Why the U.S. Lacks Leverage over China

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


Malcolm Riddell

Founder | CHINADebate

Malcolm Riddell

Founder | CHINADebate

Malcolm Riddell

Founder | CHINADebate

Malcolm Riddell

Founder | CHINADebate

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.
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