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China’s Sinovac vaccine is quickly changing from a hoped-for diplomatic triumph to a sign that China isn’t yet ready for the global cutting-edge prime time.
Initially hailed as the developing world’s trump card against Covid-19, the vaccine is suddenly facing an epidemiological crisis. Efficacy doubts have Singapore deciding people who received Sinovac should be characterized as unvaccinated. In Thailand, health officials claim more than 600 Sinovac-jabbed medical workers have tested positive for coronavirus.
It’s an embarrassing turn for Xi’s “vaccine diplomacy” scheme – one that initially caught the US flatfooted. And it’s bigger than that. The Sinovac stumble symbolizes both China’s growing number of policy mishaps as well as its broad tendency to put the quantity of growth ahead of its quality.
Count Cathie Wood of Ark Investment Management is among those growing skeptical of Xi’s economic management. In her case, it’s Chinese President Xi Jinping’s fast-widening tech crackdown that raises big questions about the new model he appears to be developing on the fly.
Wood, one of Wall Street’s biggest names of the moment, has been selling mainland tech stocks following Xi’s moves against fintech giant Ant Group, ride-sharing behemoth Didi Global and a fast-growing number of tech disrupters. The China weighting of her flagship Ark Innovation ETF fund plunged to less than 1% – way down from 8% in February.
This pivot away from a Chinese sector that seemed about to rejig the global pecking order raises questions about Xi’s endgame. The conventional wisdom is that this is about controlling consumer data and managing risk. Perhaps. But there’s also a “throwing-the-baby-out-with-the-bathwater” quality to the policy direction.
The just-ended Donald Trump era was far more of a blessing than a curse for Xi’s Communist Party.
The former US president’s taxes on US$500 billion of mainland goods surely did damage. Along with slamming global growth, the tariffs upended supply chains and contributed to today’s semiconductor shortages and inflation. And Trump’s bans on mainland companies destroyed billions of dollars of wealth.
But four years of Trumpian chaos was a once-in-a-lifetime opportunity for Xi.
Xi amassed the most power of any Chinese leader since Mao Zedong and telegraphed an ambitious plan to raise Beijing’s global clout. The 2017-2020 Trump era, for all its turbulence, played right into the Xi zeitgeist of rising China offering the developing world a better model than a gridlocked Washington and a foundering West.
Even the Covid-19 crisis was a moment to spread China’s wings in the developing world. Critiques about what really happened in Wuhan aside, the Sinovac vaccine, coupled with a “V-shaped” economic recovery that would make Xi’s nation the key engine driving global growth, looked set to strengthen Brand China.
This Trumpian void, more broadly, seemed an ideal opportunity to markedly expand Beijing’s influence at America’s expense — and perhaps permanently. Instead, the last several months have seen Xi kick any number of balls into the back of Beijing’s own net.
Going global with Sinovac before its time could be its own reckoning for China Inc’s clout.
But so are Xi’s moves to suffocate Hong Kong’s autonomy and troll Taiwan. Beijing’s over-the-top response to Australia asking legitimate questions about why Beijing was slow to warn of a coming pandemic is another bad global look.
Ditto for scrapping dialogue with Europe – or retail giants like H&M – over concerns those parties raised about alleged forced labor in the Xinjiang region.
The unhinged “wolf warrior” bombast emanating from Xi’s diplomatic corps, meantime, smacked of Trumpism with Chinese characteristics. Eventually, even Xi realized his mean-tweeting diplomats had gone too far.
But more than any of the above, the biggest misstep may be having global investors wonder if Xi really does have a plan for China’s economic future.
Two years ago, the trajectory was obvious. Xi’s ginormous “Made in China 2025” blueprint would lead the future of aerospace, chips, renewable energy, self-driving vehicles, software, biotechnology, artificial intelligence, green infrastructure, you name it.
Moves to internationalize the yuan and get Chinese stocks included in global benchmarks like MSCI and bond indexes – FTSE Russell, most recently – would give markets a “decisive” role in Beijing’s decision-making, just as Xi promised.
That was then. Now – who knows?
This question has haunted many a foreign investor since November, when a hotly-awaited initial public offering by Jack Ma’s Ant Group was suddenly and dramatically scrapped.
At the time, observers rationalized it as Xi’s team trying to reduce risk. Yet coming only days after Alibaba Group founder Ma chided state-owned banking giants as having a “pawn shop mentality,” and regulators not understanding the internet, it was hard not to sense the empire was striking back.
