FINANCE & ECONOMY BUSINESS & INDUSTRY

Digital Currency TikTok-Kuaishou Dream Rivalry

ENVIRONMENT & SOCIETY OPINION

HK Universities Avoiding Ideological Head North War

Issue 127 January 2021 ISSN 2222-4033

The Big Crackdown How Chinese police clamped down $153 billion of illegal online gambling enabled by China's e-commerce giants Private Banking January 2021 caixinglobal.com Contents

ON THE COVER

14 Investment Firm Turns on Money Man China Minsheng Investment Group levels financial misconduct accusations against the CEO of an investment bank it has backed for years

16 What to Watch in the New 5-Year Plan Amid a global pandemic and p. 36 deepening geopolitical tensions, top Communist Party officials meet next week to decide on policies to drive sustainable economic growth

18 What’s Next for the Yuan? Chinese currency may still have legs after 8.5% gain against greenback since end-May, analysts say

21 Property Developers Run Into Debt p. 36 Limits Companies that cross debt-related red lines will have their ability to take TheThe BigBig CrackdownCrackdown on more borrowing curtailed How Chinese police clamped down $153 billion of illegal online BUSINESS & INDUSTRY gambling enabled by China’s e-commerce giants 24 Private Firms’ Knuckles Rapped Over Buyouts Series of fines come after regulators declared their intention to take a harder look at big tech with new anti- EDITORIAL FINANCE & ECONOMY monopoly rules 04 Joining the TPP Won’t Be 08 China’s Dream to Lead in Digital Easy. China Should Anyway Currency 25 Speed Bumps to Self-Driving Car Complying with some of the The future of money is electronic and Navigation CPTPP’s more challenging Beijing wants to own it Vast numbers of satellite base conditions will be beneficial in stations are being built as companies and of itself 10 China Races to Catch Money rush to develop their own national Launderers networks 06 EYE ON CHINA Rapid evolution of financial criminality has left a 13-year-old anti-money 27 How Apartment Rental Giant Fell laundering statute in the dust, forcing Apart authorities to press for tougher, more Danke Apartment ran out of cash effective rules and penalties offering below-cost leases as the pandemic cooled the market and its 12 Anbang Salvage Runs Aground CEO was detained Company created to take over a significant portion of the 30 TikTok Rival Continues to Play conglomerate’s assets has failed to Second Fiddle complete its restructuring on time Kuaishou Technology is on track to

Exchange rate used in this issue: 1 yuan = US$ 0.15 2016 Caixin Global Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic,mechanical,photocopying,recording or otherwise without the prior permission of Caixin Global Limited. Published and printed by Caixin Global Limited, Unit A, 18th Floor, Public Bank Centre, No. 120 Des Voeux Road Central, Hong Kong, China STAFF BOX Publisher READER COMMENTS Hu Shuli Managing Editor Doug Young Assistant Managing Editor Han Wei (World) Senior Editors Nerys Avery, Bob Simison, Lu Zhenhua, Marcus Ryder Section Chiefs Lin Jinbing, Flynn Murphy Copy Desk Chief Michael Bellart Copy Editor Joshua Dummer Reporters Timmy Shen, Matthew Walsh, Tang Ziyi Guo Yingzhe, Nandini Venkata, Lu Yutong, Ding Yi Denise Jia, Luo Meihan, Anniek Bao HOW CHINA IS RACING TO CATCH UP WOMEN FITTED WITH MANDATORY Art Director Ye Xueming WITH MONEY LAUNDERERS BIRTH CONTROL DEVICES FIND LITTLE RECOURSE AFTER DECADES Art Assistant Wang Xintong Plenty of businessmen overseas OF PAIN remit money back to China Editorial Coordinator Yu Zhuyangyang through underground banks. It’s The subdistrict in my certainly necessary to have a law hometown asked me to have one against money laundering, but of these devices implanted after in the meantime we ought to I had my baby, but I didn’t Contributing Editors Managing Director Ling Huawei, Gao Yu, Huang Shan, Li Li Xin reflect on why even legally comply because I’ve have not Qing, Guo Qiong, Huo Kan, Ren Bo, Yang General Manager earned money is being moved been back to my hometown Zheyu, Wang Su, Yu Hairong, Zhang Yuzhe, Jenny Que through underground banks. We since. Now the policy has Wu Hongyuran, An Limin, Qin Min, Wang Yiyin, Chen Baocheng, Li Zengxin, Xu Advertising and won’t be able to fundamentally expired and no one cares Heqian, Huang Kaixi, Xu Xiao, Liu Fang, Conference Directors tackle money laundering until anymore, but millions of Du Ke, Zhang Fan, Yu Ning, Ji Tianqin, Gordon Jing, Owen Fan we lower such financial costs. ordinary people have born the Yu Dawei, Wang Heyan, Jiang Fei, He Xin, Subscription Managers & Wang Duan Specialists pain and individually paid for Yan Chengjia, Lu Yuting Pehr the side effects of this policy. Design Consultant Qi Lin Marketing Directors & Specialists 0204 Art Director Liu Xinyi, Wang Shuwei 可儿妈 Zhao Lingjun Art Designers HOW SOE DEFAULT WAVE SHOWS Hu Yuanyuan, Dong Kun STATE BAILOUTS ARE OVER Thanks to Caixin for this report. It gives a voice to a normally For years now, some companies muted group in this society. This have been taking on new debts kind of journalism is a pillar of to repay old ones. Their civil society. efficiency is actually pretty low Contact Us: Institutional Subscription Hong Kong and they are always running Jamesgc6 Yan Chengjia Unit A, 18th Floor, Public [email protected] Bank Centre, No. 120 Des deficits. However, this isn’t Caixin Global +86 (10) 8564 7151 Voeux Road Central, Hong reflected in their financial www.caixinglobal.com Kong, China statements and the credit ratings Addresses agencies are puppets of the Editorial inquiries Singapore [email protected] Beijing 101 Thomson Road, United bond issuers. Once these These comments were translated Floor 5, Building 6, Sanlitun Square, #06-01, Singapore companies are no longer able to from Caixin’s Chinese website. Product inquiries SOHO, 8 Gongti Beilu, (mailing address). [email protected] Chaoyang District, Beijing, Tel: +65 6829 5420 keep going back to the bond China. Fax: +65 6829 5301 market for more money, they Advertisements and Tel: +86 (01) 8590 5050 will find themselves in a debt conferences Fax: +86 (10) 8590 5101 Owen Fan crisis. Comments can be sent to [email protected]@caixin.com with with the the [email protected] Shanghai +86 (10) 8590 5215 Room 1501-1502, Ascendas writer’s name and location, or Gordon Jing Plaza, 333 Tianyaoqiao Road, 道理不深言语多 left on the English website at [email protected] Xuhui District, Shanghai, +86 (21) 6115 2028 english.caixin.com.www.caixinglobal.com. China. Comments may be edited for Tel: +86 (21) 6115 2028 Fax: +86 (21) 6115 2016 length and clarity.

2016 Caixin Global Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic,mechanical,photocopying,recording or otherwise without the prior permission of Caixin Global Limited. Published and printed by Caixin Global Limited, Unit A, 18th Floor, Public Bank Centre, No. 120 Des Voeux Road Central, Hong Kong, China January 2021 caixinglobal.com

Contents

beat ByteDance to a public listing, but that’s just about the only metric the company is leading on

32 Why Ant’s IPO May Stay on Ice Tough new regulations for microlending may force significant changes for fintech giant’s platforms and a big haircut off its $302.5 billion valuation

34 Alibaba Soothes Market Watchers Chairman and CEO thanks government for encouragement, pledges support for regulation

ENVIRONMENT & SOCIETY 42 Mandatory IUDs Cause Decades of Pain An artist's rendition of the planned Permanent IUDs were key to Guangzhou campus of the Hong Kong University of Science and Technology. enforcing the one-child policy, but Photo: The Hong Kong University of complications and side effects have Science and Technology blighted many lives

44 Hong Kong Universities Head North Expansion into wealthy Guangdong 54 Biden Could Use CPTPP to 62 Avoiding China-U.S. Ideological province gains momentum as Greater Compete With China Rivalry Bay Area integration picks up steam Even if the U.S doesn’t return to it, the Keeping ideology out of China-U. CPTTP could be used strategically to S. strategic competition will help to 46 Biodegradable Plastic Push Faces drain China’s external development prevent proxy wars Cost potential The world’s biggest plastic-maker must address issues with the 56 Reform Could Offer Way Out of production, regulation of the materials CPTPP’s SOE Rules

FINANCE & ECONOMY BUSINESS & INDUSTRY to meet waste reduction goals If reforms continue, Beijing could Digital Currency TikTok-Kuaishou Dream Rivalry dramatically reduce the number ENVIRONMENT & SOCIETY OPINION HK Universities Avoiding Ideological Head North War 48 HIV Discrimination of state firms that meet the trade Issue 127 January 2021 ISSN 2222-4033 Caixin traveled to the northeastern agreement’s definition city of Shenyang to photograph the daily lives of some of the country’s 60 Regulate the Data-Driven 963,000 people infected with the Globalization

virus that causes AIDS The U.S., China and EU need to The Big Crackdown How Chinese police clapped down $153 billion of illegal collaborate to avoid excessive online gambling enabled by China's e-commerce giants fragmentation of global digital trade OPINION CONCEPT: YE XUEMING 52 Biden Likely to Rework Trade Deal Any new agreement is unlikely to be reached until late 2021, while a Get your information the way you want it reduction or removal of existing U.S. tariffs is not expected Digital Magazine Subscription [email protected]

caixin.com +86 (10) 8564 7151 EDITORIAL

Joining the TPP Won’t Be Easy. China Should Anyway

Complying with some of the CPTPP’s more challenging conditions will be beneficial in and of itself

hina is supporting and participating in a succession of The treaty has a wide scope, including goods trading, C multilateral trade initiatives. As soon as the Regional intellectual property rights, environmental protection, Comprehensive Economic Partnership (RCEP) was signed, competition between state-owned enterprises, and President Xi Jinping stated at the Asia-Pacific Economic government procurement. Some requirements, such as Cooperation video summit that “China will actively consider regulatory consistency, are quite innovative. joining the Comprehensive and Progressive Trans-Pacific When the United States withdrew from the agreement’s Partnership (CPTPP).” previous incarnation, the Trans-Pacific Partnership (TPP), Amid the ongoing backlash against globalization and some 22 clauses were suspended, making the CPTPP more the economic impact caused by the coronavirus pandemic, inclusive. However, its basic orientation has not changed, China’s actions and positions not only help boost the domestic and its standards still exceed most existing multilateral trade and world economies, but also deepen reform and opening up, and investment agreements. Meeting the requirements is assist China’s participation in international governance and not easy, even for advanced economies: Japan, a leading provide a strong riposte to unilateralism and isolationism. CPTPP signatory, has made major compromises in fields like The CPTPP officially came into force on Dec. 30, 2018. agricultural products, which have proved quite controversial It represents the highest standard of a new generation of domestically. trade agreements and has become a template for future high- First of all, it should be noted that the CPTPP is by standard free trade agreements. no means unattainable for China. In fact, the country has The Chinese government has gone through the process of already met the vast majority of its terms. In recent years, observing and contemplating how to deal with the CPTPP. China has continuously deepened institutional reform and The heads of the related departments have trodden carefully opening, especially in the financial sector, and is moving around the issue. At last year’s Two Sessions, however, forward with the construction of free trade zones. All these Premier Li Keqiang said “China holds a positive and open developments have laid a solid foundation for China to join attitude toward joining the CPTPP.” the CPTPP. Xi’s latest remarks further reveal the fruits of Chinese However, the agreement obviously carries challenges and policymakers’ thinking on this issue and represent a significant possible impacts on China. Scholars generally believe that and careful decision. People have long been arguing about it will be relatively harder for the country to accept clauses whether China should join the treaty. Now there is an on the national treatment concerning goods and market authoritative answer, the next questions are: Can we join? access; investment; state-owned enterprises and designated When should we join? And how should we join? monopolies; and intellectual property rights. Some clauses on The main issue for the Chinese government in considering e-commerce and labor are unlikely to be accepted at all. whether to join CPTPP is undoubtedly a comprehensive We must base our judgments on rigorous and accurate weighing of the pros and cons of doing so. There are real gains inquiry to avoid drawing implausible conclusions. For to be made: According to expert calculations, China’s entry example, the CPTPP’s rules on state-owned enterprises are into the CPTPP could boost GDP growth by between 0.74 often regarded as a major obstacle for China. However, some and 2.27 percentage points and export growth by between scholars have said after intensive research that the relevant 4.69 and 10.25 percentage points. regulations are actually highly consistent with the constraints However, some worry about the potential impacts and that China has accepted under the framework of the World challenges of joining the CPTPP. We believe China must also Trade Organization, and the few new constraints may not be retain a positive and open attitude toward this issue. If China completely unacceptable. joins the agreement, certain sectors will naturally feel varying We should bear in mind the long-term development of impacts over a certain period of time. But this is natural: If it China’s economy and society when considering whether to had a small impact, or none at all, what would be the point of accept terms that currently seem harsh. Part of this has to do joining? with what the government calls the “second centenary goal,” Additionally, we should look at China’s achievements in namely to make China a prosperous, democratic, civilized economic and social development, have confidence in the and harmonious modern socialist country by 2049. country’s adaptability, and take a dynamic view, knowing that The conditions for the CPTPP are now far more favorable we will further increase our adaptability during any future to China and it can take a positive attitude toward joining. negotiations by deepening reform and opening up. Once our policymakers have made a strategic decision, The CPTPP has been dubbed a template for free trade the relevant departments should formulate a timetable and agreements with high-standards. This is not an exaggeration. roadmap for joining the CPTPP as soon as possible.

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After weeks of space travel, China’s Chang’e 5 lunar probe returned to Earth. On Dec. 17, a capsule carrying about two kilograms (4.4 pounds) of rock and soil samples landed in the northern region of Inner Mongolia, the first time moon samples have been brought back to earth in more than 40 years.

Part of Hukou Waterfall, China’s second largest, froze over after the temperature dropped in early December in the northern province of Shanxi.

06 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 07 Shanghai coffee shop Hinichijou has gotten a lot of attention from its novel way of doing business. Hordes of customers mobbed the cafe early in December to have the experience of getting coffee served by a furry bear claw through a hole in the wall. Hinichijou’s founder said the initial purpose of the cafe was to employ disabled people who have trouble getting work

A Chengdu resident is tested for coronavirus on Dec. 5. The city of Chengdu took a ‘wartime’ footing after seven locally transmitted Covid-19 cases were reported in two days early in December.

06 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 07 FINANCE & ECONOMY

China’s central bank digital currency has been tested in cities including Shenzhen, Suzhou and Chengdu. Photo: VCG

was beaten to the top spot by the Bahamas, FINANCE whose central bank launched its Sand Dollar in October. The PBOC has already finished building the infrastructure for its Digital Currency Electronic Payment China’s Dream to Lead (DCEP) system (数字货币和电子支付工 具) and has been carrying out localized testing in cities including Shenzhen and Suzhou although no date has been set for in Digital Currency its official launch. Draft revisions to the central bank law published on Oct. 23 include clauses that The future of money is electronic and Beijing wants to own it provide the legal framework for DCEP, giving the digital yuan the same legal By Hu Yue, Wang Liwei and Luo Meihan status as the physical yuan. And China’s long-term plan for the economy through 2035, released after the Fifth Plenum of hile most of the world’s governments challenges of the new decade — digital the Communist Party Central Committee, Ware still focused on defeating the novel currency (数字货币). which took place at the end of October, coronavirus that’s plunged the global The People’s Bank of China (PBOC), refers to “steadily advancing digital economy into its worst slump since the which started research on a digital yuan as currency research and development.” Great Depression of the 1930s, central far back as 2014, is leading the field and As it gears up for the domestic launch bankers are gearing up to tackle what is likely to be the first major economy to of DCEP, China also wants to make sure could become one of the biggest financial introduce a sovereign digital currency — it it has a seat at the global digital-currency

08 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 09 IN THIS SECTION China Races to Catch Money Launderers Anbang Salvage Runs Aground Investment Firm Turns on Money Man

table. Over the past few months, President focused the minds of officials at national months earlier, according to the BIS. Xi Jinping himself has highlighted the and international level on the future of The year 2020 “has been a watershed need for China to get involved in setting money — how it’s spent and transmitted, moment in the attitudes of many central international standards and formulating how it’s regulated and how to control the banks around the world towards CBDC,” global rules to handle risks to make sure it risks stemming from cryptocurrencies Benoît Cœuré, a member of the BIS’s retains its competitiveness. including stablecoins and other digital Executive Committee, told Caixin in an “We should… actively participate in payment systems. interview in October. While Libra has formulating international rules on digital Research into digital currencies has accelerated central banks’ move toward currency and digital tax to create new taken on added momentum in the wake of CBDCs, it is technological innovation that competitive advantages,” Xi wrote in the Covid-19 pandemic, which led to an is fundamentally driving the change, he an October article published in Qiushi, acceleration in the use of digital payments, said earlier in June. the Communist Party’s main theoretical fuelling concern that hundreds of millions The Bank of Japan, in its October journal. And in a speech at a summit of of consumers, especially the elderly and paper “The Bank of Japan’s Approach to leaders from the Group of 20 nations on the “unbanked” — those without access Central Bank Digital Currency,” said it Nov. 21, he called for the organization to banking facilities — will be shut out would start testing the basic functions of “to discuss developing the standards of the financial system. The proportion CBDC as a payment system in 2021. The and principles for central bank digital of contactless payments in global card same month, the European Central Bank currencies (CBDCs) with an open and transactions increased to more than 33% published a report on the possible issuance accommodating attitude, and properly in March when the pandemic raged of a digital euro and said that it would handle all types of risks and challenges around the world, up from around 27% six decide whether to launch a digital euro while pushing collectively for the development of the international monetary system.” Digital Currency Pilots Around the World China has left the rest of the world Digital Currency Pilots Around the World in the dust when it comes to digital OfficialOfficial launch launch CompletedCompleted pilots pilotsOngoing pilotsOngoing pilots currencies, although that shouldn’t come as much of a surprise given the way the Uruguay government and domestic companies — Limited mobile-based like e-commerce giant Alibaba Group pilot from Nov. 2017 to April 2018 China Holding Ltd. and its fintech affiliate Ant Pilot programs announced Group Co. Ltd. — have used digital in April 2020 in four regions technology to transform a backward banking and financial architecture into a The Eastern Caribbean cutting-edge, online-focused and user- Central Bank Phase 1 started in March 2019. Sweden friendly system for the internet age. Phase 2 rollout in four member Pilot announced in Feb. A survey of 66 major central banks countries scheduled for July 2020 2020 to run initially until carried out by the Bank for International but delayed due to Covid-19 Feb. 2021 Settlements (BIS) toward the end of 2019 showed that 80% were engaged in some form of CBDC work, up from 70% in Ukraine The Bahamas Limited pilot carried the previous survey in 2018. Of the 80%, First country to officially out from Feb. 2018 only 10% had gone as far as developing roll out a CBDC, beginning to Dec. 2018 pilot projects and all of them were in on Oct. 20, 2020 emerging market economies. Some 40% of those doing CBDC work said they had progressed from conceptual research to experiments, or proofs-of-concept, where they had carried out feasibility tests to verify whether the currency had practical potential. That change has been partly prompted by the rise of cryptocurrencies such as Bitcoin, and by Facebook Inc.’s announcement in June 2019 that it was working on a project to launch a global blockchain-based digital currency, Libra. Although the social media giant’s proposal has since been watered down to Sources: Bank for International Settlements, central banks a more run-of-the-mill payment system, it Sources: Bank for International Settlements, central banks

