In today’s issue:
1. Where in the World is Jack Ma?
- 'The CCP's Ambivalence about the Private Sector’
- ‘Jack Ma Misreads Xi Jinping’
2. China’s Fintech Threat
- ‘Financial Technology Is China’s Trojan Horse’
3. 2021 Economic Outlook: Sunrise in a Fractured World’ | CHINA
- ‘China: Taming the Overshoot’
For the past several months - since the much-criticized speech, the Ant Financial IPO debacle, the regulatory dressing down, and the anti-monopoly probe into Alibaba - Jack Ma has not been seen in public.
- ‘Where in the world is Jack Ma?’ has become a question both in the international press as well as on Chinese social media.
Reports say he’s not under detention, and he’s not been ‘disappeared.’
- Instead, it is said that, with shareholder, employees, regulators, and apparently even Xi Jinping all mad at him, he has made the decision to hunker down in Hangzhou and stay out of sight.
- It’s hard to see how he could do himself any good saying anything right now.
Casting doubt on this explanation are the number of Chinese billionaires and well-known figures who have fallen afoul of Xi Jinping and the Chinese Communist Party and come to bad ends.
- So even if Mr. Ma is out of official clutches for the moment, it doesn’t mean his time isn’t coming.
As newsworthy as Mr. Ma’s plight is, more important is its place in the context of Xi Jinping’s efforts to bring the private sector generally and the fintech industry more specifically under tighter Party control.
- Weaving these together, along with the story of CITIC founder and stay-behind capitalist, Rong Yiren, Neil Thomas has produced a terrific essay, ‘The Red Capitalist,’ in The China Wire.
He examines the changing fortunes of China’s private sector since the founding of the PRC.
- And he contrasts the difference in the skills in navigating these changes between Mr. Rong (generally successfully) and Mr. Ma (to be determined).
- [Note: I have omitted Mr. Rong’s story from the posts below because of length not interest – the entire essay is well-worth reading.]
Mr. Thomas says: ‘Beijing has grown increasingly suspicious of powerful business elites.’
- ‘Under Xi Jinping, the Party has begun to exert greater control over the private sector, with plans announced last September to cultivate a “backbone team” of business executives who “unswervingly follow the Party” and cooperate in “major national strategies.”
'There’s little doubt that business elites who defy the Party will be dealt with harshly.'
- 'In recent years, Beijing has hunted down entrepreneurs, seized their assets, and broken up and occasionally even nationalized firms deemed a systemic risk to the economy.'
- ‘Perhaps no other nation has arrested more billionaires and brought them to heel.’
‘Even Jack Ma, the country’s best-known entrepreneur, seems to have fallen out of favor with the Party.’
- ‘He’s been upbraided by Beijing and denounced in state media.’
- ‘Xi is reported to have personally intervened to cancel the global stock offering of Ma’s Ant Group on the eve of what was expected to be the biggest IPO in history, following a strident speech Ma made in October.’
- ‘In the aftermath, banking and antitrust regulators are threatening to carve up parts of Ma’s $400 billion empire amid reports the 56-year-old internet tycoon has gone missing.’
‘In addition to brazen contempt for Party officials [especially in that speech in October 2020], Ma’s transgression was made worse by his seeming obliviousness to the Party’s economic goals, which have shifted considerably in recent years.’
- ‘De-risking China’s debt-laden financial system became one of Xi’s top priorities.’
‘ “The reason why Jack Ma and others could build enormous Internet companies is because the Party had no idea what they were doing,” says Jim McGregor of APCO China.'
- ‘ “Things changed once the Party-State started to see them as a potential source of financial risk, and therefore as a potential source of risk to social stability.” ’ says Harvard’s Meg Rithimire.
‘Xi, of course, is not Mao.’
- ‘He believes the private sector is an “intrinsic element” of China’s economy and refers to entrepreneurs as “our people.” ’
- ‘Xi does not want to socialize business; he mostly wants private firms to support Party policies.’
- ‘And if the decision to rein in Ma is any indication, he will likely succeed.’
- Stay tuned.
Depending on how you look at it, the argument in 'Financial Technology Is China’s Trojan Horse' in Foreign Affairs by Nadia Schadlow and Richard Kang of Prism Global Management, either:
- Contradicts the narrative outlined just now that the Party is out to control fintech regardless of the cost to industry, or
- Presents a sort of flip side to that narrative, with the Party co-opting fintech in a plan for China’s geoeconomics dominance.
