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'Stock Market: China Doesn’t Care How Much Money Investors Lose'

Bloomberg

Malcolm Riddell

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CHINADebate

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Shuli Ren | Bloomberg

'Stock Market: China Doesn’t Care How Much Money Investors Lose'
'Stock Market: China Doesn’t Care How Much Money Investors Lose'
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Interview
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China's Tech Crackdown
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Interview

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China's Tech Crackdown
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China's Tech Crackdown

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BIG IDEA | ‘Does Beijing not care how much money foreign investors have lost? Does the government really want to close China Inc.’s access to the deep pool of global capital? The short answer is, no, the government doesn’t care.
'But it’s not that simple. Beijing is pursuing other goals.’

‘Whether you’re a bond or stock investor, chances are you’ve been burned by the Chinese government this year.’

‘Does Beijing not care how much money foreign investors have lost? Does the government really want to close China Inc.’s access to the deep pool of global capital?

  • ‘The short answer is, no, the government doesn’t care.’

‘But it’s not that simple. Beijing is pursuing other goals:’

‘And Beijing is suspicious of companies that are skilled at raising capital overseas—beyond its watchful eye.’

  • ‘There’s one practice it’s especially concerned about: a variable interest entity (VIE) corporate structure commonly deployed by the hottest unicorns.’
  • ‘Often incorporated in the Cayman Islands, these startups raise capital and list their shares offshore.’
  • ‘The money raised, in turn, gets pumped into China for business developments.’

‘Sometimes, China might feel it’s being hijacked by hot foreign money.’

  • ‘For example, Beijing wanted to scale down investment in for-profit education as early as 2018, but venture capital kept pouring in.’
  • ‘Now the lucrative bet has been called to a halt.’

‘Or consider geopolitical risks. Because of the VIE structure, in theory, DiDi, which is incorporated in the Cayman Islands, didn’t need Beijing’s approval to list in New York.’

  • ‘But China’s cybersecurity office was concerned enough about DiDi’s data security—such as possible exposures to sensitive government locations—that it suggested the company postpone its IPO.’
  • ‘DiDi ignored the warning, and we all know how it’s turning out.’

‘Beijing has made great efforts to instill discipline into its marketplace, and it wants to see more hot unicorns list and raise money on the mainland.’

  • ‘Yet they continue favoring New York over Shenzhen, Hong Kong over Shanghai.’

‘So it’s not that China is antagonistic toward foreign money.’

  • ‘It just wants to admonish those who seek loopholes abroad.’

‘And this is the new message: If you’re going to invest in China, you’ll have to do it through the capital markets it’s developing.’

  • ‘That won’t only strengthen the domestic economy, it will also allow Beijing to make sure the capital goes to industries it wants to develop and stays away from areas it deems a threat to the common good.’
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