Here’s an absolutely stunning and potentially crucial development that I sure didn’t anticipate: The Chinese government is emerging as one of the most powerful forces working to decouple the American and Chinese economies.
In fact, Beijing’s recent crackdown on Chinese entities (remember: since China has no free market economic or financial system, these organizations shouldn’t be called “companies” or “businesses”) could rival the tariffs and the technology curbs imposed by the Trump administration and continued by President Biden as a means of (1) reducing America’s dangerous economic reliance on this increasingly hostile rival, and (2) cutting the long-time outflow of valuable U.S. capital and knowhow that inevitable enriches and strengthen the People’s Republic.
This turn of events is so unexpected, because, as I’ve written, finance looms as the one policy front on which decoupling had made the least progress. Worse, despite the obvious and more subtle threats posed by this trend to individual investors (described insightfully here by investment analyst and friend Steven A. Schoenfeld), not to mention to American security, prosperity, and privacy, the flow of U.S. capital to the People’s Republic kept swelling. So far this year alone, a record $12.5 billion has been raised for Chinese entities on U.S. stock markets in 34 listings – way up from $1.9 billion worth of new listings in 14 deals during the same period last year. And many more seemed on the way.
But don’t think that these numbers come anywhere close to revealing China’s presence in U.S. finance. The kinds of initial public offerings (IPOs) mentioned just above have been appealing to Chinese entities and to the regime because with the U.S. exchanges the world’s biggest by far, passing muster with them is like a Good Housekeeping Seal of Approval. Therefore, it’s inevitably encouraged investors the nation and world over to pile in. As a result, the total market capitalization of these entities stood at no less than $2.1 trillion as of two months ago.
In recent days, however, China has made clear that some national security concerns of its own, along with dictator Xi Jinping’s determination to bring these gigantic, highly advanced organizations closer to heel, were now outweighing the prospect of continuing to attract more oceans of U.S. and other global investment. Just two days after ride-sharing giant Didi Chuxing raised a record $4.4 billion in a June 30 Wall Street debut, Beijing’s internet regulators ordered it to stop signing up users. This past Monday, China ordered that its app be removed from Chinese app stores (as recounted here). The announced justifications: the need both to protect national security, and users’ personal data.
But since China’s leaders are not exactly known as champions of personal privacy, the former was surely the real reason, along with the desire to reassert control. Last weekend, in messages presumably endorsed and even placed by Chinese authorities on the Twitter-like platform Weibo, Didi was actually accused of transferring the data it collected overseas.
Since then, moreover, the crackdown has gone beyond Didi. On Monday, China also announced a cyber-security review of two entities also listed in U.S. markets, and The Wall Street Journal reported that Chinese regulators had suggested that Didi postpone its IPO. The following day, Beijing “issued a sweeping warning to its biggest companies, vowing to tighten oversight of data security and overseas listings just days after Didi Global Inc.’s contentious decision to go public in the U.S.”
This news, along with the beatings taken by the share prices of these U.S. listed companies and major counterparts in trading worldwide, have prompted widespread speculation that the Chinese IPO wave in American finance is over, a least for the time being. And almost right on cue, reportedly today a Chinese entity decided to drop its own U.S. IPO plans because of Beijing’s new stance.
Wall Street of course isn’t happy – huge underwriting and trading fees stand to be lost. But China’s evident change of priorities represents a golden opportunity for U.S. leaders to jump in and lend a helping hand. They should make the regulatory moves needed to keep Chinese entities out of U.S. markets for good going forward, and speed up efforts to kick out those remaining. And as is not the case with other decoupling policies, American officials seemingly can be certain that China’s powerful flunkies in the Washington, D.C. swamp won’t be trying to gum up the works.