One question grates on investors: Didn’t Xi’s team know on October 23, a day before Ma’s Shanghai speech, what Ant had been planning? Global investors sure did. The $37 billion IPO would’ve eclipsed Saudi Aramco’s 2019 listing to become history’s biggest.
The Ant IPO would take place a world away from New York, where Alibaba listed in 2014. Listing in Shanghai and Hong Kong would raise the clout of Xi’s two most important financial centers.
That did not happen, and Ma himself – formerly, the shining example of the high-flying Chinese CEO on the global stage – has lost his voice and his visibility.
Xi’s actions made clear that international bragging rights take a back seat to letting outward-facing tech billionaires know who’s boss.
The more recent crackdown on Didi shows the Ant fiasco wasn’t an aberration. Details differ, of course (Chinese regulators claim they directed Didi to delay its June 30 IPO in New York).
But the chaos surrounding the Cyberspace Administration of China, or CAC, banning Didi from app stores over “seriously violating laws” about data collection and usage suggests Xi’s crackdown on Big Tech has only just begun.
“Investors have to rethink the entire China structure,” warns David Kotok at Florida-based Cumberland Advisors. He says it means, at a minimum, that Ma’s Ant fiasco “is not a one-off” and that “everything China touches must be viewed with suspicion.”
Adds Wood of Ark Investment Management: “I do think there’s a valuation reset” concerning the prospects for large Chinese tech firms. “From a valuation point of view, these stocks have come down and again from a valuation point of view, probably will remain down.”
When analysts look at the decisions Xi has made over the last 12 months, they’re often framed relative to the US – ie, in terms of how this move, or that policy tweak, will advance Beijing in its rivalry with Washington.
More insights might come from asking whether Xi’s maneuvers will underline China’s native potential.
Getting Alibaba, Didi, Tencent, Baidu and others to toe the Communist Party line will surely increase Xi’s control over all facets of China Inc. And it will increase his already overwhelming odds of winning a third presidential term next year. Yet it might also hobble an industry vital to China’s journey upmarket.
The more Beijing views tech innovators as threats to the party rather than change agents creating new jobs, efficiencies and wealth, the more the Xi era risks deadening the animal spirits that are needed to rival Silicon Valley.
There’s an argument, of course, that China heading off giant monopolies may rid Xi of the ongoing headaches Washington faces with Amazon, Facebook and Google.
As Nathan Attrill, a China expert at the Australian National University, notes, Beijing’s Didi drama “has spooked riders and drivers while energizing rivals who see a rare opportunity to chip away at a leader holding 90% of the market.”
And let’s not forget the real long-term question here, says Jeffrey Towson, a business professor at Shanghai-based China Europe International Business School, or CEIBS.
Didi “getting hammered in share price due to regulatory issues” is surely important, he says. “But that is short-term. The big question is, ‘When will they reach operating profitability?’”
Yet the CAC just put the bar for new tech startups searching for funding remarkably low. Last week, the CAC said mainland companies holding data on 1 million or more users must get cybersecurity approval before listing.
But in a nation of 1.4 billion people, which companies wouldn’t have that many users?
The broader question is: How much will this plethora of issues discount China’s $14 trillion economy?
Xi’s tech crackdown could cost China roughly $45 trillion of capital flows by 2030, according to calculations by Rhodium Group and the Atlantic Council. That’s more than 3.2 times today’s gross domestic product (GDP) squandered as Team Xi arguably puts what’s best for the party over what’s best for economic dynamism.
The Didi controversy alone might have Western investors thinking twice before getting involved in Chinese tech IPOs. As Josh Rogin, a Washington Post foreign affairs columnist, puts it: “Wall Street must now acknowledge that the risk of investing in these companies can’t be known, much less disclosed. Therefore, US investors shouldn’t be trusting their futures to China Inc.”
The thing is, China’s scale and potential make it a must-invest place for punters everywhere. And look at the “Who’s Who” of Western finance behemoths racing to increases their China operations: Goldman Sachs, JP Morgan, BlackRock Inc, Vanguard, Amundi, Credit Suisse, Schroders – and more.
None of the above players, nor any serious economists, doubt China’s vast potential. But Xi’s team must find a balance between their control instincts and leaving capitalism alone to work its magic. The events of the past 12 months suggest the former is thriving at the expense of the latter.