08 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 09 FINANCE & ECONOMY

project toward the middle of 2021. touching each other’s phones regardless The U.S. Federal Reserve has been of whether or not they are connected to FINANCE more circumspect. When the BIS the internet, a feature Mu says is a clear approached other major central banks advantage over Alipay and WeChat Pay. China Races to Catch about setting up a group to study digital China’s focus in developing DCEP has currencies, the Fed initially declined to get been on domestic use by consumers for Money Launderers involved, a senior central banker close to retail payments rather than on “wholesale” the group told Caixin. But after the group use related to settlement and payment was formally launched in January 2020, the between institutions in financial markets Rapid evolution of financial criminality has left a 13-year-old anti-money laundering statute in the Fed subsequently changed its mind and or for cross-border payments, with the dust, forcing authorities to press for tougher, more joined the six other founding central banks, aim of making them more efficient and effective rules and penalties which included the Bank of England and transparent, and easier to supervise. the European Central Bank. Its name That’s partly because China has a huge By Peng Qinqin and Denise Jia appeared on the first report issued by the informal economy which is driven by cash group in October discussing the common payments and breaking the cycle will help hinese authorities are getting more principles and key features a CBDC and the government control corruption, illegal Cserious about fighting money its supporting infrastructure should have. cash flows and tax avoidance among other laundering, or the illegal hiding of the The Fed’s chairman, Jerome Powell, said it things. origins of money obtained through was more important for the U.S. to “get it But longer term, as China’s financial criminal activities. right than it is to be the first.” system becomes more developed, the Regulators got a wake-up call in 2019 Over the past years, Chinese central DCEP would be conducive to the when the international Financial Action bank officials have attempted to clear up internationalization of the yuan, Mu said Task Force (FATF) on money laundering confusion and misunderstanding about in a speech in 2019. highlighted flaws in China’s system. Later the DCEP, how it fits in to the country’s That’s one key reason why China that year, several Chinese lawmakers monetary policy and system, how it is pushing hard for common global submitted proposals to amend the nation’s changes the role of dominant third-party standards for digital currencies and 13-year-old anti-money laundering law payment systems Alipay and WeChat Pay, for increased coordination among to catch up with the rapid evolution of and how China’s approach to its digital international financial authorities to financial criminality. currency differs from other countries. regulate them. The PBOC has already In a video address to a virtual meeting Those efforts have coincided with the been contributing to work on standards. in June of the FATF, a global money rollout of testing of the currency in retail A paper published by the central bank’s laundering and terrorist financing settings in three cities — Shenzhen, digital currency research institute in 2019 watchdog, People’s Bank of China Suzhou and Chengdu — and the Xiongan noted that China was the first to add (PBOC) Governor Yi Gang said China New Area, a development hub for the digital currency-related content to the was revising its anti-money laundering Beijing-Tianjin-Hebei economic triangle. repository for ISO 20022, a new global law to broaden the scope of supervision, Mu Changchun (穆长春), the head standard covering financial information enhance its effectiveness and increase the of the PBOC’s digital currency research transferred between financial institutions severity of penalties. institute, and Fan Yifei (范一飞), the that includes payment transactions, If not for the Covid-19 pandemic, the central bank’s deputy governor, have securities trading and settlement top-level international conference on anti- spearheaded those efforts, giving speeches information, and credit and debit card money laundering would have been held and writing commentaries to explain the information. in Suzhou in the first time for China to rationale behind the DCEP. Their message The paper’s authors said China’s host a plenary meeting of the organization. is that issuing a sovereign digital currency efforts to fill the gap have not only The FATF was founded in 1989 on will maintain the PBOC’s control over expanded the scope of the application the initiative of the G-7, the Group of the financial sector and monetary system, of the new ISO 20022 standard, but also Seven leading industrialized nations, neuter the threat posed by Libra and other helped promote the internationalization to develop policies and set standards to cryptocurrencies; provide a backstop to of China’s digital currency standards and fight money laundering. China joined the the existing mobile payment infrastructure, improved China’s international influence intergovernmental organization in 2007, which has become systemically important; in the digital currency field. the same year the country enacted its first promote financial inclusion by making A source close to BIS told Caixin that anti-money laundering law. electronic payments more accessible to broader coordination between central Money laundering, so-called after people without bank accounts; and combat banks in this area is very important, so Chicago gangster Al Capone’s practice of money laundering, financial fraud, and that in the future, the digital currencies of legitimizing criminal proceeds by running terrorism financing. different central banks can be transferred the funds through cash-only laundromats Mu has repeatedly emphasized that across borders. “It is like establishing in the 1920s, is a huge and growing DCEP is a replacement for cash and will a unified communication technology problem. The estimated volume of money be centrally controlled by the PBOC. standard, it doesn’t matter if you’re using a laundered globally every year accounts The technology behind the currency will Samsung, Huawei or Apple mobile phone, for as much as 5% of global GDP, or $2 enable people to send and receive funds by you can still talk to each other.” trillion, according to the United Nations

10 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 11 Office on Drugs and Crime. Updated standards are required networks are often used in money In the past year or two, China’s anti- Rapid developments in financial laundering, but cases involving such money laundering efforts have drawn information, technology and underground lenders are mostly increasing attention in international communication allow money to move prosecuted as “crimes of illegal business financial circles. The PBOC has been anywhere in the world with speed and operation” rather than money laundering. ramping up punishment of financial facility, making it easier to hide the true The sentencing is relatively lenient relative institutions that fail to adequately guard sources of funds from criminal activities. to the damage these illegal lenders cause against money laundering. This also makes the task of combating to society, said Yang Xiaoping, a former In the first six months of 2020, the money laundering harder and more urgent governor of the PBOC’s Kunming branch. PBOC doled out penalties of more than than ever. In addition to underground lenders, 370 million yuan ($53.89 million) for But with the evolving means of money pyramid sales schemes and gambling are money laundering violations, exceeding laundering, China’s law enforcement has also often related to money laundering, the total for all of 2019, data from the been unable to keep up with international but those crimes are rarely prosecuted as central bank showed. standards. Among shortcomings of money laundering. The significant increase in fines China’s current statute, lawmakers In 2018, courts across the country reflects a revision in the way the central proposing amendments said, is that concluded 4,825 cases involving money bank calculates punishment of financial limitations on the definition of upstream laundering, in which 11,428 individuals institutions that fail to effectively money laundering cannot meet the received sentences. Among them, however, guard against money laundering. Such practical needs of combating crimes. only 47 cases were specifically identified institutions would previously receive only In addition, they argued, the severity as money laundering, involving 52 people one fine at a time regardless of how many of punishment is relatively lenient, the who were sentenced. rules they broke. Now multiple penalties scope of punishment is relatively narrow The FATF raised the issue of too few are imposed for multiple violations. The and anti-money laundering efforts fail to sentences for money laundering in its largest single fine the central bank imposed reflect proactive “risk-based” principles. fourth round of anti-money laundering exceeded 100 million yuan. According to a work report of the evaluation of China in February 2019. “We increasingly realize that anti- Standing Committee of the National “The FATF considers it inconceivable money laundering is an important People’s Congress released May 25, the that China, the world’s second-largest part of national governance,” said Wu amendment of the anti-money laundering economy, has only a few dozen ‘money Xiangjiang, the head of Industrial and law has been placed on 2020’s legislative laundering’ convictions a year,” a person Commercial Bank of China’s internal agenda. close to the assessment told Caixin. control department. “In the process of Another factor that contributes to internationalization, we also recognize Scope needs to be expanded the low numbers of money laundering that strengthened anti-money laundering One key change will be expanding the convictions is that China’s criminal law regulation is the consensus of global definition of criminal money laundering. does not allow the prosecution of money governance.” For example, illegal informal banking laundering for one’s own personal benefit. “If a corrupt official launders his own bribery money by transferring and hiding it, this is not considered money laundering under current law,” a senior anti-money laundering regulator said. While expanding the definition of money laundering in the revised law, the purpose of anti-money laundering efforts will be expanding from just combating crimes to preventing and curbing money laundering-related activities. “A lot of behaviors may not qualify as crimes, such as individuals leasing or selling their identifications or accounts to other people, which could facilitate money laundering,” a person close to the work on amending the statute said. The revised law would consider making these activities illegal, the person said. Current law requires that financial An anti-money laundering slogan institutions as well as certain nonfinancial displayed at a bank in Haikou, institutions fulfill anti-money laundering Hainan. Photo: VCG obligations as the financial system is no longer the only channel for money

10 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 11 FINANCE & ECONOMY

laundering. For example, real estate, such a risk-based principle and require complete its restructuring plan by its initial precious metals and other nonfinancial related parties to carry out money August deadline amid disagreements industries are often used to conceal and laundering risk assessments, allocate among regulators and stakeholders as launder money. However, China’s anti- regulatory resources according to the well as disputes over some of Anbang’s money laundering work mainly targets risk and impose prevention and control overseas assets, knowledgeable sources financial institutions, while nonfinancial measures. told Caixin. institutions have never formally done A senior Chinese anti-money Regulators and stakeholders of Dajia anything to prevent money laundering. laundering regulator held up rampant have already agreed to an overhaul of The FATF’s evaluation also pointed cross-border telecommunication fraud the restructuring plan, the sources said. out that China’s anti-money laundering as an example. In the compliance-based China Insurance Security Fund Co. supervisory system was almost exclusively approach, a responsible institution is Ltd., Dajia’s largest shareholder, would focused on the financial sector while there considered to have fulfilled its obligation finish reevaluating the company’s assets were no effective preventive or supervisory by reporting suspicious transactions, but by the end of 2020, and would restart measures covering the nonfinancial sector. there is nothing it can do if the criminals wooing strategic investors in 2021, they “The PBOC’s level of understanding withdraw fraudulent funds abroad. said. Insurance Security Fund operates of risk in the nonfinancial sector is low, as However, under the risk-based principle, the insurance protection fund that raises little work has been done in this sector,” the responsible institution in addition to money through mandatory contributions the evaluation found. reporting suspicious transactions should from insurance companies based on their Money laundering has a high immediately take reasonable risk control premium income. correlation with cash transactions. Banks measures, such as restricting related The faltering salvage operation raises and other financial institutions in China accounts and suspending online banking questions about how easily the insurance are required to report all domestic and or overseas cash withdrawals, the regulator protection fund will be able to recover overseas cash transactions of more than said. the 60.8 billion yuan ($9 billion) that it 50,000 yuan. But to avoid scrutiny of For Chinese financial institutions that injected into Anbang after it was seized large-sum transactions, money launderers are used to a “check-the-box” compliance by the government in 2018. It also often split transactions into 49,900 yuan approach, switching to a proactive risk- raises doubts about China’s corporate units. based principle will be a big challenge. turnaround campaign to defuse the risks If banks are required to include all to the financial system spawned by not transactions of clients in anti-money just Anbang, but other freewheeling Switch to risk-based approach laundering monitoring, it will be too much conglomerates like CEFC China Energy Most financial institutions in China are work, said an anti-money laundering Co. Ltd. and Tomorrow Holding Co. familiar with their anti-money laundering official at a city commercial bank. Ltd., particularly amid the economic compliance obligations, but they often “If customers have to wait longer for changes brought about by the coronavirus do not understand the money laundering the service, they may be gone,” the official pandemic. risks they face, the FATF evaluation said. said. “The risks of money laundering are different for different types of financial Getting the fund’s money back institutions operating in different regions,” The chief goal of the restructuring plan is said Yu Pei, partner of the Deloitte to ensure Insurance Security Fund avoids China Anti-Money Laundering Center. FINANCE taking a bath on its investment, the sources “However, domestic banks have not yet said. Financial regulators have decreed made a good risk assessment of themselves Anbang Salvage Runs that the fund firm can only hold Dajia and do not know where they are exposed equity temporarily, with an end goal of to money laundering risk. They just Aground Dajia emerging from restructuring as a mechanically complete their compliance privately owned company. obligations but fail to implement more Regulators initially intended for Dajia targeted risk-control measures.” Company created to take over a significant portion to have a decentralized stake structure In February 2012, the FATF published of the conglomerate’s assets has failed to complete consisting of three to five new qualified its updated standards on combating its restructuring on time investors — the goal was to prevent a money laundering, recommending a risk- By Hu Yue, Wu Yujian and Guo Yingzhe single large shareholder from abusing based anti-money laundering principle. its position, the sources said. However, This requires financial institutions to nbang Insurance Group Co. Ltd. has they found it difficult to attract enough assess the risks associated with illicit Abeen dismantled and has decided to go quality investors and eventually decided activities such as money laundering and into liquidation, but the story of the once not to stick to the decentralized equity terrorist financing and then reasonably high-flying conglomerate remains far from plan. Nonetheless, recouping as much deploy corresponding resources in over. of Insurance Security Fund’s money as response to the risks. Dajia Insurance Group Co. Ltd., the possible remains the primary goal, they The revision of China’s anti-money company created to take over a significant said. laundering law will consider adoption of portion of Anbang’s assets, has failed to The 60.8 billion yuan was used to

12 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 13 plug the hole in Anbang’s capital that its founder Wu Xiaohui had left by falsifying capital injections. Wu was sentenced to 18 years in prison for fundraising fraud and embezzlement in May 2018. At the end of June 2018, Anbang recorded negative 130 billion yuan in net assets, including a paper loss on its investment in China Minsheng Banking Corp. Ltd. One reason behind the restructuring plan’s failure was that some of Dajia’s assets had lost value amid the pandemic, causing hand-wringing among regulatory officials about the possible loss of the insurance protection fund, according to people familiar with the matter. According to the previous restructuring plan that was made around the end of June, Primavera Capital Ltd. and Xiamen International Financial Technology Co. Ltd. were set to buy about 32% of Dajia’s stake for 1.5 yuan per share, and Insurance Security Fund’s The company created to take over holding would be reduced to 63%, the a significant portion of Anbang’s assets has failed to complete its people said. restructuring on time. Photo: VCG However, under the plan, the fund firm would have to tolerate a paper loss in the billions of yuan until Dajia’s share valuation recovered to the point where them. Foreign insurers can also partner amid fallout from the pandemic, using it could sell off its stake without losing with Primavera Capital in investing in Dajia’s delayed disclosure of disputes over money, which is 2.5 yuan per share, the Dajia, they said. the ownership of the hotels as an excuse, people said. the sources said. In April, AB Stable filed a Much of that paper loss has something lawsuit against MAPS in the U.S. to force to do with Anbang’s investment in Lawsuits overseas it to honor the deal. Minsheng. In recent years, Anbang Dajia also faces uncertainties in its The disputes over the hotels’ ownership bought a large number of shares of the disposal of some of the assets Anbang were stirred up by a person named Andy Shanghai- and Hong Kong-listed bank, accumulated during its unbridled overseas Bang living in California. He claimed that eventually sinking 90 billion yuan into the spending spree in the 2010s, such as four of his companies owned the hotels stock, according to Caixin calculations luxury U.S. hotels. Dajia has set aside based on a contract he had signed with based on data from Minsheng’s exchange hundreds of millions of U.S. dollars to deal Wu and Chen Xiaolu, a former Anbang filings. The majority of Anbang’s stake with these uncertainties, the sources said. director. In 2019, the four companies in Minsheng has been transferred onto After regulators took over Anbang, filed lawsuits in the U.S. demanding to be Dajia’s balance sheet. Currently, the they decided to sell its overseas assets compensated by Anbang and Dajia. bank’s sluggish share price leaves Dajia 50 that did not do much to augment its core However, private detectives hired by billion yuan in the hole on the investment. insurance business. One snag in this plan Dajia later found out that the companies As to Dajia’s other assets, some is a dispute between an Anbang subsidiary were incident-faking extortionists, and have gained in value just as others have and a company owned by South Korean judicial authentication showed that the declined amid the pandemic, the sources investment firm Mirae Asset Global contract was fake and Wu and Chen’s said. Although its total assets need to Investments Co. Ltd. over Anbang’s signatures on it were forged, the sources be reassessed, Dajia could have a net Strategic Hotels & Resorts Inc. said. Several U.S. courts eventually asset value as high as 20 billion yuan, In September 2019, Mirae’s MAPS dismissed related lawsuits. without taking into account the Minsheng Hotel and Resorts One LLC agreed to As of the end of August, Anbang’s investment. pay $5.8 billion to buy Strategic Hotels overseas investment totaled about 130 Joining Dajia’s restructuring in 2021 from the Anbang subsidiary, AB Stable billion yuan, and Dajia had recouped still interests some companies, including VIII LLC. The deal included 15 hotels in about 80 billion yuan by selling off assets, Primavera Capital and some listed the U.S. But MAPS tried to back out of the sources said. That disposal will be Chinese insurers, the sources said, as the deal in 2020 due to the decline in the nearly complete once it offloads Strategic some Dajia assets remain attractive to hotels’ value and its rising financing costs Hotels, they said.

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asset management to insurance brokerage Holdings Ltd., a Hong Kong-listed FINANCE and equity investment. company owned by billionaire Li Following its subsidiary AMTD Ka-shing, AMTD Group was later Investment Firm Turns International Inc.’s IPO in New York in controlled by a subsidiary of U.S. 2019 and second listing in Singapore in investment bank Morgan Stanley until on Money Man 2020, the group was planning to list its 2015. fintech business in Hong Kong in 2020, In 2015, AMTD Group brought in Choi told a Hong Kong newspaper in CMIG, one of China’s largest private China Minsheng Investment Group levels financial April. investment firms, and L.R. Capital misconduct accusations against the CEO of an Before heading AMTD Group, Management Co. (Cayman) Ltd. as investment bank it has backed for years 42-year-old Choi worked at Citigroup, major shareholders, who bought a By Wei Yiyang, Wang Duan, Wu Hongyuran PricewaterhouseCoopers Hong Kong and combined 71% stake, according to an and Luo Meihan UBS AG. At UBS, He worked hard and AMTD Group bond prospectus from was demanding — sometimes willing to March 2016. Choi’s parents held stakes mbattled private investment take compliance risks to achieve goals, in L.R. Capital and a related company in Econglomerate China Minsheng one of his former colleagues told Caixin, 2015, according to Bloomberg News. Investment Group Corp. Ltd. (CMIG) who spoke highly of his competency. AMTD Group said in the filing that has turned against its former partner Choi got to know Dong Wenbiao, then the growth of its investment banking Calvin Choi, chairman and CEO of chairman of China Minsheng Banking business would hinge partly on its ability Hong Kong-based financial services Corp. Ltd. and founder of CMIG, when to take advantage of the relationships and provider AMTD Group Co. Ltd., he participated in one of the lender’s businesses of CMIG and L.R. Capital. accusing Choi of financial fraud, as the financing projects years ago, people with The rapid expansion of AMTD debt-ridden investment firm struggles to knowledge of the matter said. The pair Group was largely backed by CMIG, pay off its debts. later developed an extraordinary and knowledgeable sources told Caixin. The scandal comes as AMTD Group, close business relationship, especially CMIG entrusted the company with whose listed subsidiary calls itself the No. when Choi worked for UBS, where billions of yuan intended for investments, 1 independent investment bank and asset he most recently served as managing but didn’t get much of it back, they said. manager in Asia, continues to expand. director of its investment bank division, “Some projects (with entrusted money Since Choi took over in February 2016, multiple financial industry insiders said. from CMIG) actually made money, but AMTD Group has transformed itself he didn’t give us the profits. Some had from a small mortgage lender into a losses, but we don’t know whether he financial conglomerate with businesses Debt collection truly invested or misappropriated the ranging from investment banking and Cofounded in 2003 by CK Hutchison money,” a CMIG senior executive said. CMIG has been trying to get its money back from Choi since 2018, the year Dong stepped down as CMIG chair, company insiders told Caixin. Company management vowed to “send Choi to jail” if he failed to return its funds, an insider said. In August, after CMIG publicly accused Choi in Hong Kong of defaulting on his repayments, Choi released a statement that didn’t directly address CMIG accusations. At one point, Choi owed CMIG about 3 billion yuan ($447 million), though he has since paid back 700 million yuan, the company senior executive recently told Caixin. The two sides’ breakup came in the context of a CMIG liquidity crunch driven largely by its overseas investment failures and poor management. Founded in 2014, CMIG racked up much of its debt during a subsequent In August, CMIG hung banners in Hong Kong accusing Calvin Choi spending spree, typically from its of defaulting on his debts. international investment arm, CM International Capital Ltd., which took

14 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 15 company had managed some of several AMTD International Inc. went Hong Kong-listed mainland banks’ IPO public in the U.S. in 2019. Photo: VCG proceeds. Coincidentally, AMTD Group said in the 2016 filing that it scored a role managing a $300 million investment portfolio for Bank of Qingdao Co. Ltd. as a result of a “relationship” it developed with the mainland bank after facilitating the lender’s Hong Kong IPO in late 2015. A spokesperson for Bank of Qingdao told Caixin on Friday that all funds raised from its Hong Kong IPO had been transferred to the mainland as required by the State Administration of Foreign Exchange and were earmarked to replenish its capital — as opposed to being handing over to an outside manager for investment. In 2017, a related company of L.R. Capital and another investor sold off their stakes in Bank of Qingdao, and then AMTD Group bought roughly the same number of the bank’s shares, according to shareholding records disclosed on some bad bets on several Hong Kong- banks to list in Hong Kong, multiple the Hong Kong Stock Exchange. Later listed companies, people familiar with the industry insiders said. that year, AMTD Group lent a similar matter said. To help explain things, an industry amount of the shares to its controlling CM International Capital, specializing insider gave a hypothetical example of a shareholder, L.R. Capital, which in in international investment, is considered small mainland bank launching an IPO turn used them as collateral to obtain to be CMIG’s most corrupt and in Hong Kong that is undersubscribed by loans from an undisclosed third party, chaotically managed unit, whose total 200 million yuan. In such a case, AMTD according to AMTD International’s losses over its lifetime are estimated to be Group would serve as an intermediary 2019 annual report. The shares lent were at least 10 billion yuan, the people said. to help find financial institutions and worth about HK$1.2 billion at the end of With $2.2 billion in registered capital, local consortiums that can lend 200 2019. the company squandered all of its net million yuan to a company, who then The third party who issued the loans is assets in a few years, failing even to make invests in the IPO in exchange for a stake Guangzhou Rural Commercial Bank Co. it clear how the losses occurred, a former in the bank, the person said. After the Ltd., according to public records from CMIG employee said. listing, the company can use the stake as Bank of Qingdao and the Hong Kong In 2019, CMIG defaulted on a series collateral to borrow money from another bourse. In 2017, AMTD Group served of yuan- and dollar-denominated bank. as the financial advisor and joint global bonds, with a number of employees also AMTD Group’s rapid growth coordinator for the Guangzhou lender’s hollowing out its assets, the people said. indicates that it may be engaging in the Hong Kong IPO. To shore up its balance sheet, CMIG kinds of business that large institutions AMTD Group’s investment in Bank began asking debtors, including Choi, for turn their noses up at — such as buying of Qingdao not only helped its controlling its money back. up stocks that no one wants and then shareholder secure financing, but also thinking up ways to sell them, a Hong enabled its listed subsidiary to dress up Kong investment banker told Caixin. financial statements that would have Money game Meanwhile, AMTD Group has shown losses. After bringing in CMIG and L.R. expanded its asset management In 2019, AMTD Group signed a Capital as shareholders in 2015, business through IPO services, such as derivative agreement with a company AMTD Group started to develop its by asking clients to invest part of their owned by Andrew Chiu — a grandson investment banking business, including IPO proceeds in its asset management of Hong Kong tycoon Chiu Te-ken. The underwriting equity and bond issuances products, the investment banker said. income generated from the agreement, for Chinese mainland companies who The funds, which often get locked up for which was linked to the stock of Bank of were eager to raise money in Hong Kong, several years, can be invested in other Qingdao, contributed over HK$1 billion but didn’t have much appeal to overseas IPOs, thus expanding the scale of assets of AMTD International’s profit in 2019. investors. under the company’s management, he Andrew Chiu holds a stake in AMTD AMTD Group specializes in raising said. International, where he serves as a vice funds for small and midsize mainland Choi once acknowledged that the chairman.

