China Cracks Down on Speculation, Stressing Innovation as the Driver of the Economy
Sept. 23, 2021 (EIRNS)—A contingent of Wall Street’s most powerful speculative investment houses, including BlackRock (personally led by CEO Larry Fink), and Goldman Sachs, held Sept. 17 a three-hour meeting in China with the Securities Regulatory Commission and the People’s Bank of China, the central bank. These investment bankers are unnerved by China’s increasingly tough crackdown on speculative activities, which the U.S. and British bankers view as a lucrative source of income.
Other U.S. investment banks that rushed to attend the meeting included Fidelity Investments; Citadel; and the private equity firm Blackstone. They met with Fang Xinghai, Vice Chairman of Securities Regulatory Commission, and Governor Yi Gang of the People’s Bank of China. On Sept. 18 Bloomberg reported the story, “China Defends Tech Crackdown in Meeting with Wall Street Chiefs”: “Global investors have been unnerved by the regulatory onslaught from Beijing targeting its biggest technology companies and other industries as well as a push by President Xi Jinping to create ‘common prosperity.’ ” Further, “Chinese policy makers are also considering tougher scrutiny over a legally gray corporate structure that is commonly used by Chinese tech companies to seek offshore listings, with some policy adjustment already underway.” And still, Bloomberg writes, “Billions of dollars in potential profits are at stake for Wall Street.”
The media did not mention whether the bankers raised the case of troubled Evergrande property developer, although they likely did. Evergrande has $300 billion in debt. British, American, Swiss, and other banks could lose billions on Evergrande. But Evergrande is framed by the Chinese policy over the last 18 months of shutting down trillions in speculative investments, shutting down offshore sinkholes, closing down “gray areas,” and distancing themselves from British-American financial shackles and the emerging blowout of their financial institutions. China’s success in that policy may have brought the Evergrande instability to a head.
We consider a timeline showing a few pivotal steps in this process.
• For nearly three years, anti-China forces threatened to delist Chinese companies from the New York and other U.S. stock exchanges. In the United States, one cannot buy a Chinese stock, or most foreign countries’ stock, directly. Instead, one buys an American Depositary Receipt (ADR), which is a negotiable certificate issued by a U.S. bank representing one or more shares of a foreign firm’s stock. Chinese companies have associated ADRs with a market valuation of $2.1 trillion on U.S. stock exchanges. During the last two years of the Trump administration, as the anti-China diatribes ramped up, various Senators introduced legislation threatening that unless China agreed to be audited by U.S. accounting firms—Chinese companies are audited by Chinese accounting firms—and by U.S. regulators, Chinese stocks would be delisted from New York stock exchanges. It culminated in a violently anti-China bill, the Holding Foreign Companies Accountable Act, which requires that foreign companies publicly listed on U.S. stock exchanges declare they are not owned or controlled by any foreign governments. Congress passed the act by a wide margin, and President Trump signed it on Dec. 18, 2020. Much rhetoric against the Communist Party of China accompanied it, saying the CPC controlled most Chinese companies. They would have to open their books to accounting firms (and intelligence agencies) to prove the CPC did not own them.
Beijing apparently decided that it would try to comply with the legislation, but thence, it would no longer depend on the U.S. as a principal source of funds.
• In November 2020, Chinese regulators stepped in to suspend the $37 billion initial public offering (IPO) of Ant Group, owned by high-flying Jack Ma (Ma also owns Alibaba, the internet retails sales company). The Ant Group, between June 2019 and June 2020, transacted $17 trillion in credit card debt, outstripping Mastercard and Visa. Apparently, the Chinese government viewed the Ant Group’s and Jack Ma’s growing power and financial transactions as overstepping acceptable bounds. The Shanghai Stock Exchange said that Mr. Ma had been called in for “supervisory interviews,” and “other major issues,” including changes in “the financial technology regulatory environment” that needed to be examined. Ma’s IPO, that would have been the world’s largest, was postponed. It never went through.
• On June 30, DiDi Global, a successful ride-hailing service (like Uber) issued an IPO for $4.4 billion in New York City. It appears from Chinese and other press accounts, that DiDi, like other flashy Chinese firms, only cursorily consulted Chinese regulatory agencies, high-stepping it to the United States to get its pot of gold. Two days after the IPO, a Chinese cybersecurity regulator ordered the removal of DiDi’s app from China’s smartphone app stores. It is a little difficult to carry on a ride-sharing company without an app.
The July 4, issue of Forbes reported: “Didi’s not alone in facing the wrath of Chinese regulators, who’ve been cracking down on the nation’s big-tech leaders—Tencent, Alibaba, JD.com—with new actions aimed at curbing risk and unfair labor practices.”
• In a May 31, article, “China Wrecks IPO for High-Flying Education Startups,” Bloomberg reports on the crackdown of private education and tutoring firms. In March, President Xi Jinping suggested the surge in “after-school tutoring was putting immense pressure on China’s kids, signaling a personal interest in curbing excesses.” Some companies, which were only in existence six months to two years, were already trying to issue IPOs, frequently managed by Wall Street investment banks, pitching themselves especially to Chinese families: “You don’t want to ruin your child’s chance to pass exams.” Bloomberg stated, China’s regulation is “forcing once high-flying start-ups to moth-ball” IPOs.
• On Aug. 23, Reuters heralded, “China Halts Over 40 IPOs as It Investigates Law Firm and Broker,” revealing that the Shenzhen Stock Exchange had suspended more than 30 IPOs, and the Shanghai Stock Exchange, 8. Each of the exchanges is investigating “shady firms.” On Aug. 23, China’s cabinet announced that it would tighten scrutiny over accounting firms in a fight against financial forgery, vowing “zero tolerance” toward misconduct.
In order to have full sovereignty, in the last 18 months, China has greatly lessened its dependence on highly speculative British, U.S. and other financial markets, and has begun to crush in the outset hundreds of financial and service company IPOs, which contribute nothing to the physical economy or to scientific and technological innovation. On March 11, Premier Li Keqiang unveiled the new Five Year Plan, which focuses on scientific self-reliance and innovation as the economy’s driver, with 7-10% of state investment to go to innovation. Around that March, perhaps not accidentally, the crackdown on speculation and IPOs greatly intensified.