has resulted in the company’s profits sliding by 37% following the regulatory setbacks14.
Moreover, Didi, the Chinese ride-hailing version of Uber, also faced regulatory trouble from government authorities, with the Cyberspace Administration of China (CAC) publicly ordering the company to stop signing up new users and later ordering Didi to remove its app from domestic app stores, pointing to its supposed violation of laws regarding the collection and use of personal data. Ultimately, such measures reflect a broader shift in government policy towards companies listed abroad, as China’s top executive body declared a sweeping crackdown on” illegal security activities”, declaring that it would tighten regulations over companies. The announcement, which called for the establishment of a framework for the “application of [China’s] capital market laws” comes as the Chinese government attempts to deal with American regulators’ desire to access the audit files of U.S. listed Chinese companies. Against such an increasingly hostile market environment, Chinese companies listed in the U.S. that sought to take advantage of eager appetite from investors might have to curb their expectations as Beijing starts to criticise the data security implications for foreign firms listed abroad15.
More recently, the China’s regulatory storm has led to a crackdown on private education companies, plunging the entire sector into an existential crisis. China’s State Council and the Party’s Central committee have jointly issued rules aimed at curtailing the growing sector that has been flourishing due to significant funding from international investors, as well as increasing spending from families who are fighting to provide a better life for their children. In fact, the size of the after-school tutoring sector has reached a value of upwards of $100 billion, for which online tutoring services account for $40 billion. However, the recently announced rules would make it so that companies teaching middle and primary school subjects need to register as “non-profit institutions”, essentially preventing them from making returns for investors. In addition, no new private tutoring firms can register, and online education platforms also need to have approval from Chinese regulators despite any previous credentials they might have had16.
However, despite such actions, the country’s securities regulators have tried to ease concerns among international investors. After holding a call with executives from global investors, regulators in Beijing have tried to reassure investor groups, including executives from BlackRock, Fidelity, Goldman Sachs, and JPMorgan, that the Chinese government was not “completely tone-deaf to international investors’ sentiment”17. Moreover, Chinese state media has tried putting investors at ease following sharp share price declines in Shanghai and Shenzhen, with an article by Xinhua stating that the CSRC maintained an “open attitude” on where Chinese companies list. One person close to the CSRC stated that he “didn’t expect the policy to have such a big impact on investor sentiment and [are] keen to send the message that it is business as usual . . . but everyone felt the crackdown is too much and there is no regulatory boundary”18. Thus, not much has been done to assuage concerns regarding future regulatory policies.
Consequently, we are already noticing a trend in which multiple Chinese tech start-ups are opting to cancel their plans to list on domestic Nasdaq-style markets. Instead, companies are looking to launch overseas. With over 100 companies voluntarily withdrawing their listing applications for the Shanghai STAR Market and the Shenzhen ChiNext market, the Chinese authorities are faced with the dilemma of how to manage its regulations to allow for more listings19.
However, the Chinese government’s desire for more regulation might not stop here. In fact, Chinese regulators are weighing greater oversight on the so-called Variable Interest Equity structures, also known as VIEs. These structures have allowed Chinese tech companies, for more than two decades, to skirt Beijing’s restrictions on the access of overseas capital markets and restrictions on foreign investment. However, the China Securities Regulatory Commission (CSRC) is now reportedly considering requiring Chinese companies who use a VIE to seek approval before going public in the U.S. or Hong Kong. This is incredibly significant as it is estimated that, last year, more than 100 companies using the VIE structure held around $4 trillion of market capitalisation in the MSCI China Index, with Americans holding $700 billion worth of shares20.
Ultimately, such rethinking of its rules regarding companies listed overseas comes against the backdrop of the continuing tensions with the U.S. and its crackdown on China’s tech sector. In fact, Didi warned that “uncertainties in the PRC legal system” may lead to regulators finding VIE contractual agreements and business “to be in violation of any existing or future PRC laws or regulations”21. Moreover, such increased oversight by Chinese authorities may also hinder dozens of Chinese companies who have filed or are in the process of filing a listing in the U.S. For example, one company relying on a VIE structure, LinkDoc Technology, has stopped its plans for its previously upcoming US listing22.
Ultimately, China’s desire to rely less on U.S. capital markets stems from its yearning to balance its standing vis a vis the US and to develop its own stock market to boost the financial status of Hong Kong, according to Jefferies23. Consequently, it seems there is every motivation for China to limit overseas listings in the future, especially those done through a VIE structure. This ultimately remains the ‘billion-dollar question’ that we are waiting to see answered24.
Chinese Companies’ Impressive Adaptability to Crackdowns
However, even though all of this points to a treacherous climate for Chinese companies, closer analysis indicates that a new generation of firms has been thriving. This is because many of these companies have spent the past years expanding their global operations and are thus in the position to make as much money outside China as they do in it. Moreover, inverting a decade-long trend of copying non-Chinese intellectual property, some of these companies have become tech-giants in their own right.
In fact, China was the largest investor in the world in 2010. Foreign direct investment from Chinese firms reached $133bn. Moreover, the country boasts 3,400 multinationals, which is almost as much as the combined number of the U.S. and Western Europe, with an estimated 360 big Chinese groups having reported foreign revenues. In addition, Chinese venture capitalists invested an estimated $3.2bn into 249 different U.S. start-up deals25 in 2020. Moreover, Chinese presence is not only deep, but also broad. For example, more than 100 of the listed firms earned at least 30 per cent of their revenues outside of China. In total, China’s top ten foreign earners generated around $350 billion or so in overseas sales. This total has grown by 10% a year on average since 2005, which is twice as fast as the equivalent figure in Japan, Europe or even the U.S.
The first pillar of China Inc’s new global strategy is “astute localisation”. While in the past the majority of Chinese FDI consisted of asset purchases, a significant amount was reinvested in earnings from foreign operations last year, by contrast. For example, Hisense, a maker of consumer electronics, is aiming to treble its overseas sales from $7.9bn in 2020 to $23.5bn in 2025. This would allow for a significant amount of capital to be spent on foreign factories, R&D, and marketing (for example the company is sponsoring the 2022 football World Cup in Qatar).
Despite this, however, Chinese firms have been able to maintain their subsidiaries’ foreign leadership. For example, ChemChina has allowed its foreign assets to operate as global companies despite having merged with another state-backed giant. Another example is Syngenta, a leading global provider of agricultural science and technology, which has maintained its Swiss headquarters and its mostly foreign board and executive team, after being bought for $43bn.
Moreover, Chinese companies prefer to avoid mega-deals in favour of smaller targets. While the speculative wave of investments between 2015 and 2017 swallowed up $425 billion in assets, and subsequently raised the suspicion of both Chinese and foreign regulators, the 235 outbound transactions so far this year have hit the $1bn mark only three times.
In conclusion, such corporate advances might be stymied by U.S sanctions or by changes in the country’s legislation. Biden’s continuation of Trump’s confrontational rhetoric has so far resulted in an array of sanctions and regulations aimed at stifling Chinese economic influence. While America’s European partners may not fully follow suit, Chinese companies have had to deal with the brunt of such geopolitical quarrels. Chinese businesses also face their own government’s desire to limit their presence in U.S. capital markets through stricter regulations. Thus, Chinese multinationals would need to adapt again to deal with the geopolitical power battles between their country and the U.S. However, as we have highlighted above, they have previously shown themselves to be fully capable of doing so.