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While it has always claimed that its investment in Bank of Qingdao is a strategic long-term one, AMTD Group in June sold nearly half of its stake in the bank, according to Hong Kong bourse records. On the same day, Ariana Capital Investment Ltd., another company founded by Andrew Chiu, acquired exactly the same number of the lender’s shares as AMTD Group sold. Neither AMTD Group nor Ariana explained the sale and purchase. They didn’t disclose whether the trades constituted related-party transactions, either. The spokesperson for Bank of Qingdao said the transactions were merely market actions, and AMTD Group and Ariana had both disclosed the information in a timely manner based on their obligations to the exchange. The Port of Qingdao’s automatic shipping container terminal, Oct. 8. Photo: VCG

ECONOMY finalized and published, and they then flourish and grow in a sustainable way. What to Watch in the need to be given final approval by the President Xi unveiled the “dual country’s top legislature, the National circulation” (双循环) strategy at a New 5-Year Plan People’s Congress, at its annual meeting Politburo meeting in May. Although that usually takes place in March. no concrete details of the strategy The plans usually cover almost every have been released, broadly speaking, Amid a global pandemic and deepening geopolitical economic and social issue and set targets it involves making the economy more tensions, top Communist Party officials meet next ranging from annual economic growth reliant on “internal circulation” — week to decide on policies to drive sustainable and urbanization rates to pollution the domestic cycle of production, economic growth control, education and research and distribution and consumption — for its By Yu Hairong and Tang Ziyi development spending. development, while being supported by Here are some key themes to watch out “external circulation,” which relates to hina’s top leaders mapped out policies for in the 14th FYP. international trade and investment and Cfor the country’s economic and social China’s links with the rest of the world. development over the coming five years at Reform of the markets for factors a key meeting in October, with President Dual circulation of production — land, labor, capital, Xi Jinping’s new “dual circulation” Expect to hear a lot more about some technology and data — is needed because strategy taking center stage to help relatively new buzzwords, especially dual the current system is distorting the price the economy overcome medium- and circulation, factor market reform and and allocation of resources and holding long-term challenges. governance, along with older ones such as back growth in what’s known as total Proposals for the five-year plan (FYP) supply-side structural reform which first factor productivity, a key measure of an covering 2021-2025 were discussed at the emerged in late 2015. economy’s productivity, according to fifth plenary session of the Communist Far more than just buzzwords though, Wang Yiming, a former deputy director Party’s 19th Central Committee from these are serious, well-thought-out of the Development Research Center, a Oct. 26 to 29, the highest-level policy- strategies and policies to guide China’s think tank under the State Council. setting event since the outbreak of economic development through a Covid-19. A broad outline of the plan was fundamental structural shift away from published after the gathering but a more speed toward quality and sustainability. No more GDP growth targets? detailed menu of policies is not likely to Dual circulation and factor market The 14th FYP is particularly important be released for weeks or even months. reform emerged last year and will provide for the next stage of China’s economic This will be China’s 14th FYP since a broad framework for government and social development as 2020 marked 1953. Government officials, advisers, ministries, officials and advisers to design the end of the country’s decades-long academics and lawmakers spend months and implement more detailed, specific goal to achieve a “moderately prosperous debating the contents before the plans are policies that will help the economy society (小康社会) in all respects.” This

16 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 17 is a traditional concept dating back to slowdown and that speed is no longer stimulus policies that will have side Confucian times to describe a society the most important factor in economic effects that include a further buildup of with a functioning middle class. It has development. debt and leverage, excess capacity and been tweaked and updated over the years China’s annual average GDP growth asset bubbles, Xu Lin, a former director and it was fleshed out with concrete goals rate has slowed from 9.8% over the 2001 of the National Development and Reform at the Communist Party’s 18th Congress to 2005 period just after the country Commission’s development planning in November 2012: double gross domestic joined the World Trade Organization department, wrote in an article in May. product (GDP) and per capita income to an average of 6.7% over the first four Wang Tao, the head of Asia economics from 2010 to 2020, and eradicate poverty. years of the FYP that ended in 2020. and chief China economist at UBS The targets were set to be achieved just Economists widely expect that over the Investment Bank, expects China’s GDP ahead of the 100th anniversary of the 2021 to 2025 period of the 14th FYP, the growth to average only 5% in the next five founding of the party in 2021. pace will fall even further, to a range of years, weighed down by a series of factors With the finishing line in sight, 5% to 5.5%. including shifts in global supply chains the government is now focusing on The GDP targets in the FYPs have fueled by tougher U.S. policies on the formulating strategies to cope with new bowed to the inevitable — the annual use of Chinese technology and growing challenges and objectives. Policymakers average target in the last plan was set at pushback against globalization. On the know the economy faces many “at least 6.5%,” down from 7% in the domestic front, China will be challenged headwinds. On the external front these 12th plan that ran from 2011 to 2015. by aging demographics, elevated macro include the ongoing Covid-19 pandemic, There has been considerable debate about leverage, technology bottlenecks, and low worsening relations with the U.S. and the what an appropriate target rate should be efficiency in some areas of the economy. prospect of technology and supply chain for the next FYP and whether the GDP Wang said she expects the government decoupling. On the domestic front they growth goal has outlived its purpose and to either not set an explicit growth target include cleaning up the environment, should be scrapped altogether. or put forward a lower and more flexible upgrading China’s industrial structure, The pre-eminence of the GDP target, range of around 5%. shifting to a consumption-driven which historically policymakers deemed Li Chao, chief economist at Zheshang growth model, boosting incomes and necessary to ensure full employment, Securities Co. Ltd., said the government reducing wealth disparity, and coping meant that local governments focused on should scrap the target altogether with a declining labor force and an aging boosting investment, the easiest way to and put more emphasis on the quality population. achieve short-term growth. and structure of economic growth. It’s widely expected that the 14th Based on past experience, continued He proposed alternative goals such as FYP will play down GDP expansion as focus on the pace of growth, especially the proportion of value-added output a major target and focus more on the if the target is set too high, will drive from strategic emerging industries quality of growth, a recognition that local governments to strive to meet or as a percentage of GDP, the rate of the economy is undergoing a structural exceed it. That could lead to unnecessary urbanization, direct financing as a percentage of total social financing, or the market capitalization of China’s stock A shoe production workshop in market as a percentage of GDP. The Wenzhou, Zhejiang province, Sept. goals would serve as indicators to allow 19. Photo: Liang Yingfei/Caixin the government to track the performance of core supply-side factors, including the productivity of labor and capital, Li said.

More focus on consumption China has for many years emphasized the importance of increasing domestic demand, especially after the 2008-2009 global financial crisis. But the focus was placed on infrastructure and property investment with far less support for household consumption, which is a more long-term and complex issue to tackle. But now, many local governments have complained they are running out of good infrastructure projects to carry out, financing is becoming more difficult to find and the central government has imposed more stringent controls on local government financing vehicles.

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Concerns over price bubbles in the Liu Shijin, vice chairman of the China R&D spending to around 3% in 2025. housing market have led to a campaign to Development Research Foundation, a That would support spending on basic rein in the sector that’s now lasted more government-sponsored think tank. research and cutting-edge technologies in than three years and shows no signs of areas such as semiconductors, software, being relaxed. As a result, increasing precision machinery and advanced robot domestic consumption, especially private Technology self-sufficiency technology, as well as to strengthen consumption — goods and services China has for years implemented various intellectual property rights protection, bought and consumed by households — strategies to promote the country’s she said. needs to be at the forefront of the dual shift up the industrial value chain and circulation strategy, economists say. bolster its position in high-tech and other Private consumption as a share emerging sectors, notably through the of GDP still lags far behind that of Made in China 2025 initiative and the developed countries, although that mass entrepreneurship and innovation FINANCE does give China plenty of room for campaign. But the drive has taken on improvement. The latest data from the added urgency as tensions with the What’s Next for the Organization for Economic Development U.S. have deepened and the threat of a Cooperation (OECD) show that technological decoupling rises as America Yuan? in China, household spending as a imposes more and more restrictions percentage of GDP is 38.5%, compared on the sale of high-tech components to Chinese currency may still have legs after 8.5% with an average of 60% for OECD Chinese companies. gain against greenback since end-May, analysts economies, 64.5% in Brazil and 67.9% in President Xi has continuously say the U.S. emphasized the need for self-sufficiency Catching up will involve a whole host in key technologies, and at an August By Peng Qinqin and Guo Yingzhe of policies involving taxation and the symposium to solicit input for the 14th fiscal system to narrow the gap between FYP from economists and scholars, otwithstanding growing tensions rich and poor, redistribute income he said technology and innovation can Nbetween Washington and Beijing and away from companies toward private foster new growth drivers and are key the Covid-19 pandemic, now is a good consumers, increase household income to building “internal circulation.” His time for Chinese mainland tourists to hop and give households a greater share of remarks reaffirm expectations that China on a plane to the U.S. — the appreciation national income. will double down on its efforts to reduce of the yuan over the past months means The government is already taking its reliance on technology from the U.S. they are getting far more bang for their steps down this path — in 2018, for and other economies and many analysts buck. example, the government announced expect the 14th FYP to put even greater At the end of May, they needed to an overhaul of the personal income-tax emphasis on funding for research. exchange 7,146 yuan to get $1,000, but system that the cut burdens on almost For the past decade, spending on on Dec. 14 they would only have had to 60% of taxpayers, according to Gan research and development (R&D) as part with 6,537 yuan, a saving of 609 Li, a professor at the Research Institute a percentage of GDP in developed yuan, or 8.5%, according to the central of Economics and Management at countries such as the U.S., South Korea bank’s official closing price. The yuan Southwestern University of Finance and and Japan has been two to four times has been the second-best performer Economics. the rate in China, according to Li, the against the U.S. dollar among Asian But economists generally agree economist at Zheshang Securities. currencies since it hit a closing low of that much more needs to be done and Although R&D spending to GDP has 7.16 yuan on May 28, beaten only by the the 14th FYP could well include new been a target in every FYP since the 10th South Korean won. reforms, policies and measures to help plan covering 2001-2005, the country The Chinese currency’s rapid drive household consumption. Li Shi, a has never achieved the figure set by the appreciation over the past months to professor at Zhejiang University, said the government, official data show. In 2019, its strongest level against the dollar in government should accelerate reform of China’s R&D spending to GDP ratio was nearly two and a half years has raised the income distribution system, further 2.2%, below the 2.5% target for 2020. concerns among some analysts that it improve the social security system and Wang from UBS said she expects has strengthened too quickly and could enhance government transfer payments the 14th FYP will raise the target for have an adverse impact on exports — to poor people. in an analysis of November’s official One way to create demand, especially manufacturing Purchasing Managers for services, is to expand the middle class, Index, the National Bureau of Statistics which is currently estimated at around President Xi said technology noted that 18.8% of export companies 400 million people. The government and innovation can foster new said they were affected by fluctuations should aim to double the size of this in the exchange rate, up from 17.1% in cohort to 800 million to 900 million, or growth drivers and are key to October, and some survey respondents about 60% of China’s total population, building internal circulation said appreciation had put corporate over the next 10 to 15 years, according to profits under pressure and led to a decline

18 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 19 in export orders. Even so, some analysts say Chinese policymakers’ tolerance for appreciation is set to continue. “Comments from senior officials … suggest that appreciation is currently looked at favorably in Beijing, since it makes yuan-denominated assets look ‘competitive’ internationally,” Louis Kuijs, Hong Kong-based head of Asia economics at research firm Oxford Economics Ltd., told Caixin. “Barring drastic FX (foreign-exchange) pressure, I expect the authorities to maintain this stance in 2021.” Kuijs said he expected the yuan to be trading at 6.6 per dollar at the end of 2020 and saw further appreciation to 6.5 by the end of 2021, although he expected to see “significant exchange- The yuan’s rapid appreciation over the rate fluctuations over and above the past six months to its strongest level underlying trend, consistent with the against the dollar in nearly two and a direction of reform.” half years has raised concerns that it has strengthened too quickly. Photo: VCG London-based research firm Capital Economics Ltd. sees even stronger gains, estimating the yuan will appreciate to 6.2 per dollar by the end of 2021, partly reference rate, also known as the fixing, fall — it can’t only rise or only fall. If we because of a persistently large gap for the currency’s value against the dollar. never trust the market, we can never go between yields on Chinese government The yuan is still only allowed to down this road” toward a market-based bonds (CGBs) and U.S. government move by a maximum of 2% either side exchange-rate mechanism, Guan said. bonds, which will attract overseas of the reference rate which is published In the past, some spurts of yuan demand. CGBs offer a much higher each trading day at 9:15 a.m. local time, appreciation against the dollar were return than U.S. Treasuries — the but the fixing is now more volatile and driven by speculation that the central 10-year yield differential has risen by over the PBOC allows it to be more market- bank worked hard to stamp out, mostly 200 basis points since the end of 2019, driven. In October, the central bank through starving the offshore yuan the firm noted in a Dec. 8 research note. scrapped the counter-cyclical factor, a market in Hong Kong of liquidity and Analysts and participants in the key element of the way it sets the daily ordering financial institutions to sell the foreign-exchange markets interviewed reference rate originally introduced in Chinese currency to satisfy demand. by Caixin say now is not the time 2017 to stem the yuan’s depreciation. But the current stretch of gains is for regulators to step in and halt the That has given traders more of a say in being fuelled by fundamental factors, appreciation because it is not being determining the yuan’s value. analysts say. One driver is the rebound driven by speculation but by fundamental China’s foreign-exchange market in exports since the depths of the factors such as a strong economy, has matured since the 2015 reform and Covid-19 pandemic in the first quarter, a booming exports, and inflows of overseas the public has increasingly adapted to financial regulatory source told Caixin. money investing in China’s capital the more flexible yuan, said Li Liuyang, Appreciation driven by fundamentals markets. Instead, policymakers should a forex analyst at China Merchants is reasonable and if regulators take take advantage of the yuan’s strength to Bank Co. Ltd. Increased exchange- measures to block it, pressure will only introduce more flexibility into the current rate flexibility means that investors and continue to build, the source said. exchange-rate formation mechanism and traders can respond more quickly and Although in the past yuan give the markets a bigger role in deciding efficiently to new market information and appreciation had a negative impact on the yuan’s value, as they have been take new long or short positions based on overseas sales, the historic correlation promising for several years. their changed expectations, Li said. between the exchange rate and The People’s Bank of China (PBOC), Financial regulators need to have more exports has been disrupted by factors the central bank, has gradually been tolerance for fluctuations in the exchange including the Covid-19 pandemic and introducing more flexibility into the rate, said Guan Tao, chief global the U.S.-China trade war, said Zhong yuan exchange-rate mechanism since economist at BOC International (China) Zhengsheng, chief economist at Ping the last major round of reform in August Co. Ltd. “We have to believe that in the An Securities Co. Ltd. That suggests 2015, when it shocked global markets by context of the marketization of exchange the yuan’s recent rally will not have a changing the way it calculated the daily rates, the exchange rate will rise and substantial impact on exports until

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assets in China are higher than those in Yuan’s Spectacular Rally many other countries which has lured 7.2 global investors and pushed up demand for the yuan. Global investors are also less keen to hold U.S. dollar assets owing to the economic chaos in the U.S. caused 7 by the spread of the coronavirus and by the lack of a strategy by President Donald Trump’s administration to bring it under control. As of Dec. 14, the U.S. dollar 6.8 index, which measures the value of the Onshore yuan-dollar spot exchange rate dollar against a basket of currencies of the U.S.’s most significant trading partners, had dropped more than 7.7% since the end of May. 6.6 6.5446 In China, foreign exchange trading is tightly controlled to prevent currency speculation and stabilize the exchange rate. In order to increase the yuan’s 6.4 Jan. 2 March 2 May 6 July 1 Sept. 1 Nov. 2 Dec. 15 flexibility further and give the market more of a say in determining its value, Sources: China Foreign Exchange Trade System, CEIC some analysts and market participants say regulators need to ease up on some Yuan Turnover Surges controls. Currently, when importers or exporters exchange foreign currency 6 5.8 through a bank, bank officials have to check documents such as contracts and customs declarations that prove the Yuan-dollar monthly trading is for real business. trading turnover (trillion yuan) 5 But these controls deny businesses the freedom to buy and sell foreign exchange at will to hedge against currency fluctuations. If traders think the yuan is 4 cheap and want to buy more because they think it’s going to appreciate, they can only buy based on their business’ trading volume and are not allowed to buy more, a source in the foreign exchange 3 market explained to Caixin. Regulators should relax checks on documentation when there is a large fluctuation in the exchange rate so that exporters and 2 Jan. Jan. Jan. Jan. Nov. importers can buy or sell currency more 2017 2018 2019 2020 freely in order to hedge their foreign exchange risks, the source said. Sources: China Foreign Exchange Trade System, CEIC Cross-border capital flows are another key factor affecting the exchange rate and as a result are also subject to strict the pandemic fades, he said. forecast contraction of 4.4% for the world controls. When capital was pouring into Another driver is the recovery in as a whole. In 2021, the IMF estimates China in the decade through 2014 and economic growth since the historic slump China’s economy will expand 8.2%, way the yuan was appreciating, the PBOC in the first quarter. GDP expansion has faster than its projection of 5.2% growth was more concerned about controlling picked up speed and was 4.9% year-on- for the global economy. inflows, but since 2016, the focus has year in the third quarter, boosting the China has steered clear of the massive been on controlling outflows to rein in confidence of investors, companies and fiscal stimulus rolled out by most major depreciation pressure on the currency consumers in the world’s second-biggest economies hit by the coronavirus, and and preserve the country’s foreign economy. The International Monetary avoided implementing an excessively exchange reserves. Fund now projects 1.9% GDP growth for loose monetary policy and slashing However, as confidence in China’s the full year of 2020, compared with a interest rates. That’s meant returns on economy has improved and the