Either way the argument is provocative. Here goes:
First, ‘Chinese fintech firms function like a geoeconomic Trojan horse.’
- ‘First, Alipay [one of Jack Ma’s companies] and WeChat Pay—companies that make up 95 percent of China’s mobile payments market—integrate themselves into daily economic life in another country.’
- ‘Then, piggybacking off this financial infrastructure, they and other Chinese firms acquire digital banking licenses and rapidly expand into other sectors, including digital insurance, consumer credit, remittances, and lending.’
- ‘These companies soon become too embedded in their host country to remove.’
Second, ‘China’s bid for fintech hegemony in Asia is a step toward an even bigger goal: achieving global reserve currency dominance.’
- How? Expansion of the digital Yuan.
So third, ‘Beijing is challenging the sway of the U.S. dollar over Southeast Asia and parts of Africa as it prepares to launch, likely within the next year, a sovereign digital yuan, which would make transactions easier and also enable China to better track how its currency is used.’
- ‘Consumers and merchants throughout Southeast Asia will soon be able to use the digital yuan on Alipay and WeChat Pay.’
- ‘Later, the apps will serve as distributors of the digital yuan as local businesses find it more efficient to use the yuan than the dollar in transactions with Chinese companies.’
- ‘The CCP could then push for the digital yuan to be used instead of the U.S. dollar by bigger institutions and businesses conducting large transactions, such as making interest payments and financing supply chains.’
- ‘China’s digital yuan could also siphon transactions away from Western-dominated money exchange platforms such as SWIFT, the key mechanism that maintains U.S. dollar dominance in global trade.’
I don’t have the knowledge to judge how likely these scenarios are or to what extent they might succeed.
- That said, from what little I do know, I can see Chinese fintech leading to at least a modest erosion of the dollar in Southeast Asian transactions.
- But nothing in my studies show the Yuan as a serious threat to the dollar, from fintech or any other Chinese effort.
- And while the Chinese government no doubt welcomes fintech’s expansion in Southeast Asia, I find it difficult to imagine that that would trump the Party’s aim of exerting more control over the industry and of lowing risks to China’s financial system.
More disturbing is the essay’s pointing out that U.S. firms have not been ‘serious about offering other countries alternatives to China’s fintech companies, tapping the strength of U.S. technology firms.’
- ‘Either Alibaba or Tencent has invested in every single one of the 13 technology unicorns—startups valued at $1 billion or more—in Southeast Asia.’
- ‘Facebook and PayPal, by contrast, invested in their first Southeast Asian fintech player, Gojek, just last March.’
The essay concludes: ‘U.S. companies such as Facebook, Google, and PayPal must not get boxed out of the world’s most significant growth markets, which are mostly in the Indo-Pacific region.’
- Unlike the rest of the essay, that strikes me as unarguably true.
This issue concludes with another great analysis of the global economy from CreditSuisse, ‘2021 Economic Outlook: Sunrise in a Fractured World.’
- As usual, I have just included the section on China, but the entire report is worth careful reading.
A few bottom lines:
- Estimated 2021 GDP growth: 7.1%
- ‘With the recovery already underway, a GDP growth overshoot in 2021 appears inevitable.'
- ‘From a policy perspective, we expect that authorities will likely avoid a pro-cyclical policy stance and, to the extent possible, rein in the overshoot in 2021.’
- ‘They would most likely prefer to avoid an aggressive overshoot in one particular year in exchange for a smoother and more sustainable growth profile over the next five years.’
- Translation: Even if GDP is 7.1%, the number reported this year will be lower, with the difference carried over.
- ‘We expect a moderation to M2 growth on the monetary front from 10.4% in 2020 to 9.3% in 2021.’
- ‘On the fiscal front, we expect a tighter fiscal stance.’
- ‘We revised our expectation for 2021 headline CPI downward, from 2.5% yoy to 1.1% yoy, mainly due to pork deflation.’
- ‘As per the exchange rate, the CNY is expected to experience additional appreciation over the coming 12 months.’
- ‘We forecast USDCNY to reach around 6.3 by the end of 2021.’
You’ll find an analysis of each of these and more in the report.