Realpolitik has an unsavoury connotation. In pursuit of benefits, we are willing to sacrifice seemingly eternal moral principles. Henry Kissinger as the architect of Richard Nixon’s visit to China in 1972 comes to mind, who checkmated the Soviet Union by embracing the other communist dictator Mao Zedong. Yet when it comes to investing in China, to trade with, sell to and source from the biggest trading nation on earth, we pursue our own realpolitik with gusto dismissing moral scruples for pecuniary gain.
China is the predominant trading partner for 75 per cent of all countries. Global investors are holding USD800 billion worth of Chinese shares, an increase of 35 billion since January alone. Since the inclusion of Chinese stocks and bonds in broadly used global indexes, investment funds and ETFs have grabbed a growing share of Chinese paper.
The last 15 years have proved very profitable for venture capitalists, private equity and early investors who put money into Chinese technology companies. Baidu, Alibaba, Tencent ‒ the Google/Amazon/Facebook equivalents in China ‒ became worldwide household names, soon to be followed by the likes of JD, Huawei, Didi and ByteDance.
What these companies lacked in international reach they compensated with a massive dominance in China. Many of them listed on US stock exchanges: the Nasdaq Golden Dragon China Index, mirroring all 98 Chinese companies listed in the US, has gained 276 per cent since its inception more than 15 years ago. Yet in the last six months the Golden Dragon Index has lost 35 per cent. Since February, US-listed Chinese companies have shed a combined market value of USD770 billion, a minus of 46 per cent. Ride hailing company Didi Chuxing, which went public in New York only last month, fell 50 per cent below its listing price.
Troubles started last year, when the much-anticipated New York IPO of Ant Financial, Alibaba’s erstwhile payment subsidiary, was cancelled on the personal order of president Xi. Its ‘Alipay’, serving one billion customers and 80 million merchants, in tandem with the world’s largest money market fund sporting 588 million users, was supposed to raise USD35 billion US, catapulting its worth to USD313 billion.
Then the deal was off. Billionaire owner Jack Ma had to publicly repent and hand his brainchild over to the Central Bank of China. Property companies, online teaching, ride hailing, social media: under the pretext of outlawing anti-competitive behaviour and data mishandling the Chinese Communist Party (CCP) is cutting its technology behemoths down to size and humbling its billionaires into submission, to the detriment of global investors.
Some Western observers look with quite some admiration at China’s anti-competition crackdown, comparing it to our futile attempts to reign in our own internet krakens, merely bemoaning the fact that in the process the rule of law is somewhat substituted by the rule of the CCP.
Robert Armstrong, commentator of the Financial Times, points out that shares of Chinese companies are always trading at a discount to their peers in the West precisely because they do not grant real ownership. This discount just got a little steeper now, he thinks. In other words, we are not real investors, but merely donors hoping for a fair reward.
It is argued that the CCP may act ruthlessly, but that it is neither irresponsible nor unpredictable. Investors have to understand that invariable data – and populace – control and financial stability will always be prioritised over buccaneering, private enterprise.
I think the reality is more profane. With Xi Jinping, China now has a leader who has little sympathy for private entrepreneurship. He prefers state enterprises run by subordinates to jet-setting oligarchs. His distains the unruliness of markets and envies China’s billionaires hogging the limelight. There’s no predictable end to this.
Two-thirds of world growth depends on China. Decoupling means self-immolation
We have seen it all before: the besmearing, incarceration and expropriation of billionaires under the pretence of felony and trumped up accusations. The bone of contention is regularly independent wealth, often the intended flotation of a company in the West. A stock market launch brings millions of dollars to offshore accounts, buying liberty and freedom from political tutelage for the entrepreneur. At least abroad.
Russia’s version of national reckoning started with Mikhail Khodorkovsky in 2003, an oil tycoon and banker and at the time Russia’s wealthiest man, who was accused of fraud and condemned to spend the next 10 years in a Siberian labour camp. In 2006, Vladimir Yevtushenkov was put under house arrest and accused of embezzlement shortly before his oil company Bashneft was supposed to debut on the New York Stock Exchange. Hurriedly he “agreed” to the transfer of Bashneft to state-owned Rosneft.
Shell lost its majority ownership of the oil and gas asset Sakhalin-2 without much ado because salmon spawning on the island was apparently in danger. The salmon rejoiced when Gasprom took over, even though the implementation and construction of the project remained with the Anglo-Dutch company. Bill Browder, at the time the biggest foreign investor on the Russian Stock Exchange, was relieved of his tremendously profitable investment firm Hermitage Capital simply by revoking his entry visa. Accusations of fraud came by return of post.
There are many more cases, in the case of Saudi Arabia perhaps less legalistic. What they have in common are not real violations of a law, but political abuse of the law. Russia and China are not upholding the rule of law, they are ruling with the law. While we may shrug off Russia as an investment opportunity, it is hard to do the same with China.
We can pique Russia with embargoes, yet must fear China doing the same to us. Talk about pro-democracy protests in Hong Kong, the cultural and physical annihilation of China’s Muslim population, or about the Wuhan Institute of Virology and the instant death of trade will follow, be it in Korean pop music, Japanese chocolates or Australian coal.
While we may refuse to be the sacrificial investor lamb – on moral or financial grounds – we cannot choose a world without China. Two-thirds of world growth depends on it. Decoupling means self-immolation. We therefore have to set the rules of engagement with China firmly and solitarily. Otherwise we will be picked off one after the other, companies and countries alike.
Guess who is selling coal to China now that Australia has been put on China’s black list? Quite ironically, US coal shipments to the Middle Kingdom have increased by 748 per cent.
Swedish fashion retailer H&M is the latest victim of a state-ordered consumer boycott, after officially refusing to use cotton derived from Xinjiang province’s ‘re-education’ camps. They can afford it. Only five per cent of their revenue stems from China. But what should companies like LVMH or Daimler do, which depend much more heavily on Chinese sales? We cannot save 10 million Uyghur in China with embargoes, as much as they’d deserve to be saved. But we should praise their cause whenever we can. Sadly, other Chinese minorities will be next.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com
Andreas Weitzer, independent journalist based in Malta