20 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 21 government has further opened up recovery and a mass coronavirus as the government steps up efforts to the capital markets to overseas money, vaccination program could also increase control debt and risks in a sector that’s inflows have returned and forex international investors’ appetite for more become an increasing concern for regulators have signaled an easing of risky assets, which would favor China and policymakers. restrictions on money leaving China to other emerging markets. However, other Regulators have tested a new take some of the heat out of the yuan’s factors could make markets more risk financing directive on 12 top real appreciation pressure. averse, according to Ping An Securities’ estate firms that will limit their ability Zhong, who pointed to uncertainty over, to take on more borrowing, according or disruption to, the handover of power to sources who took part in a meeting More quotas from the Trump administration to the between the People’s Bank of China, In September, for example, the State new president, a resurgence of Covid-19, the Ministry of Housing and Urban- Administration of Foreign Exchange and a higher global debt burden resulting Rural Development, property firms and (SAFE) issued $3.4 billion of new quotas from the pandemic. That would increase other government bodies on Aug. 20 in for the Qualified Domestic Institutional demand for dollar-denominated assets, Beijing. Developers subject to the trial Investor (QDII) program that allows which are seen as a safe haven in times include China Evergrande Group, Sunac domestic investment in overseas of trouble, and could spell the end of the China Holdings Ltd. and Country securities markets. It was the first yuan’s spectacular run. Garden Holding Co. Ltd. addition in 22 months and took the total The ability of companies in the pilot to quota issued since the program started in increase their debt is subject to three red 2006 to $117 billion. lines: a liability-to-asset ratio (excluding The SAFE is considering further presales) of no more than 70%; a net increases in QDII quotas to send a FINANCE debt-to-equity ratio of under 100%; and message of openness to the market, cash holdings at least equal to short-term sources familiar with the issue have Property Developers Run debt, according to information circulated previously told Caixin. online that Caixin has confirmed with Some analysts argue that investment Into Debt Limits sources. quotas should not be used to try to Developers that do not overstep any of influence the exchange rate. If regulators the three red lines will be able to increase open up immature capital outflow Companies that cross debt-related red lines their annual interest-bearing liabilities channels as a way of easing yuan will have their ability to take on more borrowing by up to 15%, while those that cross one appreciation pressure, then once the curtailed or two red lines are allowed an increase situation reverses, investors could then By Wang Jing, Niu Mujiangqu, Timmy Shen of 10% and 5%, respectively. Companies use this same channel to take capital out and Gavin Cross that step over all three red lines will be of the country, Guan said. If policies are banned from taking on more debt. then changed back, it damages the image hina’s property developers are Executives from the 12 companies of openness the government wants to Cpreparing for another bleak winter who attended the Aug. 20 meeting portray, he said. The million-dollar question now is: for how much longer can the yuan keep appreciating. Part of the answer lies with the U.S. dollar, the world’s dominant currency and that, in turn, will depend to a great extent on the economic policies of U.S. President-elect Joe Biden. So far, his policy agenda suggests he will implement an expansionary fiscal policy to support the economy through the Covid-19 pandemic and that will keep the dollar weak, many analysts say. Biden is also widely expected to start repairing relations with its trading partners, which would also benefit other currencies, said Li from China Merchants Bank. That could see the dollar index fall by 4% to 5% from its current level. Under that scenario, the A residential project of real estate developer Country Garden stands yuan could appreciate by another 2% to in Wuhan, Central China’s Hubei 2.5%, Li said. province, on May 10. Photo: VCG A broad-based global economic

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were notified verbally that they had been selected for the pilot and gave Property Developers Face Fresh Financing Limits their feedback, according to one source Y = Maximum permitted annual growth in debt who was present. The documentation detailing the trial was handed out to the executives at the end of the meeting. China’s government started a crackdown on real estate speculation about four years ago after prices of residential property surged, raising concerns a bubble was building that could exacerbate risks in the financial system. Policymakers have repeatedly stressed that “houses are for living, not for speculation,” but although property was one of the few sectors not to benefit from post-coronavirus stimulus policies, the market is growing red hot again in many parts of the country. The new borrowing directive is the latest attempt to exert control over real estate financing, a policy that’s been in effect with varying degrees of severity and success over the past few years. Sources: Ping An Securities, public information compiled by Caixin Regulators issued a slew of measures in 2019 to curb excessive borrowing by property developers — the banking and Ltd. out across the industry, “it could lead to insurance regulator instructed banks to Data compiled by Caixin show that the death of a large number of small and carefully screen developers’ qualifications Evergrande, Sunac, Greenland, and midsize property developers.” when issuing loans and restrained trust Zhongliang already triggered all three Shao Mingxiao, the CEO of Longfor companies from providing new financing red lines at the end of June. Group Holdings Ltd., which is not to real estate companies. Country Garden, one of three involved in the trial, said at an Aug. 26 One of the biggest costs incurred by developers to already cross one red briefing that the main intention of the developers is the purchase of land-use line, has expanded rapidly over the three red lines is to stabilize leverage, rights from local governments to build past few years following a strategy of curb the growth of developers’ debt and new homes, and although transactions “high leverage, high liabilities, and high stabilize the housing market. Shao said slumped in early 2020 due to the turnover.” Wu Bijun, chief financial regulators want real estate developers’ Covid-19 epidemic, business has been officer and vice president of Country financing to grow in an orderly manner picking up again as local authorities Garden, said at an Aug. 25 briefing and that the new measures will help scramble to raise cash. that the company’s financial indicators to give them better oversight of “This is a clear signal from the were “in a good state” and that the new companies. regulators, which could lead some real rule would not have a big impact on the Deng Haozhi, a real estate expert estate firms to slow down the pace of management of the business. based in Guangzhou in South China, land acquisition,” one source at a major While most executives have sounded said that in effect the new policy puts property developer said, adding that land a positive note in public, saying that the a hard cap on the growth of real estate cost is a big part of the real estate firms’ impact of the pilot will be manageable, companies. It will solidify the positions spending, and reducing the acquisition of one senior executive at a midsize of the top firms and put state-owned land is one of the most effective measures Shenzhen property developer told Caixin developers at an even greater advantage to curb debt. that if and when the directive is rolled because they enjoy lower financing costs The 12 developers taking part in the and are in general more cautious about pilot are: China Evergrande, Sunac, adding leverage. Greenland Holdings Corp. Ltd., “Judging from the experience of the Zhongliang Holdings Co. Ltd., Sunshine “This is a clear signal from past few years, the financing costs of City Group Co. Ltd., Country Garden, the regulators, which could private enterprises are generally higher China Vanke Co. Ltd., Seazen Holdings lead some real estate firms than those of state-owned enterprises Co. Ltd., Poly Real Estate Group (SOEs), while among SOEs, those Co. Ltd., China Overseas Property to slow down the pace of land administered by the central government Ltd., China Resources Land Ltd. and acquisition” have the lowest financing costs,” Deng Shenzhen Overseas Chinese Town Co. said.

22 Caixin - China Economics & Finance January 2021 Energy Macroeconomy Sports Economy Urbanization Performance Evaluation FOCUS Technology Capital Market Agriculture Medical and Health C l i m a t e Investment Strategy International Trade

Ms .Ruan Phone：+86(21)3383 0502-820 Email：[email protected]

Ms.Jiao Phone: +86(10)8564 7130 Email: yangjiao caixin.com @ BUSINESS & INDUSTRY

Alibaba’s headquarters in Hangzhou, East China’s Zhejiang province. Photo: VCG

business spun off by Tencent Holdings BUSINESS & TECH Ltd., was also fined over a previous purchase. Meanwhile, the administration said it’s reviewing the combination of DouYu Private Firms’ Knuckles International Holdings Ltd. with Huya Inc., which could create a Chinese game livestreaming leader akin to Amazon.com Rapped Over Buyouts Inc.’s Twitch Interactive Inc. Also put on notice was logistics giant SF Express, after its parcel locker service Series of fines come after regulators declared their intention to take a provider Hive Box was fined 500,000 yuan over its May acquisition of China harder look at big tech with new anti-monopoly rules Post Smart Logistics Technology Co. By Qian Tong, Flynn Murphy and Anniek Bao Ltd. through a share swap. The deal gave Hive Box, which owned 44% of the smart lockers distributed across the country by hina’s antitrust watchdog has rapped Regulation (SAMR) said it had fined the end of March, a combined market Cthe knuckles of three of the nation’s Alibaba Group Holding Ltd. 500,000 share of 69% after the acquisition was leading private firms, issuing fines over yuan ($76,500) for failing to seek approval completed, according to the state-run previous acquisitions in the latest signal before increasing its stake in department Xinhua News Agency. their transactions are being ever more store chain Intime Retail Group Co. Ltd. “The illegalities of the cases are closely watched. to about three-quarters in 2017. relatively clear,” the regulator said in an The State Administration for Market China Literature Ltd., the e-books official, 6,000-character fact sheet posted

24 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 25 IN THIS SECTION How Apartment Rental Giant Fell Apart TikTok Rival Continues to Play Second Fiddle Why Ant’s IPO May Stay on Ice

to its website. “The above-mentioned for as much as 15.5 billion yuan to expand based on anti-monopoly rules that cite companies have a large influence in the into filmed content. a maximum fine of 500,000 yuan and industry, carry out many investments and The companies had failed to seek potential to divest the asset in question. takeovers, have specialized legal teams and approval for the deals, which aren’t Divestment was a highly disruptive should be familiar with the regulations deemed anti-competitive, the antitrust remedy that would only be used in governing M&A. Their failure to actively regulator said Monday. extreme cases, it said. declare has a relatively severe impact.” A draft amendment to the Anti- While acknowledging mergers and Monopoly Law published in January acquisitions were an important means for End of uncertainty would dramatically increase the fine’s internet firms to develop, the regulator said Monday’s fines mark the first time upper limit from 500,000 yuan to 10% of all companies — domestic and foreign, Chinese internet companies have been the operators’ sales in the previous year. state-owned and private, and regardless penalized under the country’s 12-year-old Jiang said for large internet companies of size and whether they are traditional or Anti-Monopoly Law, which holds that all that use the VIE structure, with turnover tech firms — should realize that China’s firms must apply for antitrust clearance calculated based on the consolidated Anti-Monopoly Law applies to them. when making acquisitions that cross a amount at the group level, future fines Alibaba said in a statement that it has certain threshold set by the regulator. could be astronomical. made adjustments to comply with the But at least part of the reason why government’s instructions, and Hive Box many large private Chinese firms do said that it has “humbly accepted and not typically do so is because of a long- actively implemented” the requirements running lack of clarity over whether stated in the notice. China Literature has variable interest entities (VIEs), the legal BUSINESS & TECH been actively working with regulators on structure many Chinese tech firms use, compliance, according to its statement. are within the purview of China’s Anti- Speed Bumps to Self- Tencent did not respond by press time Monopoly Law. to questions about the investigation into VIEs, typically based in low-tax Driving Car Navigation the merger of Huya and Douyu. jurisdictions like the Cayman Islands, were traditionally used by Chinese businesses like Alibaba and Tencent to allow them to Vast numbers of satellite base stations are being Private criticism fundraise in the U.S. and skirt Chinese built as companies rush to develop their own Regulators declared their intention to laws that prevent foreigners from owning national networks increase scrutiny of China’s largest tech assets in certain areas. By Fang Zuwang and Lu Yutong corporations with new anti-monopoly “It has become common for companies rules last month. In November, Beijing simply not to declare potential transactions ollowing the government’s call for unveiled draft regulations that would over the past few years,” Jiang Huikuang, Fthe rapid development of the self- establish a framework for curbing anti- co-partner of Zhong Lun law firm, told driving car industry in the next few years, competitive behavior such as colluding Caixin. companies are aggressively rolling out the on sharing sensitive consumer data, Things seemed to shift at the end of satellite base stations needed for such cars alliances that squeeze out smaller rivals July when the SAMR approved a joint- to stay on the road. and subsidizing services at below cost to venture transaction proposed by two State-owned telecom company China eliminate competitors. VIE-structured companies for the first Mobile Ltd. began offering precision Beijing’s heightened scrutiny is time since 2012, when Walmart Inc. positioning services in October, after spurring fears of a broader crackdown on was cleared to buy into online grocery building a network of 4,400 base stations the country’s largest firms. On Monday, business Yihaodian. Even though the deal across the country in just four months. shares in No. 3 internet company Meituan was approved, it was seen by some as a This kind of speed is just what the plunged 3.8% after Communist Party sign that companies with VIE structures government seems to be after. In February, newspaper the People’s Daily published may no longer be spared anti-monopoly the authorities said China should be mass an editorial slamming the industry’s probes. producing autonomous vehicles by 2025. preoccupation with areas such as In a fact-sheet question which asked However, in a scenario that has grocery delivery at the expense of real whether the fine’s relatively small size been repeatedly played out when the technological innovation. would have any deterrent effect, the government encourages an industry’s China’s two largest corporations are regulator said it took the approach growth, the specter of excessive capacity also its most acquisitive, using scores and wasteful construction is looming due of deals to expand into adjacent fields to uncoordinated development. and groom some of the country’s most promising startups. Alibaba had led a ‘It has become common for $2.6 billion buyout of Intime as part of companies simply not to Construction race efforts to develop new business models While navigation services powered by that combine e-commerce with brick-and- declare potential transactions GPS or China’s homegrown BeiDou mortar retailing. China Literature agreed over the past few years.” satellite network are increasingly in 2018 to buy New Classics Media Corp. ubiquitous, they usually aren’t precise

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Why Your Map Might Be Off A satellite base station equipped with 5G stands at a street intersection on Oct. 29 in Dalian, Northeast China’s Liaoning province. Photo: VCG

Source: Qianxun’s company website

enough to facilitate autonomous driving. and SAIC Motor Corp. Ltd. China Mobile muscled in on the To solve this problem, base stations can Another leader in the field is Navinfo crowded field this year, rolling out its measure and correct positioning errors Co. Ltd., which provides positioning 4,400 base stations in less than four within a certain radius, ensuring driverless services to clients including Germany’s months, said Yu Chengzhi, a China Mobile cars stay on the right route. Daimler AG and Audi AG. In 2018, it set departmental vice president. That is Foreseeing future demand for this kind up Sixents Technology, which specializes an eye-popping pace, with one leading of precision positioning, tech companies in high precision positioning networks. manufacturer of base stations for the began getting into this game prior to The following year, the newly-formed mapping industry telling Caixin its annual the government’s target-setting. Back in company received investments from the capacity only amounts to about 1,000. 2016, e-commerce giant Alibaba Group state-owned China Telecom Corp. Ltd. Holding Ltd. tied up with state-owned and internet giant Tencent Holdings Ltd. defense equipment manufacturer China As of October, it had built 1,900 base Different industries, different North Industries Group Co. Ltd. to form stations, covering most highways in central needs Qianxun Spatial Intelligence Inc. and western parts of China, said Sixents’ China now has more base stations than the Qianxun is now a major player in this Vice President Wang Ping, adding that the U.S. Data from National Geomatics Center field with 2,800 domestic base stations and figure will rise to 2,000 by year-end. of China show the country had more than another 120 abroad, Caixin has learned. 10,000 satellite positioning base stations The Shanghai-based company said it will as of August, with another 12,000 under continue to expand its network, without Forseeing future demand for construction, while the National Geodetic offering further details. Survey (NGS) says the U.S. has 2,200. Its positioning services have been precision positioning, tech In part, China’s high figure is due to the deployed in a new-energy vehicle launched companies began getting into desire of companies to each operate their by state-owned Guangzhou Automobile own network, rather than collaborating Group Co. Ltd. in June. Qianxun said it is this game prior to government with others or sharing data. also looking to partner with state-owned target setting Jiang Weiping, director of Wuhan automakers China FAW Group Co. Ltd. University’s GNSS Research Center,

26 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 27 BUSINESS & TECH How Apartment Rental Giant Fell Apart

Danke Apartment ran out of cash offering below- cost leases as the pandemic cooled the market and its CEO was detained By Hu Yue, Niu Mujiangqu, Wu Xiaomeng, Qu Yunxu and Han Wei

he financial turmoil that crippled TDanke Apartment, one of China’s largest online apartment rental platforms, spilled into the streets across China in recent weeks as angry tenants clashed with landlords. Now employees are threatening to sue Danke, whose name means “eggshell” in Chinese, over unpaid wages. Danke faces disputes of over 3.4 billion yuan ($520 million) of unpaid debts, including 1.6 billion yuan of loans from Tencent-backed WeBank, 1.2 billion yuan owed landlords and renters, and 600 million yuan due to contractors, Caixin learned. The collapse of Danke’s controversial business model sent shockwaves through China’s massive rental market and sounded alarms over the online rental said that data confidentiality concerns stations between them, more than double industry’s debt-fueled growth. Danke and may lie behind this phenomenon, as well the U.S. total — are both devoted to its competitors rent flats from landlords as developers building networks to fit a driverless vehicles. on long-term leases and then sublet specific market niche. “Having a satellite station network the properties to tenants after making Most companies target their services covering the whole nation gives the renovations. at vehicles, so their stations are built along operator a great premium,” said an These companies are supposed to roads, said Gong Jiaqin, founder of a industry person. make money on the premiums they charge company that develops agricultural drones A government-led coordination tenants over the rent they pay landlords. for spraying pesticides. mechanism is needed to help developers But to attract tenants and landlords, many “We used to work with a service share base stations with each other, companies like Danke have been offering provider for this kind of positioning said Jiang, and the authorities need to higher rents to landlords than they collect product, but it cannot meet our demand,” “reasonably” control the number of from tenants. Gong said. “At that moment we realized stations in the country. To maintain cash flow, Danke and we need to have our own.” In the U.S., all base station operators its rivals adopted a business model that China Southern Power Grid, one of the share data with the NGS, which then requires tenants to pay a year’s rent country’s two grid operators, made the makes it publicly available free of charge. upfront and encourages them to raise same choice. To monitor its infrastructure Wang Ruiyao, a director at China’s the cash by signing up for rental loans in remote areas, it aims to build about 800 Ministry of Natural Resources, said at with partner banks. This allows the rental base stations this year. an industry conference on Oct. 22 that companies to pool tenants’ money to fund guidelines to manage satellite base station further business expansion. construction are being drafted. They will But like many of its industry Lack of coordination aim to promote the healthy development counterparts, Danke has yet to make any However many companies are actually of station construction and positioning money despite rapid business expansion. It offering similar services and competing for services under the premise of ensuring ran into financial difficulties this year amid the same market. For example, Qianxun China’s geographic information security, the pandemic, underscoring the sector’s and Sixents — with about 5,000 base Wang said. struggle with thin profit margins and

26 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 27 BUSINESS & INDUSTRY

risks stemming from debt-driven growth. out tenants. But tenants said they already Danke, run by New York-listed Phoenix paid rent to Danke, many using bank loans Danke is one of China’s largest Tree Holdings Ltd., manages 415,000 arranged by the company, and resisted online apartment rental flats across 13 big cities in China. It was giving up their apartments. platforms. Photo: VCG one of the upstarts in China’s long-term The clashes escalated in many major rental market, which has boomed since cities including Beijing, Shanghai, 2015 with government support. Beijing Shenzhen and Hangzhou. Some disputes has encouraged the development of the spilled into the streets, forcing local long-term rental market in hopes of authorities to step in. serving urbanization and diversifying the Danke employees in several cities said country’s white-hot housing market. the company’s offices have closed and Founded in 2015, Danke raised more many of the workers haven’t received any than $600 million from global investors payment since October. Some employees including Joy Capital, Tiger Fund, China are planning to take legal action against the Media Capital and Ant Group, before company, one staffer said. its $149 million initial public offering on The collapse of Danke and the massive Nasdaq in January. debt disputes stirred concerns over the Danke’s financial stress started to risks of rental loans arranged under emerge earlier this year as the Covid-19 partnerships between lenders and rental pandemic cooled the rental market. It platforms. Experts questioned whether quickly escalated after the June detention WeBank, Danke’s financing partner, did of Gao Jing, Danke’s founder and CEO. enough due diligence and risk control for Although the investigation of Gao is loans linked to Danke and whether the said to be unrelated to Danke’s business, bank shouldn’t be held accountable in the the incident slammed the brakes on the disputes. company’s fundraising, leading to an Last week, WeBank said it would waive immediate collapse of the company’s interest payments and extend the loan highly leveraged business model. terms for more than 160,000 borrowers the bank’s offer. Angry property owners who failed to linked to Danke at least until the end of Several local governments stepped in collect rental payments from Danke took 2023. But several Danke renters who to mitigate the social turmoil caused by actions such as cutting off the electricity borrowed from WeBank for upfront Danke. Caixin learned that authorities or water or changing the locks to force payments said they were not satisfied with are pushing industry leaders including SoftBank-backed Ziroom and Beijing 5i5j Real Estate Brokerage Co. Ltd. to bail out Cash-Strapped Long-Term Rentals Spike in 2020 Danke. Meanwhile, Danke is discussing a Number (units)* plan with WeBank to convert the debts to equity, people familiar with the matter said. The company is also seeking to raise $150 million to ease its cash crunch, sources said. But no deal has been reached.

