China and the US are now also drifting financially apart

September 13, 2021 by No Comments

$11.50. For that, an investor on Wall Street is now buying a share in Didi Chuxing, the Chinese taxi company that was floated on the New York Stock Exchange on June 30 – for 14 dollars. It is not often in the current stock market climate that a new tech company takes such a nosedive. Investors have become accustomed to juicy price increases.

Didi, ‘the Chinese Uber’, is not the only Chinese newcomer on Wall Street who is having a hard time. Two-thirds of the 34 Chinese companies that made their appearance this year are now trading below its introductory price. But the taxi company has contributed to Chinese companies falling out of favor on Wall Street. Both in the US and in China itself.

Just a week after the IPO, Beijing announced a major investigation into Didi’s dominance in the Chinese market, and the security of any collected data that could leak through disclosure demands by the US stock exchange authorities. The Chinese measures were draconian: new installation of the Didi app on phones in China is not allowed for the time being.

Beijing’s cybersecurity offensive doesn’t fail: business newspaper de Financial Times reported on Thursday that American banks now prefer to list 20 Chinese companies for which they provide guidance in Hong Kong. But the rules are even stricter there than on Wall Street. Two weeks ago, Beijing issued new rules to prevent sensitive data from falling into foreign hands during an IPO, including via Hong Kong. This may mean that the companies involved are unable or unwilling to comply, and that the IPO cannot take place until 2022 at best. At the same time, pressure is also mounting in the US. There is already a joint claim of duped American investors against the American banks that supervised Didi’s IPO. Because could they not have foreseen that the ax of Beijing fell just a few days after the IPO? Such political risks are beyond the bankers’ spreadsheets, something they are hardly used to on Wall Street anymore.

Warning

Goldman Sachs, Morgan Stanley, JP Morgan and all those other investment banks now have to settle for rewards for Hong Kong IPOs that are only a third of what is normal on Wall Street. And that’s not the only setback. The Biden administration is brooding on a warning to American companies to do business in Hong Kong anyway, which is increasingly withdrawing from China’s sphere of influence. Just as Beijing fears Chinese data is not safe in the US, Washington fears the opposite. Are data on servers in Hong Kong still safe for the Chinese authorities? And who is actually in charge of all that tech data, companies themselves, or the state? Last year, the IPO of Ant, a huge financial company owned by tycoon Jack Ma, was forcibly canceled. Rival Tencent did not even get around to the intention.

In this way, a gap is slowly opening between the financial centers of China and those of the US. On Thursday, the Shanghai stock exchange announced a new index that tracks the 50 most important Chinese tech companies. That is more than symbolic: everyone has their own Nasdaq index.

Not that China no longer wants Western money, on the contrary. Foreign direct investment (in factories, for example) in China rose 34 percent this half year to $91 billion. And in June alone, the International Institute of Finance calculated, 5.2 billion in Western investment money flowed to China.

That is only logical. The Chinese economy is already nearly as big as the US and will surpass it by 2030. An internationally diversified investor will want to reflect those proportions, if only partly.

Ultimately, as a financial power, China cannot lag behind the US. But that road is still long. The annual Global Public Investor report by British think tank Omfif said on Wednesday that nearly a third of central banks surveyed want to increase their reserves in Chinese renminbi over the next two years, at the expense of dollar and euro reserves. The center of gravity (half of all central banks surveyed) is mainly in Africa. But in the longer term, the advance of the Chinese currency is broadly based: almost three quarters of the central banks want a larger renminbi share in their reserves in the long term.

Not that the Chinese currency will dominate any time soon: Current central bank reserves, according to IMF data, consist of $6.991 billion in dollars, converted to $2.415 billion in euros and only 287 billion in renminbi – which is the British pound and the Japanese. yen has yet to come first. In international payments, the Chinese currency is in fifth place, where it exchanges with the Canadian dollar with a meager share of 2.5 percent. The dollar and the euro together account for three quarters of all international transactions via the interbank payment network Swift.

Digital currency

But China has often surprised with growth spurts. Moreover, the Chinese central bank has already come a long way with the introduction of a digital currency, something Western central banks have only recently made concrete plans for. The renminbi, bound by strict rules, cannot be traded outside of China itself. If this is abandoned in the coming years, things could go fast: the Chinese share of all global exports is now larger than the American one. Just as the US has the power to pay for everything, ie exports and imports, in dollars, China can also go that way. See, for example, the oil futures contracts traded on the Shanghai Stock Exchange. Not in dollars, but in renminbi.

Especially now that Hong Kong is being withdrawn as a financial center of China, a future is emerging in which not only two economic blocs, but also two financial superpowers coexist.

The question then becomes how these will relate to each other. Do they both compete in the same global financial market, or do they form their own sphere of influence? The Didi case is a tentative indication of Beijing’s attitude to this: fine if you want to put money into our companies, then you have to do it here. And on our terms. That is not that much different from how the Americans themselves have always done it.