The Big Ideas

by Malcolm Riddell

Why the U.S. Lacks Leverage over China
Why the U.S. Lacks Leverage over China
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Malcolm Riddell

Founder of CHINADebate

July 18, 2021

When I was a kid, Madison Avenue applied pop psychology to selling stuff through ‘subliminal advertising.’

  • Say you’re sitting a movie theater watching a John Wayne western. Then faster than you can consciously comprehend it ‘Coca Cola’ flashes across the screen.
  • The idea was that you would suddenly, for no reason you could discern, have to have a Coke and would head immediately to the concession stand.
  • Turns out the subtle approach didn’t work.

At the other end of the marketing spectrum is Xi Jinping.

  • As you will see in the photo below, Mr. Xi eschews all subtlety.

During the celebration of the Chinese Communist Party’s Centennial celebration, Mr. Xi stood in the same place on the balcony facing Tiananmen Square where Mao Zedong stood when he announced the founding of the PRC; Mr. Xi wore a gray Mao suit, among a sea of blue western suits; and he centered himself right above the portrait of Mao, who is similarly attired.

  • To all those who early on in the Xi regime opined that Mr. Xi sees himself as the direct successor to Mao – and were doubted - you are vindicated.

I lead with this because I had missed it when the Centennial was going on.

  • And it is too good not to share.

But what really struck me this week was the Biden administration’s advisory to business warning of the dangers of operating in Hong Kong.

  • It is an excellent document, correct in every way. And completely useless.

A Wall Street Journal editorial stated:

  • ‘The pretense of Chinese and Hong Kong authorities is that their crackdown on the rule of law and dissent will have no effect on Hong Kong’s viability as an international center for trade and finance.’
  • ‘The Biden advisory is a sober reminder how hollow and short-sighted this belief is.'
  • 'U.S. firms can’t say they weren’t warned.’

Well, that is just baloney.

  • U.S. businesses don’t need to be warned.
  • They know the risks better than Mr. Biden or Mr. Blinken – and definitely better than The Editorial Board of The Wall Street Journal – and they continue to operate in Hong Kong because they can still make a lot of money.

The editorial does get one thing right:

  • ‘Neither China nor Hong Kong authorities have paid much of a price for their assault on the city’s autonomy.’

The reasons for this are set out in Foreign Affairs’ ‘Hong Kong and the Limits of Decoupling: Why America Struggles to Punish China for Its Repression,’ by former U.S. Consul General in Hong Kong, Kurt Tong, in Foreign Affairs:

  • ‘There is little doubt that the political risk of doing business in Hong Kong is higher now than it was several years ago.’
  • ‘To date, concerns about the rule of law have not prompted much downsizing by other major foreign firms, which seem to believe that Hong Kong’s core legal traditions, as applied to commercial law, remain for the most part unchanged.’
  • ‘Most remain hopeful that Beijing understands how much damage that would do to Hong Kong’s global competitiveness and its utility as a conduit for financial flows in and out of the country.’

At the same time, ‘Western governments, led by the United States and the United Kingdom, have issued strong statements, implemented sanctions, delayed summits, canceled bilateral cooperation agreements, and changed Hong Kong’s status under their national laws in order to reflect the city’s changed reality.’

  • ‘All of these steps, however, seem only to have strengthened Chinese President Xi Jinping’s resolve to tighten his grip on Hong Kong’s political affairs.'
  • 'In general, Western countries’ bark has been worse than their bite.’

Many have advocated pressuring China through the capital markets but:

  • ‘There is no practical way to make financial sanctions Hong Kong–specific: any actions against a major Chinese bank would quickly escalate into a full-scale attack on China’s financial system.’
  • ‘Such an attack, therefore, would lead to global financial instability, lost national savings for the United States, and redoubled Chinese efforts to create an alternative to the dollar-dominated SWIFT payments system.’
  • ‘All of those developments would significantly damage the U.S. economy.’

The conclusion: ‘Foreign governments have few tools to specifically punish China for its broken promises to Hong Kong.

  • ‘The way things are playing out in Hong Kong demonstrates just how hard it will be for Washington and its partners to carry out a comprehensive “strategic competition” with China.’
  • ‘The urge in Washington, London, and other capitals to punish China for what it has done in Hong Kong is natural and palpable, but outside powers lack leverage to influence Chinese policy.’

The bad news is that in many ways Hong Kong is where the western powers have the most leverage.

  • And as little as they have influenced Beijing regarding Hong Kong, they have been even less effective in the South China Sea, the Taiwan Straits, Xinjiang, and other areas of contention.