Risky growth The loan partnership with WeBank, which provided the backbone of Danke’s expansion, became the focal point of the controversies. Under the partnership, when a tenant signs a lease with Danke, the tenant also signs a rental loan contract with WeBank to pay a full year’s rent in advance to Danke. Then the tenant makes monthly loan payments to WeBank. To encourage tenants to take out loans, Danke often offers subsidies to reduce their interest costs. * Units with cash flow and other major problems By the end of 2019, more than 65.9% Source: Kerry Properties Ltd. of Danke’s tenants made rent payments

28 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 29 Hundreds of renters and property owners gathered outside rental service Danke Apartment’s headquarters in Beijing in November. Photo: VCG

using rental loans, down from 75.8% in fragile, industry analysts said. violations by an advertising company 2018 and 91% in 2017, according to the To grab market share, Danke offered where he worked in 2014. company. higher rents to landlords than it collected But the incident cut off Danke’s access Rental loans, more than 90% of them from tenants in major cities. A document to equity financing and bank loans, a issued by WeBank, became the main viewed by Caixin showed the company person close to the company said, a source of cash for Danke. According to a paid 8,500 yuan to a flat owner in significant blow because of the company’s company disclosure, rental loan-backed downtown Beijing and sublet the property reliance on financing. payments totaled 2.75 billion yuan, at 7,850 yuan. accounting for 73.8% of Danke’s total In a letter to company executives revenue in 2019. That same year, Danke during his detention, Danke CEO Gao Risk control loopholes received 980 million yuan of upfront cash Jing said Danke needed to maintain Analysts said the financing partnership payments from tenants. rapid growth until it reached the stage between Danke and WeBank has a Chinese regulators have stepped up of sustainable growth and achieved significant hole in risk control. In practice, scrutiny of rental loans since 2018 after profitability, enabling the company to cut renters sign a contract with WeBank to several rental platforms went bust. In reliance on outside financing. apply for individual rental loans and December 2019, six central government “But the pandemic disturbed our plan authorize the bank to make payments to agencies issued guidelines to regulate and led to today’s troubles,” Gao wrote. Phoenix Tree Holdings. long-term apartment rental businesses, According to a company report, the “Rental loans are targeted to individual setting a 30% cap on the share of rental 415,000 flats Danke had in operation as of borrowers, but the money is used by the loans in total rent revenues. March 31 was nearly double the number company,” said a bank executive. It means People with knowledge of the situation a year ago. The company’s operating costs the bank has no right to monitor how the told Caixin that Danke and WeBank rose 59% year-on-year to 3.1 billion yuan funds are used as it doesn’t have a loan worked out a plan under the guidelines, during the first three months this year, contract with Danke, the executive said. aiming to reduce loan-backed rent while its net loss continued expanding to “Such a loan model has loopholes in payments to 40% by the end of this year 1.2 billion yuan. Danke posted a net loss risk control, and almost no big bank is and meet the 30% requirement by the end of 3.15 billion yuan in 2019, compared willing to do it,” he said. of 2021. But Danke’s business reshuffle with losses of 1.37 billion yuan in 2018 Rental loans targeting individual renters plan didn’t go as planned, they said. and 270 million yuan in 2017. thrived in China in recent years along with The massive sum of loan-backed The last straw was the detention of the rise of the long-term rental market. upfront payments allowed Danke to pool Gao. Danke said June 18 that Gao was Small and private banks are the main enough money to expand its property being investigated over previous business players in the market. WeBank, China’s reserves, but it also posed great leverage dealings that were unrelated to Danke. first internet-only lender, started the risks as the company’s capital chain is In his letter, Gao said he was probed for rental loan partnership with Danke in

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mid-2018 and later became the company’s biggest financing partner, Caixin learned. Kuaishou's Beijing headquarters Several banking sources said they are on Nov. 12. Photo: VCG surprised that WeBank became so deeply involved in the riskier rental loan business with Danke as the bank has sound profitability. In 2019, WeBank reported 3.95 billion yuan of net profit and 14.9 billion yuan of revenue, topping all private banks Caixin learned that WeBank also worked with rental business leaders Ziroom and Beijing 5i5j in rental loan partnerships. The bank said it monitors the partners’ financial and business disclosures closely for risk control and requires the companies to put up 5% to 8% of the total loan value as a provision against loan losses. In the agreement with Danke, WeBank also limited the use of the rental loans to paying landlords and related spending. Danke promised to return funds to the bank if contracts with tenants are terminated early. But analysts said it is difficult for the bank to monitor how public bourse, beating its bigger rival Australia and New Zealand combined. Danke used the money. Douyin — the domestic version of TikTok As Danke’s financial crisis intensified, — after it filed for an IPO in Hong Kong WeBank terminated the partnership in last month. Leadership questions November. The bank still holds 1.6 billion But a Caixin analysis and interviews Nine-year-old Kuaishou kicked into high yuan of unpaid loans to Danke renters. with insiders at Kuaishou Technology Co. gear in mid-2019, doubling its staff to Although no agreement has been Ltd. show that’s about the only metric the over 10,000, and restructuring its core reached on a solution for Danke’s loan company is leading on. businesses. Company sources told Caixin disputes with clients, some legal experts According to a prospectus filed to the reshuffles had left some in the firm said WeBank should also assume part Hong Kong regulators last month, the unclear about who was calling the shots — of the responsibility because of the risk Beijing-based firm has become the world’s product head Cheng Yixiao, or CEO Su control flaws. largest livestreaming platform, second Hua. Cai Zhen, a real estate industry expert largest e-commerce livestreaming site, and Cheng, who leads research and at the National Institution for Finance has the second-largest number of daily development on Kuaishou’s core products, & Development, said the renters’ loan active users (DAU) of any short-video holds a 10.02% share of the company and obligations should be transferred to Danke company, citing data from iResearch. serves as chief product manager. Su Hua for WeBank to claim its debts. The company is no slouch — Kuaishou has a 12.65% share and controls more said its revenue ballooned to 39.1 billion voting rights. yuan ($5.9 billion) last year from 8.3 After working as a software engineer at billion in 2017, and turned a loss of 521 tech giant Hewlett Packard and Chinese million in 2018 into a profit of 689 million Facebook clone Renren Inc., Cheng BUSINESS & TECH yuan last year. launched the company in 2011 as “GIF But the devil is in the detail. Kuaishou Kuaishou,” an animation-maker that TikTok Rival Continues reported 320 million DAUs in the first half achieved runaway success. The company of the year, while ByteDance’s Douyin said transformed into a short-video site in the to Play Second Fiddle it had almost double that — 600 million — vein of the American app Vine in 2012, in August. The firm is also under pressure and brought in $2 million in funding in in its promising e-commerce revenue 2013. Kuaishou Technology is on track to beat ByteDance stream as Douyin builds a more robust, In 2016, Kuaishou’s efforts to capitalize to a public listing, but that’s just about the only walled-off ecosystem. on the emerging livestream sector started metric the company is leading on Caixin has learned Kuaishou hopes to to pay off, mainly due to the 40% cut it By Guan Cong and Anniek Bao raise $5 billion in its IPO, valuing the firm was taking of digital gifts viewers buy at between $40 billion and $50 billion. to tip their favorite livestreamers. The eteran Chinese short video app That would value it about the same as company made a profit of 608 million VKuaishou is tracking to be first to a TikTok’s business in North America, yuan the following year on revenue of

30 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 31 more than 8.3 billion — about 95% of pandemic kept people at home, while its become China’s two largest short- which came from livestreaming. DAU eclipsed 100 million. But the average video platforms. But they were commission fees it took from transactions markedly different in terms of culture, dropped to less than 1% because Kuaishou target audiences and brand image — Warning signs missed was paying small vendors to sell and encapsulated in the phrase “Douyin in the When Kuaishou became the world’s remain on its platform, the firm’s director south, Kuaishou in the north.” biggest livestreaming platform at the end of creative content, He Haoxun, told Kuaishou had failed to penetrate in of 2017, it was not counting on the stellar Caixin. China’s hipper southern megacities like rise of Douyin. Kuaishou had more than Kuaishou’s potential to capitalize on Guangzhou and Shenzhen. In 2019, the 40 million DAUs in the second quarter of livestreaming e-commerce is stronger than company ramped up advertising there and 2017; Douyin had several million. Alibaba, if Kuaishou’s 7.2 billion yuan launched a blitz called “K3,” with CEO Su The way Kuaishou insiders tell it, the worth of revenue from advertising in the Hua targeting 300 million DAUs and 15 company failed to play defense, even first half is factored in. billion yuan of revenue in advertising that though some had warned management not Kuaishou said it was the world’s second year. The teams responsible for Kuaishou’s to overlook the smaller firm. biggest e-commerce platform in the first ads business expanded from dozens of Douyin ramped up marketing efforts half by GMV, after Taobao’s livestreaming people to over 60 and the advertising after taking in $2 billion in investment in offerings. Taobao Live has 400 million department was transformed. 2017 which valued the firm at $30 billion. users and over 1 million retailers on its The firm achieved a coup when it Daily active users spiked to 70 million livestreams, according to company data became the exclusive short video partner by February 2018. Douyin was setting from March. for the Spring Festival Gala of 2019, new fashion trends which translated into Kuaishou wants to facilitate 250 billion China’s most watched annual broadcast product sales. “When searching ‘Douyin’ yuan worth of transactions this year, which event. That was not cheap — the firm paid on Taobao, you would see products from would see it overtake Taobao Live’s 200 3 billion yuan for the rights — but it did Douyin’s videos, but searching ‘Kuaishou’ billion yuan in GMV for 2019. But He help the company hit its DAU target. would only get you livestreaming has played down the idea Kuaishou would The DAU blitz did not translate into equipment,” lamented one Kuaishou seek to challenge Alibaba by copying the long-term revenue, however. The company insider. business model of Taobao or Pinduoduo, made 7.4 billion yuan from ads last year, By 2018, Douyin, which was founded saying instead that it will use livestreaming falling short of Su Hua’s target by half. just two years earlier, set its annual commerce to grow its user base. revenue goal at 20 billion yuan. Kuaishou To that end, it has partnered with was aiming for somewhere between 20 e-commerce giant JD.com Inc. with the Uncertainty overseas and 30 billion yuan that year. aim of enticing users to buy products The story of ByteDance’s overseas forays “It wasn’t that (Kuaishou CEO) Su from JD without leaving Kuaishou’s is well known. What looked to be China’s Hua didn’t see the threat from Douyin,” interface, instead of simply searching and first truly global internet success story one ByteDance investor said. “But he did purchasing them on Taobao. was disrupted by allegations of data theft, not expect it to happen so fast.” Compare that to rival Douyin, which wound up in the crosshairs of the U.S. Kuaishou was valued at nearly $20 has been developing an independent president, and was targeted globally in a billion in March 2018 when it received e-commerce supply chain, after the Washington-led campaign. $1 billion from around 10 investment August purchase by ByteDance founder Unlike ByteDance, which highlighted firms including tech giant Tencent. Half a Zhang Yiming of a Wuhan company with its international achievements through year later, ByteDance closed a $3 billion a coveted online payment license opened multiple funding rounds, the touchy issue funding round and saw its valuation more the door for his firm to free itself from of Kuaishou’s overseas ambitions was than double to $75 billion. Nearly half intermediaries. conspicuously absent from its prospectus. of that valuation was for Douyin, several Douyin removed links to third-party Kuaishou’s Zynn, with which it investors said. e-commerce platforms Taobao, JD.com hoped to tap the U.S. market, has come and Pinduoduo from its app in October. under attack from American Senator Josh Hawley, who wants the U.S. Federal All eyes on e-commerce Trade Commission to investigate the short Kuaishou made a turn into e-commerce Kuaishou in the north video app on national security grounds. in August 2018, and the next year its gross By 2018, Douyin and Kuaishou had It has been removed from the Apple and merchandise volume (GMV) — the total Google app stores for engaging in unfair value of goods sold on the app — had competition and paying users to watch ads exploded to 59.6 billion yuan, up from just The way Kuaishou insiders tell and use the app, which had helped boost it 97 million yuan. Its revenue from online into the top three for downloads in June. retail increased 10 times to 259 million it, the company failed to play Kuaishou has other international yuan in 2019, on the back of a roughly defense, even though some offerings. Aside from Zynn, it has Kwai, 5% commission it was taking on products which has gained some popularity among bought from partner vendors. had warned management not Russian teenagers and is now targeting In the first half of 2020, Kuaishou’s to overlook the smaller Douyin Latin America, as well as SnackVideo in GMV rose to 109 billion yuan as the India. Other international products

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include social media site Lolita, video comes back to the market, Ant is likely to operations of microlenders, prevent risks editing toolkit MVMaster, and short video face a significant haircut off its valuation from online micro loans, protect the communities UVideo and VStatus. of 2 trillion yuan ($302.5 billion). legal rights and interests of microlenders Kuaishou has fallen victim to the same The shockwaves of the suspension will and clients, and promote the healthy geopolitical uncertainties as other Chinese spread far beyond Ant Group and affect development of the online microfinance tech firms. Following a violent border other fintech companies weighing initial business.” clash between India and China in June, public offerings (IPOs), an investment The move caught Ant by surprise. Indian authorities introduced tit-for-tat banker said. They include JD Digits, Hours earlier, Ant Group staffers finished retaliatory measures including a ban on the fintech arm of JD.com, which in all setups and rehearsals for the stock the use of Kuaishou’s Kwai, UVideo and September issued a prospectus for a 20 debut on the Shanghai Stock Exchange. SnackVideo, along with ByteDance’s billion yuan offering in Shanghai, eyeing a “It seems Ant Group wasn’t aware of TikTok, Alibaba’s Taobao and Tencent’s valuation of 200 billion yuan. (the changes) beforehand and was not WeChat. How regulators put Ant Group’s prepared,” an investment banker said. Company sources told Caixin that booming online credit business under Ant Group had marched at lightning international expansion was part of Su oversight will set an example for regulation speed toward its mega IPO since the Hua’s plan, though no systematic vision of the rest of the industry, a person close plan was announced in July, sparking has been made public. “There’s no clear to China’s central bank said. The issuance an investor frenzy. But the triumphant strategy,” one former alumnus of both of new draft rules Nov. 2 for online sentiment quickly turned on Nov. 2 when ByteDance and Kuaishou told Caixin. microlending activities forced the surprise financial regulators in China summoned The company has opened offices in suspension of Ant Group’s debut, planned the company’s top executives including 26 cities in countries including the U.S., for three days later. billionaire founder and controlling India, Singapore and Indonesia. Ant Group apologized to investors who shareholder Jack Ma for a regulatory In the wake of the planned Trump put up trillions of yuan to subscribe for its interview. administration ban on TikTok which shares and promised to properly handle Regulators called off Ant Group’s share is now in limbo, Cheng was asked at a follow-up issues. Procedures for refunding sale in Shanghai late Nov. 3. Half an hour September summit if Kuaishou planned investors have started in Hong Kong and later, Ant Group put up a statement on the to follow the company into the North Shanghai. Hong Kong bourse saying the concurrent American market. “We often cannot The regulations proposed by the offering in the city was also suspended. reverse broader trends, but we are hoping People’s Bank of China (PBOC) and the The dual listing was set to become the to bring better services to as many users China Banking and Insurance Regulatory world’s biggest ever, raising $34.5 billion. as we can, even if there’s only a slight Commission (CBIRC) stipulate stricter chance.” standards for a range of operational and financial metrics including leverage levels, Pull the trigger joint lending and cross-province business. Controversy surrounding Ant Group Regulators said the toughened rules flared up in late October after Ma publicly aim to “regulate the online microfinance criticized local and global financial BUSINESS & TECH

Why Ant’s IPO May Stay Photo: VCG on Ice

Tough new regulations for microlending may force significant changes for fintech giant’s platforms and a big haircut off its $302.5 billion valuation

By Liu Caiping, Zhang Yuzhe, Yue Yue, Wei Yiyang and Han Wei

ow that Ant Group Co. Ltd.’s would-be Nrecord initial public offering is on ice, what’s next for the high-flying fintech behemoth and investors who hoped to make a quick killing? Both may be in for a long wait as Ant Group adapts its business to tough new regulations on microlending, one of the company’s biggest business drivers, according to analysts, investment bankers and market experts. And whenever it

32 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 33 become the company’s biggest income driver, contributing nearly 40% of revenue and 48% of net profits. The proposed regulations on microlending, if approved in their current form, will create headaches for Ant Group as they may force the company to change the way it raises money to fund Huabei and Jiebei and crimp their expansion in the short term, analysts said. Changes in fintech industry regulations will have a “huge impact” on Ant Group’s operational structure and profit model, said the China Securities Regulatory Commission in a statement backing the Shanghai bourse’s decision to suspend the offering. Jack Ma, controlling shareholder of Ant Regulators can use Ant Group as Group, delivered a speech criticizing the sandbox for the biggest and most current financial regulatory system at a Shanghai summit Oct. 24. Photo: VCG complicated supervisory experiment for fintech companies, a person close to regulators said. “Financial regulatory bodies have been regulators for hampering innovation in service Alipay, Ant Group has tapped discussing the supervision framework for the name of preventing risks. At a high- into a sprawling array of financial services financial technology companies for a long level financial summit in Shanghai, Ma including online banking, insurance, time, and related studies are already in compared the Basel Accords, which set wealth management and credit, but it front of authorities,” a regulatory official out global capital requirements for banks, has not been subject to the same capital said. “It is just a question of time to make to a club for the elderly and blasted adequacy and leverage requirements as the determination.” regulators for not paying sufficient heed traditional financial institutions. to development and opportunities for the The article suggested drawing a clear young. boundary between Ant Group’s financial Changing environment The remarks stirred public debate and nonfinancial businesses while The draft online microlending rules would as some experts criticized Ma for integrating similar services so that every mean a major revamp to Huabei and downplaying the inherent risks of financial aspect of its businesses can be covered by Jiebei, which managed a combined 2.15 innovation. proper supervision and follow related risk- trillion yuan of outstanding loans as of Several senior government officials control requirements. the end of June, according to Ant Group’s attended the same summit, including The booming online microlending prospectus. The two platforms are Chinese Vice President Wang Qishan, sector backed by fintech companies operated by companies registered in the who called for balance between financial remains a key concern of regulators due to municipality of Chongqing in Southwest innovation and supervision. Application risks of excessive leverage. China — Chongqing Ant Shangcheng of new financial technologies and the Ant Group is the biggest online Micro Loan Co. Ltd. and Chongqing Ant emergence of new businesses have consumer credit provider in China Small and Micro Loan Co. Ltd. increased efficiency and convenience but through its Huabei (花呗) platform, which The rules stipulate that online also have amplified financial risks, Wang offers credit lines for small unsecured microlending businesses can operate only said at the conference. loans to customers for daily expenditures, within the province or region where they Ma’s comments apparently caught the and Jiebei (借呗), which offers short-term are registered and limit the leverage ratio attention of regulators. One week after unsecured loans for larger transactions, of microlenders to 16 times net assets. the summit, the State Council, China’s according to Ant’s IPO prospectus. The Analysts have widely estimated that Ant cabinet, at a meeting emphasized the online microlending business segment has Group’s online lending business has a importance of regulatory oversight and rough leverage ratio exceeding 60 times risk control treating all business players net assets. fairly. Ma’s remarks stirred public The more pressing change for An article published by a central bank- Ant Group in the new rules is tighter backed newspaper said regulators should debate as some experts oversight of joint loans that originate deliberate on the supervision of Ant criticized him for downplaying through cooperation with other financial Group as the company has grown into a institutions. Online microlenders should conglomerate that combines a wide range the inherent risks of financial fund at least 30% of any joint loan with of financial and nonfinancial businesses. innovation financial institutions, according to the Backed by the popular payment draft, which doesn’t specify what the

