Xi Gives Clarity With More To Come On Financial & Big Tech Control

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By Chris Devonshire-Ellis 

Clampdowns are a rejection of the US based economic model

China’s Xi Jinping and the CPC have given clear indications to the financial markets that a new, third path is developing as concerns Chinese involvement in global financial participation from China’s financial sector.

While the decision to curb the activities of the likes of Ten Cent, Alibaba, Ant and Didi have been met with dismay and even incredulation in the West, there are underlying reasons for this. Having wiped off about US$1 trillion from the value off Chinese Tech Stocks, the apparent crack on big tech has sent shock waves through the global economy. Bloomberg have commented that “Xi has forgotten what made China great again” while other media have suggested he “just does not understand global finance” – a suggestion similar to that made by Jack Ma to China’s financial institutions at the Bund Conference in Shanghai last year. He was promptly dropped out of sight for several months before reappearing, somewhat contrite and certainly diminished. So what is going on?

It is clear that China’s leadership have decided upon deep change. It is also evolving, remains unclear about the end result, however a new path is emerging. It will not, despite the wailings of the likes of Bloomberg, have all been Xi’s ideology either – decisions to adopt a new approach will have been made by consensus and not Xi alone.

At its heart I suspect it is a reflection of the fear of a Government losing control. In this case, the United States itself has been the primary exhibit. Beijing will have noticed how American big business has subverted its politics. This is certainly true of the Oil Industry, who have grown so politically powerful they are able to dictate that America wages wars. And is has done. Afghanistan was never just about a response to 9-11, it was related to control and supplies of Turkmenistan’s massive gas fields. Iraq wasn’t about Saddam Hussein’s (never found) weapons of mass destruction; it was about oil. If one looks at many of the conflicts the United States has been in over the past twenty years – Libya, Syria, Venezuela in addition to Afghanistan, energy supplies and control have been at the heart of it. Add in sanctions against Iran and Russia for the same reasons and a picture emerges – a US democracy in hock to the Oil companies. It is a similar picture with the US National Rifle Association, a body now so politically ingrained that no politician dares take them on. Meanwhile, mass shootings at US schools are now a bi-annual event and the country suffers from gun related deaths at a rate of 38,000 every year. There are enough privately owned guns registered in the United States to have 1.2 for every man, woman, child, and newborn baby. In China, the figure is negligible.

So, what does this have to do with China? In fact, it is a major reform driver – China does not wish to follow the US model and permit non-Government industries to develop into commercial entities and individuals wielding so much power that it subverts Government ideology or wastes resources. Jeff Bezos, the global delivery boy, has amassed so much wealth that he is allowed to waste it on a useless rocket that ascended just 78 miles above the earth. In China, that would be seen as completely inappropriate. The solution? To prevent subversion and waste, the Government takes control.

There have been warnings about adopting such an approach to ‘free trade’, not least by the economist Adam Smith. Yet to China, a parting of the ways when it comes to the US version of capitalism, its debt-based economy and short-term fixation on results, against China’s initially on face value, not dissimilar ‘Chinese characteristics’ version is now occurring.

These geopolitical issues are now affecting China’s domestic decision making because the United States under Trump, and continued with the Biden administration, is making decisions that directly interfere with the operation of the Chinese economy.  This means Chinese commerce and the relevant Ministeries need to assess whether this is a passing phase, or gaining strength, and how it may impact.

The targeting of Chinese politics behind the decisions recently made towards big tech,  education and so on are very much commercial. To understand this, we must look at the possible impacts on different sectors. But also involved is making an assessment as to whether China’s domestic major decisions are influenced by their strategy and tactics for the United States. Is Beijing expecting conflict and bunkering down and ensuring all commercial leaders are good, reliable Party people?

We may find all this passes as there may be a new level of understanding concerning the big issues of the upcoming Climate Change Conference in Glasgow where the United States and China will meet face to face. Other outstanding issues, including trade and political relations will undoubtedly be discussed on the sidelines.

This rectification has also become necessary in China as the Party line had lost some comparability with the domestic private sector. That has now been reigned in. The danger is that too much Government interference can suppress innovation and lead to stagnation: Russia and China’s problem. Yet from the other perspective, too much freedom leads to greed, waste, and violence: the United States’ problem. It is the classic conundrum: Capitalism vs. Marxism, being replayed again.

China though is too smart to revert to the suppression of innovation through overhanded Central Government control. It remembers well both the strengths and ultimate weaknesses of the Soviet Union, where an imbalance, encouraged by US policies, led to its downfall.

China then is embarking on a rather more substantive and strategic change, across a wide canvas of Chinese politics, economics and social policy than previously thought and this has taken the West especially somewhat by surprise, although in hindsight one could have seen it coming.

Perceived US aggression towards China, followed by other Western nations,  has kick-started China’s move not towards appeasement, as we have seen with the rise of the so-called ‘Wolf Warriors’,  but a more considered perception that international engagement now requires tighter internal controls, even the defanging of a potential fifth column.

This is influenced by the implications of an emerging new alignment of international forces. The China and Russian relationship is at the core of this, but it also includes relations throughout Asia, Eurasia, the Middle East, Africa, and Latin America orbiting around them.

These changes are fairly obvious, not least in Afghanistan, where a new consensus is taking the place of the Western military efforts in the form of the Shanghai Cooperation Organisation. That broad consensus includes NATO member Turkey, in addition to China, Russia, Iran, the Central Asian states, and includes Turkmenistan, which had previously remained politically aloof but is hugely gas rich. In addition, Saudi Arabia and Egypt have both been awarded SCO Dialogue Partner status, both powerful Muslim countries and implying a growing trend for the regional powers to sort their own differences out with China as the banker.

There may be even more upheaval on the way in terms of the global economy. China and Russia have long held that the US debt-based economy is intrinsically unsound, and that the US dollar is an unreliable global tool. Both are exploring ways to develop economies at least partially based on real assets, rather than debt. Both are keen to divest themselves of US dollar holdings with Russia nearly fully compliant.

Clearly, there is much to ponder. However, it will be the management of China’s demands of its big businesses and its involvement in this sector that is the real issue, not the re-structuring of it. That has not yet become clear, and it is this that is creating the fuss. One thing is for sure, China is holding a mirror up to the US debt and risk adverse approach where profits must always be made, and non-conformity means bankruptcy. Beijing doesn’t like what it sees there. The question is what new, third path asset management will emerge?

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Silk Road Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Asia, and assists foreign investors into the region. For strategic advisory and business intelligence issues please contact the firm at silkroad@dezshira.com or visit www.dezshira.com

 

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