All by way of saying, the Hong Kong business advisory checks a box, but is less than useless on changing western business’ decisions, let alone Beijing’s.

  • At the same time, China isn’t sitting still.

In a recent issue of the CHINAMacroReporter, we posited that one aim of Xi’s crackdown on Chinese companies listed in the U.S. or planning to list was to drive those companies from New York to Hong Kong. Here’s an update.

  • Bloomberg reports that it has been told that Chinese companies listing on the Hong Kong Stock Exchange will be exempt ‘from first seeking the approval of the country’s cybersecurity regulator, removing one hurdle for businesses that list in the Asian financial hub instead of the U.S.’
  • Destination: Hong Kong.

Initial reports suggested that Wall Street investment banks representing Chinese companies would suffer.

  • This would be in contradiction to Beijing’s long and overt and successful courting of U.S. financial services firms with the aim of persuading them to use their lobbying clout to persuade Washington to moderate its tone and actions toward China.

But not to worry. As if to confirm Mr. Tong’s analysis on cue, Bloomberg also reports:

  • ‘International banks like Morgan Stanley have earned some $6.4 billion in fees from offshore listings by Chinese companies since 2014.’
  • ‘About 60% of that was generated from Hong Kong listings.’
  • That percentage is about to rise as Beijing pushes Chinese companies to the Hong Kong exchange.

Here’s another headline from Bloomberg: ‘Wall Street’s China Dreams Get Jolt From U.S. Hong Kong Warning.’

  • Yeah. Sure.

Bloomberg

CHINADebate

The Big Ideas

'China Plans to Exempt H.K. IPOs From Cybersecurity Reviews'

‘China plans to exempt companies going public in Hong Kong from first seeking the approval of the country’s cybersecurity regulator, removing one hurdle for businesses that list in the Asian financial hub instead of the U.S.’
7/18/2021

The Wall Street Journal

CHINADebate

The Big Ideas

The Editorial Board | The Wall Street Journal

'Biden’s Warning on Hong Kong'

‘The pretense of Chinese and Hong Kong authorities is that their crackdown on the rule of law and dissent will have no effect on Hong Kong’s viability as an international center for trade and finance.’
The Editorial Board | The Wall Street Journal
7/18/2021

Foreign Affairs

CHINADebate

The Big Ideas

Kurt Tong | Asia Group

Hong Kong and the Limits of Decoupling

‘The United States’ inability to make China regret—much less reverse—its transgressions in Hong Kong suggests that financial separation, sanctions, and economic barriers are less reliable tools than many in Washington believe.’
Kurt Tong | Asia Group
7/18/2021

Nikkei Asia

CHINADebate

The Big Ideas

'I will aim for Mao's Status.'

‘There on the gate was Xi Jinping, Chinese president and party general secretary, in a gray Mao suit. Just below his feet was the portrait of Mao Zedong, also dressed in a gray Mao suit.’
7/18/2021

Financial Times

CHINADebate

The Big Ideas

'US warns companies of risk of doing business in Hong Kong'

“In the face of Beijing’s decisions over the past year that have stifled the democratic aspirations of people in Hong Kong, we are taking action,” said Antony Blinken, US secretary of state. “Today we send a clear message that the US resolutely stands with Hong Kongers.”
7/18/2021

CHINADebate

CHINADebate

The Big Ideas

The Chinese Point of View

Here are a few of my thoughts on the importance of Wang Jisi’s ‘The Plot Against China.’ Yuen Yuen Ang’s ‘The Evolution of Chinese Corruption’ speaks for itself - but note especially how Mr. Xi's anti-corruption campaign could hurt China's economy. I have now lived long enough that when a friend complains about his or her spouse, I say to myself, ‘There are no doubt two sides to this story.’
Malcolm Riddell
Founder of CHINADebate
7/4/2021

Foreign Affairs

CHINADebate

The Big Ideas

Wang Jisi | President of the Institute of International and Strategic Studies at Peking University

'How Beijing Sees U.S.-China Relations'

‘In Chinese eyes, the most significant threat to China’s sovereignty and national security has long been U.S. interference in its internal affairs aimed at changing the country’s political system and undermining the CCP.’
Wang Jisi | President of the Institute of International and Strategic Studies at Peking University
7/4/2021

Foreign Affairs

CHINADebate

The Big Ideas

Yuen Yuen Ang | University of Michigan

'How Corruption Powers China's Economy'

‘China has managed to sustain four decades of economic growth despite levels of corruption that even Xi has described as “grave” and “shocking.” Why does it seem to have bucked the trend?’
Yuen Yuen Ang | University of Michigan
7/4/2021
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