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percentage is currently. Caixin previously Treasury Bureau said the incident won’t be significantly affected by the regulation learned that some microlenders contribute affect the stability of the city’s financial changes. Some said the current valuation as little as 1% to 5%. system. is too high. According to Ant Group’s prospectus, On the mainland, underwriters of the “The precondition of (IPO about 1.75 trillion yuan of loans issued Shanghai offering also pledged to return resumption) is to fully meet regulatory through its online credit platforms were funds and brokerage commission fees plus requirements,” one industry expert through cooperation with banks. Ant interest to investors. The money should said. “It won’t only affect Ant Group’s Group helped market about two-thirds of be back in investors’ accounts by Nov. 9, valuation but also force a great reduction the loans while putting its own money into and the shares they subscribed to were of the size of businesses such as Huabei the rest. canceled Nov. 6, Ant Group said. and Jiebei.” With its control over massive online There are also more than 10 million traffic, Ant Group has partnered with retail investors who put up 60 billion more than 400 financial institutions in yuan with five publicly offered funds that offering credit services to online shoppers. were set to acquire 11.97 million yuan of Ant Group charges the banks service fees Ant’s shares along with other assets. With BUSINESS & TECH or shares part of their interest income Ant Group’s offering suspended, some from the loans. Sources told Caixin that investors demanded refunds or changes in Alibaba Soothes Mar- Ant Group often contributes 1% to 10% in the funds’ investment terms. the joint loans issued with banks, far less Regulators urged fund managers to ket Watchers than the 30% requirement. fully consider the reasonable demands To meet the new hurdle would of investors, work out a feasible plan in mean that Ant Group would have to accordance with the law, and effectively Chairman and CEO thanks government for either dramatically reduce its loan size protect the legitimate rights and interests encouragement, pledges support for regulation or increase capital by billions of yuan, of investors. By Yuan Ruiyang and Timmy Shen analysts said. The CSRC said in a separate statement The new rules could slash Ant Group’s that the decision to suspend a “hasty” IPO fter the Chinese government’s profits on credit-related businesses from of Ant Group amid a changing regulatory Asmackdown of fintech giant Ant the current 10 billion yuan to 4 billion environment will protect investors and Group Co. Ltd. and its founder Jack Ma yuan, said Ji Shaofeng, a microlending ensure accurate, transparent information for challenging the country’s financial business analyst. That would reduce Ant disclosure. watchdogs, the billionaire’s e-commerce Group’s valuation to less than 1.5 trillion A person with knowledge of the vehicle is taking a more conciliatory yuan from nearly 2 trillion yuan currently, situation said regulators’ decision to halt approach to market regulators. Ji said. the offering followed consultations with Speaking at a government-sponsored some domestic and overseas investors internet summit on Monday Daniel to make sure the losses caused by the Zhang, Alibaba Group Holding Ltd.’s What’s next? suspension were acceptable. If the chairman and CEO, said the company Millions of investors were rattled by the regulatory changes had come after Ant will “actively learn from and respond to suspension of the offering. Ant Group and Group’s flotation, it might have led to national policies and regulations.” its underwriters have started to refund significant fluctuation of the stock and cost “In the process of great development, investors who subscribed to buy the stock, investors even more, the person said. new problems and challenges will arise, but some investors will still bear losses, According to the rules of Shanghai’s and policies and regulations that keep especially for those who borrowed heavily STAR Market, Ant Group has one year pace with the times are needed to manage for the investment. to complete its offering. But analysts said them,” Zhang said. Recently published A record 1.55 million mom-and-pop they don’t expect a resumption of Ant draft regulations governing the behavior investors subscribed to the Hong Kong Group’s IPO to come soon. It will take of internet platforms are “timely and portion of the dual offering, putting up time for the company to comply with the necessary,” he said. HK$1.3 trillion ($167.69 billion) for new rules and seek a new valuation, they Zhang’s comments were made at the the shares. A local newspaper reported said. high-profile World Internet Conference, that financial institutions in Hong Kong Most analysts interviewed by Caixin also known as the Wuzhen Summit, an loaned as much as HK$519.2 billion to said they think Ant Group’s valuation will annual event organized by the Cyberspace Ant Group IPO investors. Banks and Administration of China and other brokers offered low interest rates of 0.5% government agencies. His praise of market to 4% annually, leading to interest costs Regulators urged fund watchdogs contrasts sharply with the for investors totaling HK$36 million to antagonistic speech made by Jack Ma at HK$284 million for the five days before managers to fully consider an equally high-profile financial summit in the scheduled debut, according to Caixin the reasonable demands October in front of top regulatory officials. calculations. Ant Group promised that Although Ma has no official position Hong Kong investors would get refunds of investors and work out a at either Ant Group or Alibaba, he is on Nov. 4 and 6. feasible plan the “ultimate controller” of the fintech Hong Kong’s Financial Services and platform, according to the company’s

34 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 35 antitrust regulation of the platform economy, protect market fairness, ensure the interests of consumers and society, and encourage the healthy and continuous development of the platform economy. In his speech, Zhang was fulsome in his praise of the role of market watchdogs. He said the development of the internet sector and government regulation is “a relationship where the two promote and rely on each other,” so platform enterprises can not only better develop themselves but serve the sustainable and healthy development of the entire society, he said. China’s digital economy has developed to take a leading position in the world and has given rise to a number of excellent internet companies and platforms, Zhang said. “This is due to the great era of China’s reform and opening up, government policies to encourage development and innovation, and China’s position as the world’s largest market.” Calls have been growing over the past few years for tighter oversight of the internet economy to prevent dominant players such as Alibaba, Tencent, JD.com and Meituan Dianping from abusing their positions. Several scholars have told Alibaba Group’s CEO Caixin that the attitude toward regulation Daniel Zhang. Photo: has been too loose. VCG Although China introduced anti- monopoly legislation 12 years ago, there have to date been no major punishments meted out under the law, even as the digital economy has increasingly IPO prospectus, and still had a 4.8% stake government agency responsible for concentrated around two companies — in the e-commerce giant as of July 2. As oversight of market competition, Alibaba and Tencent — across everything arguably the most influential figure in the monopolies, intellectual property, and from digital payments and finance to development of China’s internet sector, his drug safety. SAMR released draft rules e-commerce and gaming. comments make headlines. on Nov. 10, a day before the country’s In January, the authorities released a Ma’s harsh criticism of China’s Singles Day online shopping extravaganza, draft revision of the Anti-Monopoly Law, financial regulatory system was widely aimed at preventing monopolistic behavior the first overhaul since it was promulgated interpreted as contributing to the decision by internet platforms such as Alibaba, in 2008, aiming to give the law more teeth by watchdogs to call the billionaire and e-commerce platform JD.com Inc., and and rein in the dominance of the country’s other top Ant Group executives in for a Tencent Holdings Ltd., which operates the internet goliaths. The draft broadens the dressing down by on Nov. 2, days before WeChat social media platform. criteria used to assess a company’s control the fintech giant’s shares were due to start Their publication followed a Nov. of a market and, for the first time, brings trading in Shanghai and Hong Kong in 6 meeting of the market regulator, internet companies under the scope of the what would have been the world’s largest internet regulator and the State Taxation law. ever IPO. The $34.5 billion offering was Administration where officials made it On Thursday, China announced that pulled in the wake of the meeting which clear that internet platforms should not it will set up a new joint task force backed coincided with the publication of draft abuse their dominant positions to force by 17 central government ministries and regulations to rein in the growing power of merchants to choose between platforms. departments to combat unfair competition online finance platforms. In addition to stamping out as regulators tighten scrutiny of market Although Zhang didn’t specify which monopolistic practices by internet dominance built up by tech giants. The regulations he was referring to, it’s likely platforms, the proposed rules seek to lower new committee will coordinate supervision his target was the State Administration compliance costs for law enforcement and of unfair competition and lead policy- of Market Regulation (SAMR), the business operators, enhance and improve setting efforts to protect market order.

34 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 35 COVER STORY

The Big Crackdown How Chinese police clamped down $153 billion of illegal online gambling enabled by China's e-commerce giants By Zhang Yuzhe and Denise Jia

36 Caixin - China Economics & Finance January 2021 migrant worker from the northern online gambling sites, the first obstacle is member for their ID numbers, bank cards, Chinese city Baoding “loaned” three depositing money at gambling platforms. mobile phone numbers and bank USB- credit cards under his name to friends These operations often use leading shield, which is a security tool that looks Ato offset 2,500 yuan ($380) of debt he e-commerce platforms and delivery similar to a flash disk and acts as a shield to owed. He never imagined he would later companies to facilitate massive fund protect user’s money in internet banking. be arrested for illegal sale of credit cards transactions disguised as legitimate online If more information can be provided, that were used by criminal groups to shopping deals. such as a business license, business seal, launder money for online gambling. For example, a Caixin reporter tried business bank account and USB-shield, This arrest was part of Chinese to deposit 100 yuan via online banking to the price can go up to 1,500–2,000 yuan authorities’ nationwide “Card Breaking a gambling site called “DreamGaming.” for the whole set. Campaign,” an operation to crack down The transaction showed the money went To some young jobless people from on illicit bank card transactions and bank to an Alipay account linked to a grocery smaller cities and rural areas, the chance card sales to combat telecommunications store. That gambling site can no longer be to generate 1,000 yuan from leasing fraud and cross-border online gambling. accessed as a notice says “it contains illegal their bank accounts or QR codes is The campaign aims to cut off links content.” a big temptation, said an insider at a between mobile phone SIM cards and Online gambling sites usually use payment process company. And the more bank cards, and users who are not the so-called “running points platforms” transactions go through their accounts, registered card holders. Also included are to launder gamblers’ funds to look like the more they can make in commissions. online payment accounts such as Tencent’s legitimate payments. To deposit funds, Of course, they run the risk of arrest for WeChat Pay and Alibaba’s Alipay. a gambler follows a payment link on a participating in illegal activities. This new type of crime has created an site that connects to a running points In June, police in the southwestern illegitimate industry employing 5 million platform. This platform is like a car hailing Guangxi Zhuang autonomous region to 6 million people involving information system. A registered member of the destroyed a cross-border online gambling technology (IT), payment settlements platform will “grab orders” and upload the operation involving 30 billion yuan of and operations, according to an IT funds using someone else’s purchased or fund transfers through running points department official at the Ministry of borrowed bank account. Then the money’s platforms. Public Security. The complex payments transferred to the offshore gambling site. Another channel for depositing and money laundering system ropes in The platforms make a commission of money into online gambling sites is small individual players in some of China’s 2.5% to 4% on the transactions, and the through mobile phone credit refills. These remotest places who loan or lease financial members get a cut of 1% to 2%, according transactions are disguised as normal credit credentials to offshore criminal groups, to police. additions for mobile phone accounts but which then help illegal gamblers hide Chinese social media such as WeChat actually funnel money into gambling sites. money from authorities, often using Tether and Weibo often carry advertisements Ltd.’s USDT cryptocurrency. recruiting part-time workers. Many In the first nine months of 2020, police of these advertisements are posted by Cryptocurrency money laundering cracked down on 1,700 online gambling running points platforms, which would After the running points platforms collect platforms and 1,400 underground banks pay 500–1,000 yuan to each recruited money from gamblers, how does the involving more than 1 trillion yuan of illegal transactions, data from the Ministry of Public Security showed. That compared with 7,200 online gambling cases in 2019 totaling 18 billion yuan. In the cross-border online gambling chain, mobile payments play an increasingly important role. As the front- runner in mobile payments, China has been aggressively promoting payments via mobile phone scans of QR codes, a type of barcode. In China, even a street food vendor owns a unique QR code for receiving mobile payments. The convenience associated with mobile payments has also attracted criminal gambling groups.

‘Running points platforms’ As almost all forms of gambling are Bank cards confiscated by Guangdong illegal under Chinese mainland law, if a police in authorities’ “Card Breaking Campaign.” Photo: VCG Chinese citizen wants to bet using offshore

January 2021 Caixin - China Economics & Finance 37 COVER STORY

Cross-Border Online Gambling Funding Chain

Sources: Caixin reporters’ interviews

38 Caixin - China Economics & Finance January 2021 money get to the gambling operators? The and cryptocurrency exchanges place in China since 2018. Some of them are traditional path is through underground their servers offshore, increasing the service providers for legitimate companies banks, which facilitate illegal foreign investigative challenge facing police, including Meituan Dianping and Didi exchange and cross-border trading. These Huizhou police said. Chuxing. But many others are used to illegal underground banks have long launder money for online gambling. existed in China to help citizens transfer In May, a local branch of Agricultural money out of the country, often to buy Difficult to identify Bank of China in Xiangtan, Hunan property abroad. For online payment platforms such province, detected suspicious transactions A new practice involves Tether’s as WeChat Pay and Alipay, the great at a gig job human resources provider. USDT, a cryptocurrency linked to the challenge is to identify which users’ The company had more than 200 million value of the U.S. dollar. The original accounts are actually running points yuan of cash transactions in just a dozen goal of the cryptocurrency was to solve platforms. Looking at data of accounts days, and most of the transactions took the problem of excessive value volatility. that might be used by running points place outside normal business hours. In 2019, USDT surpassed Bitcoin as platforms, the amount of transactions is Police found that the company laundered the most-traded cryptocurrency on the usually small, and many of them seem to money for telecommunications fraud market by volume. be normal payments for consumption, groups. USDT is widely used in money said Guo Qianting, general manager In November, another gig job platform laundering, gambling and other illegal of Ant Group’s anti-money laundering backed by Ant Group, China’s dominant activities, an executive at a blockchain center. Finding running points platforms online payment service provider, was platform told Caixin. In October, a local among regular users is like looking for a investigated for suspected money branch of the People’s Bank of China needle in a haystack, she said. laundering activities. Beijing Bujiao in the southern Chinese city Huizhou Another money laundering channel Technology Co. Ltd. was suspected of conducted mass arrests related to is gig job platforms, which provide having falsely issued more than 1.3 billion cross-border online gambling, the first contractors and payroll services to yuan of value-added tax invoices. Some crackdown on activities involving USDT. employers in the food delivery, ride- of the company’s money laundering In a blog post, the central bank said 77 hailing and e-commerce sectors. More activities involved cross-border gambling, suspects were arrested for using USDT than 10,000 such platforms have emerged Caixin learned. in cross-border transactions to launder gambling proceeds worth nearly 120 million yuan. Most USDT transactions in the Huizhou case were made on Huobi, a Seychelles-based cryptocurrency exchange founded by Tsinghua University graduate and former Oracle engineer China’s Illegal Online Leon Li. Online gambling sites use gamblers’ funds to buy USDT on Huobi and then sell the cryptocurrency, thus “washing” the funds into legitimate cash Gambling Enablers flow, Huizhou police told Caixin. China’s public security authorities Largely offshore gambling operators set up complex business chains ordered Huobi and other USDT exchange platforms to strengthen their linking Baidu, WeChat, Alipay, Pinduoduo and ZTO Express anti-money laundering efforts by adding video identification verification during By Tang Hanyu, Di Ning and Denise Jia transactions to make sure bank cards linked to a trader’s account actually belong to the trader. But the exchanges dark corner of the cyber world Investigators found that illegal haven’t done so. benefited from increasingly gambling sites have relied on major search An executive at Huobi told Caixin the A convenient internet-based payment engines and social media platforms that company completed its biggest upgrade and logistics services as e-commerce are household names to lure gamblers in anti-money laundering risk control in soared amid the pandemic — illegal while using leading e-commerce platforms August, without specifying the measures online gambling. and delivery companies to facilitate taken. And the shadowy, often offshore massive fund transactions disguised as Huobi’s Li and Bitcoin exchange operators of illicit gambling sites found online shopping deals. OKEx founder Xu Mingxing were witting or unwitting enablers in some of They include China’s biggest online reportedly cooperating with police on China’s leading tech giants, according search engine Baidu Inc., Tencent investigations of money laundering for to police who are conducting a massive Holdings’ messaging apps QQ and online gambling. crackdown on an unprecedented surge in WeChat and Ant Group’s payment The running points platforms online gambling. service Alipay, authorities say.

January 2021 Caixin - China Economics & Finance 39 COVER STORY

E-commerce site Pinduoduo appears gambling sites to launder more than 7 to have been especially vulnerable. billion yuan paid by gamblers, local police By the end of September, Chinese authorities Investigators also implicated major said. Most of the money was remitted launched investigations of more than 8,800 courier companies including New York- through Alipay for bogus deals with cross-border gambling cases and arrested listed listed ZTO Express, Shanghai-listed tens of thousands of fake merchants on more than 60,000 suspects allegedly involved YTO Express and STO Express, as well Pinduoduo, according to a person with in the illegal businesses. Photo: VCG as a number of logistics companies. knowledge of the matter. “Many large internet companies are Such cases show how gambling site involved in the investigations,” one police operators set up complete business chains officer involved in the probes said. linking search engines, social media The appearance of such icons of platforms, e-commerce sites, payment China’s booming e-commerce economy services and delivery systems to facilitate in gambling operators’ toolkits raises recruitment, transactions and money questions about whether the internet laundering. The gambling sites often use giants conducted adequate internal overseas servers with senior executives oversight and risk control efforts to staying abroad to command a complex vet illegal dealings, authorities say. web of activities, according to police. There’s little question that many of these Although internet companies have companies profited from involvement in argued that it is difficult to detect such the gambling operators’ complex business illegal transactions and pledged to chains, investigators say. enhance risk control, analysts said none of For their part, the legitimate online parties involved is really innocent because businesses say there are limits on their everyone benefits from the illegal dealings. ability to monitor and prevent illegal For search engines, ad promotions activities. Most of the implicated generate revenues, while fake retail deals companies are said to be cooperating with boost e-commerce platforms’ books and authorities. After a top Baidu executive bogus deliveries offer logistics firms quick Shi denied the allegations. Industry was detained in the probe, Baidu pledged money, analysts said. sources said it is almost impossible that zero tolerance for violations and promised senior company management didn’t to assist police in the investigation. notice the practices. “We’ve done everything we can do,” Serving the bad “Those (illegal) ads have always been one Pinduoduo source said. Shi Youcai, the head of Baidu’s Mobile there but were not investigated before,” Based on law enforcement data, the Ecology Group who oversees the said one online advertising customer. surge in illegal online gambling amid the company’s sales system, was detained “And Baidu is not the only one.” pandemic has been astonishing. By the Sept. 15 by police on allegations of A Caixin search of online advertising end of September, Chinese authorities helping online gambling promotions, monitoring site Reyun showed that a launched investigations of more than putting the search engine giant’s 2019 ad for a gambling-like card game 8,800 cross-border gambling cases and controversial advertising operations was promoted by a number of major arrested more than 60,000 suspects under a spotlight. His detention followed platforms backed by tech giants including allegedly involved in the illegal businesses. investigations of seven other Baidu ByteDance and Tencent. Police cracked down on 1,700 staffers starting weeks ago, including Vice In late 2020, Tencent, WeChat and online gambling platforms and 1,400 President Li Zhongjun, Caixin learned. ByteDance have all published lists of ads underground banks, involving more than Shi was later released on bail. that are prohibited on their platforms, 1 trillion yuan ($151 billion) of illegal Shi, who worked at Baidu between including gambling, lotteries and health- transactions, data from the Ministry of 2001 and 2011, returned to the company care services, among others. Public Security showed. That compared in 2019 as a special adviser to a newly While online advertising provides with 7,200 online gambling cases in 2019 restructured mobile ecology division, gambling sites access to customers, the totaling 18 billion yuan. becoming the de facto head of Baidu’s more important part for their business is In Shenzhen, Guangdong province, sales system. to set up a channel to funnel cash from police found that operators of an Shi opened the door for illegal users without being caught by regulators. overseas-based gambling site marketed advertising on Baidu’s platform and E-commerce sites like Pinduoduo and its games through QQ and WeChat and benefited personally from the business, logistics companies became part of their then directed gamblers to make nearly 2.6 one person close to Baidu’s management system. billion yuan of payments for bets through told Caixin. A Baidu business partner Several online gambling participants Alipay and WeChat Pay. said Shi tightened control over Baidu’s interviewed by Caixin said they could top In Wuxi, Jiangsu province, police in advertising partners and offered favors to up their game accounts on gambling sites August arrested two people for selling agencies with whom he had ties. Business by simply scanning a quick response code 60,000 logistics records for nonexistent with regulatory risks including promotion appearing on the website and completing deliveries. The logistics records were used of card games could be conducted only the payments through WeChat Pay or to fabricate online shopping deals for with certain agents, the executive said. Alipay. After the payments, they got

40 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 41 potential violations. But a police officer disagreed. Screen shots of shops serving online gambling showed that their products were often labeled with extraordinarily high prices. For instance, a pair of slippers priced at 9.9 yuan at other shops had a price tag of 1,999 yuan on one of the gambling-linked shops. “It should be very easily identified by e-commerce platforms to take risk control measures,” the police officer said. According to Pinduoduo, the company assisted police in cracking down on more than 10 online gambling cases in the first half 2019 and reported 18,958 suspicious cases involving 1,719 merchants on its platform. Experts said the platform should be able to do more. A police officer focusing on online gambling told Caixin that compared with Pinduoduo, other major e-commerce platforms such as Alibaba’s Taobao and JD.com have seen far less gambling-related transactions. That may partly reflect the stricter receipts showing the money was received Shop owners earn commissions from requirements on new shop registration by “Pinduoduo platform merchant” the gambling sites for managing the fake applied by Taobao and JD.com, another or Shanghai Xunmeng Information shops. police officer in Jiangsu said. Technology Co. Ltd. — the operator of “I register a shop for them to use,” There is no official disclosure on the Pinduoduo. With the transaction records, one shop owner said. “A piece of clothing size of gambling-related transactions on some of the gamers turned to Pinduoduo was priced at thousands of yuan, and e-commerce sites. In 2019, Pinduoduo with complaints after they lost huge there were soon orders.” Such shops can said it would remove revenue related to amounts of money. post daily transactions between 5,000 violations from its financial report. But behind the payments was a yuan and 600,000 yuan, according to the In the third quarter of 2019 following complicated chain of business dealings source. the online gambling crackdown in August, that disguised the illegal transactions Following the fake online orders Pinduoduo reported a surprise 2.3 billion as normal e-commerce deals, Caixin were a slew of delivery records for the yuan loss when analysts expected a net learned. Each payment was linked to an nonexistent packages to complete the profit. online purchase order placed through a chain of business designed to cover Logistics companies also played merchant on Pinduoduo with a traceable money laundering. In August, police in their part in the online gambling online shop and a clear order number. Wuxi arrested two people suspected of boom. Producing fake delivery records Payers have no idea which merchant selling 60,000 fake delivery records over requires access to couriers’ systems they paid or for what products. two years that are believed to be linked to and coordination among different Pinduoduo’s customer service staffers gambling-related money laundering. departments of a company, police said. said the company had no access to the The delivery records indicated orders Police investigations of fake deliveries details of orders, according to gambling from tens of thousands of merchants related to online gambling have targeted participants. registered on Pinduoduo, mainly based a number of senior executives of People familiar with the matter said in Zhejiang and Jiangsu. The transactions couriers and logistics companies who are that all the merchants and purchase totaled 7 billion yuan, according to police. suspected of involvement in fabricating orders were fabricated to serve gambling delivery records, a Wuxi police officer transactions. Gambling site operators hire said. people to register a shop on Pinduoduo Whose responsibility? For delivery companies, a delivery with their real identification and help With fabricated online orders and delivery request with no item to transport means them decorate the sites into seemingly records, the transfer of gambling funds is no-cost revenue to boost financial normal online shops. But no real product disguised as a normal online transaction. performance. An industry insider said the has ever been delivered despite the digital Pinduoduo said due to the lack of its 60,000 fake logistics records uncovered in transaction records, allowing the money own payment service, the company has Wuxi are likely to translate into 1.8 billion to flow from gamers to gambling site difficulties fully controlling information yuan of fake revenue for delivery companies operators, they said. related to each payment and detecting participating in the operations.

