Op-ed: The crackdown on Didi and companies like it could cost China as much as $45 trillion in new capital flows by 2030
This was a clarifying week for global investors — or for anyone concerned about authoritarian capitalism — of just how much the Chinese Communist Party (CCP) would be willing to pay to ensure its dominance.
The answer, according to a rough calculation from a new partnership formed by the Rhodium Group and the Atlantic Council, is as much as $45 trillion in new capital flows into and out of China by 2030, if the party were willing to pursue serious reform. It's an immeasurable loss of economic dynamism.
Graph courtesy of the Rhodium Group and Atlantic Council GeoEconomics Center's China Pathfinder Project
What is clear is that Chinese President Xi Jinping, during this month's celebration of the one hundredth anniversary of the CCP, has sent an unmistakable message at home and abroad of who is in charge.
Chinese domestic companies, particularly of the tech and data-rich variety, will be more likely to shun Western capital markets and adhere to party preferences. Foreign investors, only too happy to accept risk for the long-proven upside of Chinese stocks, now must factor in a growing risk premium as Xi tightens the screws.
"Wall Street must now acknowledge that the risk of investing in these companies can't be known, much less disclosed," writes Josh Rogin in the Washington Post. "Therefore, U.S. investors shouldn't be trusting their futures to China Inc."
The story that triggered this week's stir was the $4.4 billion U.S. initial public offering (IPO) of the world's largest ride-hailing and food delivery service, Didi. The ripples could be long-lasting and far-reaching for the lucrative relations between China and Wall Street. Dealogic shows that Chinese companies have raised $26 billion from new U.S. listings in 2020 and 2021.
Until this week, the greatest concern for investors was that new US accounting rules would stymie that flow. It is now more likely to be Chinese regulators themselves who plug the spigot.
The facts are that Didi Global began trading on the New York Stock Exchange on June 30, auspiciously one day ahead of the CCP centennial celebration.
One early hint of trouble was that the company played down the blockbuster listing. Not only did company officials resist the usual routine of ringing the opening bell. They went further by instructing their employees not to call attention to the event on social networks.
Still, Didi's shares rose 16% on the second day of trading, setting the company's market value at nearly $80 billion.
But by July 2, Chinese regulators put Didi under cybersecurity review, banned it from accepting new users, and then, in the next days, went even further by instructing app stores to stop offering Didi's app.
Credit all of that to a mixture of increasingly authoritarian politics, regulatory concerns over data privacy and U.S. markets, and the continual expanding of fronts in the U.S.-Chinese contest.
The cost to investors by Friday was a drop to only 67% of the stock's original value. If that's as far as the downside goes and if the regulatory retaliation against Didi stops where it is, this week could still be dubbed a win by Didi executives.
The more serious matter is the wider chilling effect, coming in the context of a series of stalled or reversed Chinese economic and marketization reforms.
The latest came on Thursday, when The Wall Street Journal reported that the Cyberspace Administration of China, which reports to Xi, would police all overseas market listings.
On that same day, Chinese medical data firm LinkDoc became the first Chinese company to ditch its IPO after the Didi news. Expect more Chinese companies to shelve planned listings and for many others to remove them from consideration.
For all the billions of lost investment capital this could bring over the short term, the larger cost is one that could be measured in trillions of dollars of endangered potential as Xi consistently backs away from the market liberalizations he once appeared to champion.
The story could not be more clearly written than through the accompanying chart from Rhodium and the Atlantic Council's GeoEconomics Center. From 2000 to 2018, China's economic growth shook the world as it expanded its share of the global gross domestic product (GDP) from 4% to 16%. China enjoyed similar growth in goods exports and imports.
Graph courtesy of the Rhodium Group and Atlantic Council GeoEconomics Center's China Pathfinder Project
At the same time, however, China's inward portfolio investment grew from near zero to just 2% of the global total while its outward portfolio investment grew from near zero to only 1%. This is not just unachieved potential from the past — it is now also the deeply endangered potential for the future that could equal the estimate $45 trillion through 2030.
In a must-read analysis of the Chinese economy in Foreign Affairs, Atlantic Council nonresident senior fellow Daniel Rosen, who is also a Rhodium Group founding partner, argues that China under Xi has repeatedly attempted to reform the Chinese economy, only to pull back. The accompanying chart provides a useful overview of what has become habit.
Graph courtesy of the Rhodium Group and Atlantic Council GeoEconomics Center's China Pathfinder Project
"The consequences of that failure are clear," Rosen writes. Since Xi took control, total debt has risen to at least 276% of GDP from 225%. It now takes 10 yuan of new credit, up from six, to create one yuan of growth. GDP growth fell to 6% in the year ahead of the pandemic from 9.6%.
Writes Rosen: "At some point, China's leaders must confront this tradeoff: [S]ustainable economic efficiency and political omnipotence do not go hand in hand."
Conventional wisdom has it that the West was naïve to think that China's economic growth and modernization, which the West so enthusiastically supported, would eventually bring with it political liberalization. Now the conventional wisdom is that China has shown it can be brutally authoritarian and economically dynamic simultaneously.
What's probably more true is that Xi may soon face the contradictions between his simultaneous desire for economic dynamism and increased authoritarian control. History shows he cannot have both, but for the moment, Xi appears willing to risk the dynamism in favor of the control.