40 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 41 ENVIRONMENT & SOCIETY

An IUD, a widely used contraceptive device in China, that has just been removed from the body. Photo: Cai Yingli/Caixin

SOCIETY Mandatory IUDs Cause Decades of Pain Permanent IUDs were key to enforcing the one-child policy, but complications and side effects have blighted many lives

By Huang Yuxin, Liang Shuting and Ju Yiwen

hen the two coils that had spent close and violating the one-child policy. over a decade. Wto two decades in her body were Six years later, she was told by village Around 300 kilometers away from Lu’s removed, Lu Ying (pseudonym) said she family planning officials that the first coil home, Shanghai resident Teng Youxia has felt reborn. “didn’t work” and that she’d have to get also spent decades dealing with the impact Lu, from Pujiang county in East a second coil inserted. Soon after, her of her IUD. Teng’s abdomen is distended, China’s Zhejiang province, had the first of health began to deteriorate, with menstrual giving her the appearance of being heavily the intrauterine devices (IUDs) fitted after bleeding around three weeks per month pregnant, and she has suffered fatigue, she gave birth to her only child in 1993, to and the desperate need to urinate every chronic pain and excessive menstrual prevent her from getting pregnant again two hours, which has spoiled her sleep for bleeding. She attributes these problems to

42 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 43 IN THIS SECTION Hong Kong Universities Head North Biodegradable Plastic Push Faces Cost HIV Discrimination

a botched IUD removal 22 years ago. suffering and decided to take the the court ruled that the target of her Coils became widely used to enforce government to court. complaint should have been her village the one-child policy from the early 1990s, Teng had a different issue with her family planning department, rather than after design improvements were touted as IUD, though it also had its roots in the county government. causing fewer negative side effects. Women apparent medical error. Lu appealed this sentence with the who refused to have an IUD inserted She too had a mandatory coil fitted court at the prefectural city of Jinhua, after giving birth faced punishments by the family planning authorities of her which administers both Pujiang and which varied across the country and at hometown, Fanchang county in Anhui Lanxi, but this was rejected. After several different times. One common punishment province, after giving birth in 1991. Side rounds of negotiation, she received would be denying the woman’s child effects occurred immediately, including 120,000 yuan from her village. While this the all-important “hukou” household painful cramps and extended, heavy was more than the government’s first offer registration document, thereby locking periods of menstrual bleeding. In 1998, of 20,000 yuan, it was far less than the 1.3 them out of accessing public services such she was told that the problems were due to million yuan she had wanted. as education and healthcare. the coil shifting several centimeters inside Teng sued the Fanchang family One of the factors behind the health her body and that she’d have to have it planning authority, health commission problems of this pair, and many other surgically removed by the family planning and the Shanghai hospital which women like them, is the specific design authorities. performed surgery on her for medical and purpose of the IUDs commonly used But after the surgery, her condition malpractice. However, the bureaucratic in China. Unlike in some other countries, didn’t improve — it got worse. stumbling block here was whether or not where these coils have a lifespan of a few Fifteen years later, a series of hospital the procedures carried out in the name years, in China they are usually intended tests in Shanghai showed that parts of the of family planning could be classified to permanently curb the fertility of coil had remained in her pelvic region as a form of medicine, and therefore mothers. To this end, they are also difficult and that the removal had been botched. whether or not they were covered by laws to insert and remove, requiring a surgical “Why didn’t the doctor in charge of the on medical malpractice. procedure rather than being able to be removal all those years ago inform me?” In 2018, the court of Wuhu, the city simply pulled out by their strings. Teng asked. which administers Fanchang, ruled that Problems including IUD expulsion, In January 2014, surgeons attempted to the malpractice law was not applicable in uterine perforation and inflammation are remove the residue of the coil, but failed her case, and that moreover she couldn’t not uncommon, and can lead to serious as the fragments had become too deeply prove that the metal fragments in her mental and physical trauma. embedded in her uterus. The next year, on uterus were from the IUD. Her appeal to Wu Shangchun, a birth control expert, the advice of her physician, Teng decided the Anhui provincial court was rejected. told Caixin that many doctors and the to have her uterus removed at Shanghai’s It is far from unusual for IUD-related women who have IUDs actually know little International Peace Maternity and Child cases to be rejected because the mingling about them, which leads to problems in Health Hospital. Teng says the surgeon of government and medical elements identifying complications and side effects. removed her ovaries and cervix without mean they don’t easily fit into any existing her consent, leaving her incontinent, and legal category. According to Caixin’s that the problem of chronic bleeding research, most cases of women suing the Painful ordeal remained. Later, she had to have yet authorities over their IUDs have been In 1993, then 24-year-old Lu was fitted another surgery on her bladder. rejected on such categorization grounds. with a mandatory IUD. In 1999, when At this time, Teng asked Fanchang Even when cases are accepted, the she went for her biannual health check to officially recognize that she had burden of proof is particularly onerous. with the family planning authority in her complications arising from the IUD, but Such lawsuits usually require the home village of Qiaoxi, she was told that the government refused. participation of family planning experts her previous coil had “fallen out” and she who can clarify any relevant evidence would have to be fitted with a replacement. — such as the metal fragments in Teng’s Just a few months later, the bleeding Failed lawsuits body. However, judicial authentication started. At a check the following year, Teng and Lu have both tried to use legal agencies — official bodies which assess she asked if the coil could be changed means to find justice, though they have evidence before it can be submitted in a or removed, but the staff refused, telling taken different paths despite the similarity lawsuit — don’t have staff with expertise her that any health problems she was of their cases. However, neither has had in family planning, meaning it’s very experiencing were not the fault of the coil. much luck. difficult to submit evidence of harm in However in 2017, at another health Lu filed an “administrative procedure” these cases, said Zhang Wensheng, a check, staff told her that there were two lawsuit against the Pujiang government, lawyer who previously worked at medical coils in her uterus — the first coil had not under a law that allows individuals to institutions. left her body before a second one was sue the authorities for infringing on In addition, these kinds of lawsuits fitted. their rights. However, a court in the take a long time but usually end in little While the county government neighboring county-level city of Lanxi reward. Lots of women cannot bear offered her 20,000 yuan ($3,050) ruled in favor of the authorities, as it said fighting for three to five years — in in compensation, Lu thought it an she couldn’t prove that the insertion of the the end they give in and accept token inadequate amount for 16 years of second IUD was involuntary. Moreover, compensation.

42 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 43 ENVIRONMENT & SOCIETY

Official recognition These challenges persist despite official recognition that IUDs can cause serious health problems. Documents on this issue were released in 1990 and 2011, which classify the common types of side effects and explain how they should be identified by officials at different levels. Women who are identified as having related complications should be provided with free treatment, the documents say. Despite this, experts say that complications are still rarely identified through this process, and often free treatment isn’t made available even to those women who can prove they have suffered health problems due to their IUD. Wu explained that many places still expect women to pay for any treatment related to complications from their IUD. Lu says she isn’t satisfied with the paltry compensation she received, but has no idea what to do other than try to make the best of her life and put the pain she suffered for nearly two decades behind her. Teng is less resigned, and is continuing her fight to hold someone accountable, though she feels bad for asking her family to help pay her medical and legal bills.

An artist's rendition of the planned Guangzhou campus of the Hong Kong University of Science EDUCATION and Technology. Photo: The Hong Kong University of Science and Technology Hong Kong Universities Head North Guangdong province, of which that drove success. Guangzhou is capital. Several of the Expansion into wealthy Guangdong province gains special administrative region’s universities momentum as Greater Bay Area integration picks are doing the same, lured by tax and land Going north up steam incentives offered by the governments of Hong Kong universities’ move northward By Wen Simin, Wang Duan and Ju Yiwen cities including Foshan, Dongguan and began at the turn of the century, Zhaoqing. when many set up graduate schools in itting at the heart of Hong Kong Guangdong local governments are Shenzhen. However the real forerunner S University of Science and Technology’s hoping that Hong Kong universities will of the current trend is Hong Kong Baptist (HKUST) Guangzhou campus is an exact not only replicate their home institution’s University, which in 2005 teamed up replica of the university’s iconic “Circle of artwork on their new campuses, but also with Beijing Normal University to open a Time” sculpture, commonly known as the their internationally recognized high campus in Zhuhai. “red bird” for obvious reasons. standards, helping to boost the province’s Then, in 2014, the Chinese The “sustainable, smart campus” lagging education sector and make the University of Hong Kong (CUHK) established by HKUST, the Guangzhou tech-producing region more innovative. opened a Shenzhen campus and soon government and Guangzhou University In part, the region sometimes touted became regarded as the tech hub’s top will begin enrollment in September 2022, as a challenger to Silicon Valley is trying university. The success of CUHK (SZ) after being approved by the Ministry of to follow the example set by the original, has often been attributed to its relative Education last year. where Stanford University, University of independence. According to public It’s not the only Hong Kong institution California Berkeley and San Jose State information, CUHK’s local partner, “heading north” to neighboring University churned out much of the talent Shenzhen University, is not involved

44 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 45 Co. Ltd. On top of this, the region also has department of Guangdong province from a rich ecosystem of startups, incubators 2012 to 2019, said in March last year. and accelerators in tech, biotech, health- Lu Xiaozhong of the Greater Bay tech and innovation. Area Education Development Institute of South China Normal University, said that Guangdong has the most higher education Mutual limitations institutions of any region in China, but In the 2020 QS World University that it possesses quantity not quality. Rankings, Hong Kong had five universities Even so, its gross enrollment ratio — in the top 100, while in Chinese mainland the proportion of young people receiving there were six, mostly located in Shanghai higher education — remains below the and Beijing. No Guangdong university national average of 51.6%, sitting at 46% cracked the top 300. in 2019, though this represents significant “Even though Guangdong has the growth from 28% in 2010. largest GDP in the country, abundant While Hong Kong has 35 higher land and financial resources, its education institutions, the city’s relatively overall educational level is still low, small pool of students, shortages of cash especially when it comes to the degree and high land prices have constrained of internationalization,” Zheng Wen, their growth. then director of the higher education All three are in abundant supply

Hong Kong Universities Set Up Guangdong Branches

Zhaoqing Guangzhou

Foshan Dongguan

Shenzhen Shenzhen Hong Kong Baptist University Shenzhen Research Institute ( Founded in 2000) in any teaching, teacher recruitment or curriculum creation. Hong Kong Polytechnic Zhuhai University Shenzhen China’s Greater Bay Area Besides the province’s largest Research Institute metropolises, several smaller cities are (Founded in 2000) also getting in on the act. Construction Hong Kong University of of a 30.7 billion yuan ($4.7 billion) Hong Science and Technology Kong Polytechnic University campus in Shenzhen Institute Guangzhou Foshan (Founded in 2001) Foshan was included in a province’s 2020 Hong Kong University of The Hong Kong Polytechnic development plan. City University of Hong Kong Science and Technology Fok University (Foshan) N/A Hong Kong Polytechnic University, Shenzhen Research Institute Ying Tung Research Institute (Founded in 2001) (Founded in 2007) City University of Hong Kong and the Zhaoqing Open University of Hong Kong are Chinese University of Hong The Hong Kong University of The Open University of Hong Kong Shenzhen Research Science and Technology Kong (Zhaoqing) N/A among those that have drawn up plans Institute (Founded in 2007) (Guangzhou) (Due to start under the framework of the Guangdong- enrollment in 2022) The University of Hong Kong Dongguan Hong Kong-Macao Greater Bay Area Shenzhen Institute of (GBA) integration scheme, which seeks to Research and Innovation Zhuhai City University of Hong bind together the economically powerful (Founded in 2011) Kong (Dongguan) N/A Beijing Normal University-Hong region across administrative lines. Chinese University of Hong Kong Baptist University United The GBA is home to most of China’s Kong (Shenzhen) International College (Started (Started enrollment in 2014) Fortune 500 companies, especially those enrollment in 2005) in technology like Huawei Technologies Source: public information compiled by Caixin

44 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 45 ENVIRONMENT & SOCIETY

across the border on the Chinese But experts told Caixin that China’s mainland. While Hong Kong’s University ENVIRONMENT plastic restrictions need further refinement Grants Committee set a HK$1.5 billion in order to be effective. “I think it’s still ($193 million) grant budget for scholars Biodegradable Plastic early days for this policy,” said Wen and universities for 2018-2019, the Zongguo, a professor at the School of Shenzhen government’s research budget Push Faces Cost Environment at Tsinghua University in was almost eight times higher. Beijing. “There are still a lot of policy Professor Guo Yike, vice president of details to come out in the future, and many Hong Kong Baptist University, told Caixin The world’s biggest plastic-maker must address issues that need to be addressed more that while the city’s research environment issues with the production, regulation of the quickly.” is irreplaceable, the big budgets on offer materials to meet waste reduction goals across the border allows researchers the By Huang Yanhao, Han Yuze and Matthew Walsh ability to focus on subjects that interest Missing understanding them, and also gives them the chance hina’s efforts to cut plastic pollution by Outdated standards and a flimsy policy to apply their research to local tech C pushing alternatives that can be broken framework are checking the progress of companies. down by living organisms face an uphill China’s biodegradable plastics industry, Chan Wai-yee, former dean of the struggle ahead of a looming end-of-year experts told Caixin. School of Biomedical Engineering at deadline. The country’s standards for CUHK, cited innovative drug research The world’s largest plastic user biodegradables have not been updated and development as an example, saying announced in January that it would ban in 15 years and include materials that that Hong Kong does not have the some single-use plastics in major cities are not widely used or no longer meet conditions to conduct experiments on by the end of 2020, part of a push to internationally accepted definitions. large animals such as dogs and monkeys, dramatically reduce the amount of waste Additionally, China has no and many pharmaceutical scientists find plastic it puts into the natural environment comprehensive system for recycling it impossible to complete preclinical by 2025. biodegradable plastics and lacks personnel studies in Hong Kong. In Hong Kong, it Policymakers have touted who can distinguish them from traditional is also difficult to find a company that can biodegradable plastics, which decompose ones, said Wang Yonggang, the secretary help produce prototype samples, while under the right conditions, as part of the general of the renewable plastics branch the mainland’s production resources are solution. But China’s biodegradables of the China Natural Resources Recycling obviously more abundant. industry appears unable to fill the gap, Association. hindered by high costs, low production As a result, both industry players capacity and outdated regulations. and the general public lack a robust Tensions in integration Those problems could slow the understanding of biodegradables, and In terms of academic freedom and clampdown on traditional plastics, which “countless lies and specious arguments” autonomy, tension exists between can remain in the environment for many plague the sector, said Wang Wang, the universities on the mainland and those in years, threatening wildlife and spreading executive vice director of the plastic Hong Kong. Academic studies run into toxic substances. recycling committee at the China restrictions on the mainland, especially China produces around one-third Synthetic Resin Association, an industry in the fields of humanities and social of the world’s plastics. The country group. sciences. Therefore the curriculums of created around 63 million tons of plastic Experts said China must pair the these mainland campuses have been a waste last year, only 30% of which was development of the biodegradables sector long-standing question. recycled, according to the China National with better recycling mechanisms. “If we CUHK Vice President Chan Wai-yee Resources Recycling Association. The don’t build a proper system for recycling said that the Shenzhen campus “uses rest was taken to landfills, burned or plastics, the problem will sooner or the same curriculum as the Hong Kong abandoned. later come back to haunt us,” said Jiang campus, and if they plan to have new The world’s No. 2 economy announced Nanqing, the secretary general in charge curriculums it has to be approved by a ban on imported plastic waste in 2017. of recycling at the All-China Environment Senate Committee on Teaching and It has also banned retailers from handing Federation. Learning of CUHK.” The campus out plastic bags for free and ordered is also able to offer internet access manufacturers to stop making the ultra- subject to fewer of the mainland’s thin variety. Capacity catch-up content restrictions than other mainland China’s biodegradables industry also faces universities. two other major issues: low capacity and That’s a greater level of independence high costs. than was offered to pioneer Hong Kong Both industry players and The two main biodegradable plastics Baptist University, whose mainland the general public lack a used in China are PLA and PBAT. The curriculum needs to be approved by both former is a polymer made from plant its parent institution and the education robust understanding of sugar which degrades under industrial authorities of the mainland and Hong biodegradables. composting conditions, while the latter Kong. is a fossil-based material that degrades

46 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 47 that it still processes many biodegradable products like other forms of waste. “Once household garbage is classified, some of it is comprehensively utilized, and some is incinerated,” said Chen, of the provincial environment bureau. “But there is currently no separate disposal method for plastic products.” Hainan also lacks a composting and recycling system for biodegradables, although one is in the planning stage, said Wang Xiuhao, an official focusing on biodegradable plastics at Hainan’s industry and information technology bureau. Currently, only one Chinese company is known to have attempted such a project on an industrial scale. The island’s struggles cast doubt on China’s ability to extend a plastic bag ban The island province of Hainan in nationwide on Beijing’s projected timeline, southern China has launched a campaign to reduce plastic waste. Ji said. He estimated that the country will need to produce between 5 million and 6 million tons of biodegradable plastic under both composting and natural the bags from PLA, China lacks the per year to support such a ban, far more conditions. technical know-how needed to use one of than China’s current production capacity Both PLA and PBAT are more its key raw materials and cannot challenge of 400,000 tons, according to a Hainan expensive to make than traditional the global industry leader, U.S.-based policy document. plastics and carry additional recycling NatureWorks LLC. Ji said he expected the government costs. These costs are usually passed on to “Even if you have money, you can’t to issue new standards in due course. downstream businesses and consumers, buy PLA at the moment,” said Gong, “If these requirements don’t come out, dampening demand for biodegradable adding that Zhongke uses other materials, (Hainan’s) plastics ban is effectively waste products. like plant fiber, in products like its paper,” he said. China’s southern province of Hainan environmentally friendly tableware. Others remain bullish. As long as is a case in point. The island of 9 million But no matter which material he uses, China enacts policies to manage the people is something of a testing ground the end product typically costs more aforementioned issues and cultivate for progressive environmental policies than its traditional plastic equivalent. the market, downstream demand and has more detailed regulations on Several industry insiders Caixin spoke to for biodegradables could spur the biodegradable plastics than the rest of for this story said companies with high development of upstream industries, said China. But its pivot away from traditional plastic use, like express delivery services, Wang Xiuhao. plastics is not going as smoothly as some takeout services and users of agricultural Tsinghua professor Wen said current would hope. sheeting, worried that the higher costs of policies left ample leeway for firms to According to Chen Xi, an official biodegradables will make their business adapt to a biodegradable future, but at Hainan’s environment bureau, the models unsustainable. conceded that current policies and province consumes 40,000 tons of non- “The cost and price of biodegradable regulations had caused a “relatively degradable disposable plastic bags and products are currently two to three times high degree of uncertainty” regarding 25,000 tons of non-degradable plastic those of ordinary products,” said Ji Junhui, the production and applications of tableware per year. the director of the Hainan Province biodegradables. Shifting that consumption toward Biodegradable Technology Innovation For now, Hainan should focus on biodegradables is no easy task. The island’s Center. “Just from a price perspective, collecting as much biodegradable plastic largest supplier of biodegradable plastic we can’t rely solely on the environmental as possible and providing the conditions bags is Zhongke Xinhui (Hainan) New consciousness of consumers.” for decomposition, Chen said. Material Technology Co. Ltd., which “The vast majority of the public, currently has a production capacity of just industry, specialists, government 7,000 tons per year. Setting up systems departments, cities, counties and third- According to Gong Zhen, Zhongke’s Hainan’s disposal mechanisms for party environmental charities supported deputy general manager, the company biodegradables also leave much to be the work plan,” he said. “There are makes the bags mainly from PBAT, desired. obviously different voices in this debate, which it buys from four major domestic The province’s patchy collection, but we must still follow the choices of the suppliers. Although it is possible to make composting and recycling systems mean majority.”

46 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 47 ENVIRONMENT & SOCIETY

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HEALTH HIV Discrimination Caixin traveled to the northeastern city of Shenyang to photograph the daily lives of some of the country’s 963,000 people infected with the virus that causes AIDS

By Liang Yingfei and Wang Xintong

48 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 49 1. A folk dancer living with HIV rehearses for an evening party organized by a community in Shenyang, Northeast China’s Liaoning province. Photo: Liang Yingfei/Caixin

2. Several HIV carriers make dumplings around a table, which has become one of their routines. Every Saturday morning, people living with HIV gather at a community center where they can dance, sing and drink tea. Photo: Liang Yingfei/ Caixin

3. Guo Xing, a 51-year-old man who was diagnosed with HIV in 2011, rests in his room in a village near Shenyang. He lost his job as soon as news of his condition spread and moved to the village to reduce his living costs. Photo: Liang Yingfei/Caixin

4. Guo walks his dogs in a courtyard. After moving to the village four years ago, he began adopting stray dogs that have now become his only companions. Photo: Liang Yingfei/Caixin

5. De Xiang, who has lived with HIV for a decade, stares at the sky from his home in Shenyang. Photo: Liang Yingfei/Caixin

hen De Xiang, a pseudonym, first suffering from psychological and social W learned he was HIV-positive, his first problems as a result of being stigmatized reaction was one of despair. “All I thought and discriminated against. about was when I would leave the world. In a village located 40 minutes west Should I tell my family? I tried several driving from downtown Shenyang, times, but the words still wouldn’t come HIV carrier Guo Xing, 51, has taken up out,” he says. residence, together with some stray dogs De, a 59-year-old man who works he adopted, in a run-down courtyard with as a caregiver in Shenyang, capital of four buildings, two uninhabitable. The Northeast China’s Liaoning province, was walls are split by cracks, some as long as diagnosed with HIV in 2010. After that an arm-length, and parts of the roofs have he decided he would never go back to his collapsed. hometown, keeping his condition a secret “Living in the village is more and planning to live alone in the city until comfortable than in the city,” says Guo, he could work no longer. referring to a previous experience when About 38 million people in the world neighbors moved away after learning are currently living with HIV, including about his disease. Guo tested positive for 963,000 in China, according to a report HIV in 2011 and lost his job as soon as the by the World Health Organization. Due to news got out. He moved to the village four its frequent transmission through sexual years ago to reduce his living costs. conduct, it has become strongly associated Advances in medicine mean that HIV with promiscuity and homosexuality. is no longer a death sentence, but instead Accordingly, lots of patients spend years can be managed similarly to less serious not only fighting the disease, but also conditions like high blood pressure and

48 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 49 ENVIRONMENT & SOCIETY

6. HIV carrier Liu Kang takes care of potted flower in front of a window at his home in Shenyang. Photo: Liang Yingfei/Caixin

7. Liu’s folded dance attire on a table. Liu was deeply influenced by a high-profile ballet called “White-Haired Girl” when he was a child. After he retired, he began performing with a dance troupe, which took up most of his time. Photo: Liang Yingfei/ Caixin

6 diabetes. Patients can expect to live almost as long as people without HIV if they take regular medication. But other challenges like loneliness and isolation have taken the place of the more serious life-or-death threat, especially for those aged 50 or above. Before his infection, De had already longed for someone who could spend a lifetime with him, even if that companion was wheelchair-bound or bedridden. But now his hopes are fading due to his infection. “I don’t want to hide my disease, but I’m still afraid that the companion I’m seeking won’t accept it,” De said, “I met a person of similar age and with similar interests and asked what he thought of people with HIV. He told me wouldn’t dare to touch such a person. I got his point and gradually distanced myself from him.” As more patients learn to live longer with HIV, loneliness has become an urgent issue that needs to be addressed, experts say. Such negative feelings can lead some to 7 stop treatment or fall into deep depression, said Li Xin, a doctor who has studied the matter. Every year, Li said she will see two or three deaths of patient related to such reasons. “I didn’t think their lives should have ended this way, they deserved better choices,” she says.

50 Caixin - China Economics & Finance January 2021 A GREAT BANK FOR BETTER LIFE

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Wang Tao is the head of Asia reduce business uncertainty and be positive for global trade. economics and chief China economist at UBS Investment Bank. No unwinding of current tariffs soon Given the bipartisan support in the U.S. for hawkish stance on trade with China and Biden’s likely focus on domestic issues initially, we do not Biden Likely to Rework expect the new U.S. administration to unwind current higher tariffs on Chinese exports soon. Nor do we expect any major changes to other Trade Deal existing U.S. policies on China in the near term. Nevertheless, as indicated by key Biden advisors, the new administration is likely to take a Any new agreement is unlikely to be reached until late 2021, while a more deliberate and multilateral approach to trade disputes. This means that U.S. trade policies may reduction or removal of existing U.S. tariffs is not expected become more rules-based and more predictable, which should help lower risk premium in the market.

A comprehensive approach It seems there is consensus among U.S. political establishment that China is a strategic competitor. According to key policy advisors to President- elect Biden, the new administration may take a comprehensive and strategic approach to U.S.-China relations. Consequently, the Biden administration is likely to maintain a tough ow might U.S. economic and foreign policies political stance on China, keep tight restrictions on H be different under a Biden administration and China’s access to advanced technology, and work what might be the implications for China? What to bring more jobs back to America. are the risks in the coming months? Meanwhile, Biden may be more open to As the UBS U.S. economics team wrote earlier, cooperation with China on global challenges the size of Washington’s fiscal stimulus will likely of pandemic control, climate change, and non- differ a great deal under different combinations proliferation. We expect the Biden administration of the White House and Congress. On the other to re-establish formal communication and hand, the U.S. president has control over foreign dialogue mechanisms with China sometime down and trade policies, which would impact U.S.- the road, perhaps along with or after repairing China relations and trade war. Compared to a relations with allies. Trump presidency with a split Congress, we think a Biden presidency with a split Congress may bring the following changes that are most relevant Trade deal implications for next year’s economic outlook in China: The phase one trade deal has held up so far in 2020 despite the challenges from Covid-19 and worsening of U.S.-China relations in other fronts. Lower risk of trade war Given that the numerical import targets in the As indicated by the Biden transition plan, the trade deal have become even more unrealistic, we president-elect wants to prioritize pandemic think China would want to renegotiate the deal. control and reviving the U.S. economy. However, Meanwhile, the new U.S. administration may in the scenario where the Republican Party want to renegotiate to push for more structural controls the Senate, UBS U.S. economics team measures in China regarding IP protection and expects only a modest fiscal stimulus package. level playing fields. As a result, they expect slightly weaker U.S. As such, we expect the two sides to engage GDP growth of 2.9% in 2021. Meanwhile, the actively in 2021, but any new deal is unlikely to risk of U.S. imposing additional tariffs on imports be reached until end 2021 or in 2022. Before that from China and other countries will likely be happens, we do not expect a reduction or removal significantly lower in 2021, which should help of existing U.S. tariffs.

52 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 53 Joe Biden speaks in Wilmington, Delaware, on Nov. 7, 2020.

We expect China’s GDP growth to rebound to We expect the two sides to engage actively in 2021, but any new 7.5% in 2021. As outlined in our scenario analysis, in the case of a Biden presidency with a split deal is unlikely to be reached until end 2021 or in 2022. Before that Congress, we think the impact of a slightly weaker happens, we do not expect a reduction or removal of existing US U.S. growth on China will be offset by a slightly better global trade environment, leaving little net tariffs. impact on growth in 2021. As economic activities recover further in China, we expect domestic consumption to related to Hong Kong and Xinjiang, and more rebound significantly, supported by robust visa restrictions affecting bilateral exchanges and exports amid a global recovery. We see much of communications. Some of the measures may be China’s tax and fee cuts expiring at end 2020 politically difficult for the next U.S. president to and infrastructure investment to slow modestly reverse or unwind, inflicting lasting damage to in 2021. We expect no change in policy rates but bilateral relations. a slowdown in credit growth as the authorities In the case of additional measures against renew focus on containing financial risks. China under the current U.S. administration in the next two months, the yuan may weaken against the dollar. However, after the new administration Short-term risks takes office and global uncertainty declines in Before the new administration takes office on 2021, we expect the yuan to appreciate again, in Jan. 20, President Trump and the current U.S. part helped by a weaker dollar. administration can and may still implement China’s attractive yields and continued additional measures against China. Such measures financial market opening should help attract are highly unpredictable and could lead to market portfolio inflows, even as the current account volatility. surplus is projected to shrink. We expect the These measures could include forcing some yuan-to-dollar rate at end-2021 to be around 6.5 Chinese companies to delist from the U.S. market, partly to reflect PBOC’s increased tolerance for a expanding the entity list or list of products that stronger yuan, though the exchange rate is likely face export restrictions, additional geopolitical to fluctuate in a wider range than before, breaking provocations, imposing additional sanctions 6.5 at times.

52 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 53 OPINION

Tu Xinquan is dean and professor of the Democratic Party’s campaign documents, a China Institute for WTO Studies at “return to tradition” will be a major feature of his administration’s trade policy. Although the trade University of International Business and policy on China has received the most attention, Economics in Beijing. it actually involves more complex diplomatic and strategic issues. How the Biden administration formulates policies toward the WTO and CPTPP is equally important as a better reflection of his Biden Could Use CPTPP to trade policy direction. The WTO, established under the leadership of the United States, is one of the three props Compete With China of the post-war international economic system. Although the Obama administration expressed dissatisfaction with the WTO, especially repeated Even if the U.S doesn’t return to it, the CPTTP could be used claims that the Doha Round was dead and seeking to negotiate a giant regional trade agreement, it strategically to drain China’s external development potential never gave up on the WTO leadership or took subversive measures. Trump adhered to his anti-establishment and anti-globalization concepts and dealt the WTO a fatal blow. He not only threatened to withdraw from it many times, but also initiated unilateral tariffs that undermined its authority. He also paralyzed the WTO Appellate Body, obstructed the smooth appointment of a new director-general, and severely disrupted its normal operations. fter four years of Donald Trump changing It should be said that there are deeper reasons A everything in U.S. trade policy completely, Joe for the United States’ dissatisfaction with the Biden will put things back to order amidst large- WTO. The current WTO system has difficulty scale chaos. in meeting the interests of the United States, The unilateral protectionist trade policy is one but the Trump administration’s actions have of the typical characteristics of Trumpism, and been counterproductive, with no substantial the type of trade policy Biden will implement has improvements on safeguarding its interests. attracted much attention. However, in contrast For Biden, it is quite easy to set things right on to Trump, Biden did not make trade policy an WTO issues, with immediate results. Regarding important issue during his campaign. From the the issue of the Appellate Body, the restoration policy plan released by the Biden team and voices of the appointment of its judges will not cost the from various channels, he did not propose specific United States anything, and it can repair the rift and systematic policies regarding trade. He only with the EU on this issue. discussed topics related to trade policies, such as In the appointment of a director-general, an leading the global “democratic world,” “returning African-American appointee can perfectly fit manufacturing industries,” and “protecting the Biden administration’s policy of supporting workers’ rights.” globalization and racial equality. Biden is generally believed to be a Although WTO reform still involves more representative of the Democratic establishment difficult and complicated matters, if the Biden and his policy propositions have inherited the administration can quickly take positive measures liberal traditions the Democratic Party has upheld on the issue of the Appellate Body and the for a long time. director-general, it will create a good atmosphere In a March 2020 Foreign Affairs magazine for WTO operations and future negotiations. article, Biden pinpointing that a government The Biden administration has clearly outlined under his leadership would quickly take measures a strategic proposition to return to multilateral to renew the United States’ democracy and order and re-uniting with allies. Returning to the alliances and “have America lead the world again.” CPTPP is also a potential policy option, especially He openly criticized Trump’s trade policy saying given that the TPP was negotiated during Biden’s he “launched an unwise trade war that harmed term as vice president. both U.S. allies and the American middle class.” However, compared with the WTO, returning, Given Biden’s own statement and the or more accurately joining the CPTPP, involves

54 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 55 U.S. President-elect Joe Biden

more variables. The current U.S. trade policy In addition, the United States, as the world’s stance has changed a lot since the TPP was largest economy, has an economic output far concluded four years ago. exceeding the total output of the 11 CPTPP Although the finalization of the TPP was a members. Joining existing free trade agreements political outcome under the leadership of the in a passive way is not in line with how the United Democratic Party, Hillary Clinton proposed its States positions itself. abolition during the 2016 presidential campaign. The latter option will face great resistance As for a TPP plan, the Democrats are hardly firm from CPTPP members. A renegotiation of the in their position. agreement requires a huge investment of political Moreover, the anti-globalization sentiment in capital and may also trigger domestic disputes. the United States will not disappear with the end As for the original TPP agreement text, both of Trump’s term. The Republicans and Democrats the United States and other member countries are evenly matched in Congress, and political have abandoned some of the provisions in confrontation is still fierce. The probability of the trade agreement negotiations. The possibility CPTPP being passed by Congress is very small. of resuming the original TPP agreement text is But setting aside the uncertainties caused by almost zero. U.S. political factors, returning to the CPTPP Therefore, no matter which path the United also requires technical feasibility. In general, there States chooses to return to the CPTPP, it will face are two potential options for the United States to a very complicated negotiation and debate process. return to the CPTPP: one is to join the current It is highly unlikely that Biden will complete this CPTPP, and the other is to renegotiate with it and mission in his administration. even restore the text of the TPP agreement. Nevertheless, this does not mean the United The former option will win the support of States will not use its return to the CPTPP as a CPTPP members, but the United States may tool against China. find it difficult to accept the text of the rules of Through negotiating with or joining the the existing agreement. For example, the rules of CPTPP, the United States can attract some origin of the CPTPP are much looser than the parties to the U.S. persuasion and influence United States–Mexico–Canada Agreement and their relationship with China. Even if the U.S do not include the property rights and investment fails to return to it, the CPTTP can still serve rules which concerned the United States in the as a strategic means to drain China’s external TPP. development potential.

54 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 55 OPINION

Zhang Chunlin, formerly lead private sector development specialist at the World Bank Group, is an academic member of Caixin Insight and an editorial board member of Comparative Studies magazine. Reform Could Offer Way Out of CPTPP’s SOE Rules

If reforms continue, Beijing could dramatically reduce the number of state firms that meet the trade agreement’s definition

he Comprehensive and Progressive Trans- “associations or similar organizations” are not T Pacific Partnership (CPTPP) trade agreement, usually registered as enterprises in China. while containing rather strict disciplinary According to Article 17.1 in the agreement, the requirements for state-owned enterprises SOE must be the enterprise that is “principally (SOEs) in its Chapter 17, also limits their scope engaged in commercial activity,” the second in several ways. In addition to the exceptions element to define an SOE. and exemptions, the definition of SOEs is an The commercial activity in this article refers to important part of the delimitation of the scope three meanings: of application. If China continues stepping up • the enterprise engages in the activity for profit its efforts to reform SOEs in fully competitive • engaging in that activity yields the production sectors, the number of enterprises that meet the of a good or service and selling that good or CPTPP’s definition of SOEs could be reduced service to consumers in the relevant market dramatically. • the quantity and price of the sale are determined by the enterprise With regard to “orientation towards profit- “Commercial activity” making,” footnote 17.1 specifically clarifies that The definition of an SOE in the CPTPP the enterprise activity cannot be classified as contains three elements. First, it must of course commercial unless its operation is based on the be an enterprise. According to Article 1.3 of the principle of “not for profit” or “cost recovery agreement, an enterprise is any legally established only.” However, it is still unclear what “not for or organized entity, including corporations, trusts, profit” and “cost recovery only” mean and how partnerships, proprietorships, joint ventures, they are defined. associations and similar organizations, regardless The principle of “not for profit” can be of whether they are established for profit or interpreted in two ways. The first is in line with whether they are privately or governmentally the standard definition of a nonprofit organization owned and controlled. as one that makes a profit but does not distribute China’s regulations for registration of it. The second is that it does not seek to make a business entities do not include the definition profit, but only to cover costs or not to lose money. of “enterprise,” though the CPTPP’s definition Footnote 17.1 is more than likely to mean the should be broader than that in China as second. If this is the case, since the so-called “cost

56 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 57 recovery” does not include the cost of equity dispute settlement mechanisms are suspicious capital, such firms would in fact be subsidized by about the list of SOEs that the other party country state shareholders. If they compete in the same releases. It can ask the other party to provide market with those who conversely have to provide relevant information and explanations, and if a market-level rate of return to shareholders, it it believes that the other party has violated the would be unfair for the latter. contract it can file a lawsuit. Moreover, according to the above definition of commercial activity, enterprises that cannot decide on the quantity and price of their sales themselves State-owned and state-controlled should not be considered SOEs either. The third element of the CPTPP’s definition of However, in the case of exempted SOEs, an SOE is government ownership and control. some are treated as SOEs even though their However, instead of directly using the general selling prices are controlled by the government concept of “ownership and control through (e.g., Vietnam Electricity Group). This needs ownership” (which is common in U.S. FTAs with clarification. other countries), it specifically lists three scenarios. Enterprises that engage in activities not to sell Namely, under the CPTPP, an enterprise is goods or services to consumers in the relevant an SOE if it is primarily engaged in commercial market cannot be counted as SOEs under the activity under one of the following three CPTPP definition either. It is not clear, however, conditions: which activities meet this definition. Perhaps such • the government directly owns more than 50% a situation does not exist. of the equity capital in the enterprise operation The above definitions could certainly be • the government, through ownership interests, exploited. If a government does not want one of controls more than 50% of the voting rights its SOEs to be subject to the rules, it can claim • the government has the right to appoint a the enterprise is “not for profit,” but only “for majority of the members of the board of directors, cost recovery,” or that it sells goods and services or equivalent, of other governing bodies. in quantities and at prices determined by the In the second condition above, it refers to a government, thereby making it no longer an SOE complicated case of using ownership interests. according to the CPTPP’s definition. For example, if the government directly owns However, the CPTPP’s transparency rules and 20% of the voting rights in an enterprise, a

56 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 57 OPINION

state holding company wholly-owned by the its reform in the given direction and is thus no government owns 20% of the voting rights, and a longer under the CPTPP’s definition of an SOE. wholly-owned subsidiary of the holding company According to the document issued by the CPC owns 10% of the voting rights, we say the Central Committee and the State Council in May government controls the exercise of 50% of the 2020, the direction of reform for SOEs in fully voting rights “through ownership interests.” competitive sectors is to strengthen the revenue This definition not only applies to the usual function of state-owned capital. This may include situation where business decisions are made by a capitalization, securitization, preferred shares, and vote of the shareholders’ meeting and the board key employee shareholding. of directors, but also takes into account situations Following this direction, state-owned in which business decisions are made by an shareholders can focus on pursuing the rate of “equivalent” management body. return on state capital in accordance with the In other words, an enterprise that is financial shareholding principle, and gradually primarily engaged in commercial activity, if its retire as minor shareholders and no longer hold business decisions are actually in the charge of majority ownership, controlling voting rights, a management body equivalent to the board or appoint a majority of seats on the board of of directors, and the government has the right directors or the equivalent management bodies. to appoint a majority of the members in this If this were to happen, these companies would management body, then this enterprise should no longer meet the CPTPP definition of SOEs. unquestionably be an SOE according to the Such enterprises will not be counted as current CPTPP definition, regardless of how many state- “state-owned or state-controlled enterprises” owned shares it has. but separately classified as “state-invested At the same time, this definition of CPTPP enterprises.” implies that an enterprise will not be an SOE and Certainly, even SOEs in fields other than full thus not subject to the SOE rules, if it meets the competition, including state-owned financial following three conditions: institutions, can also be transformed into state- • no more than 50% of the shares are directly invested enterprises, as long as they meet the owned by the government conditions and do not require state ownership. • no more than 50% of all voting power is Secondly, SOEs that serve government policy controlled by the government through ownership objectives and engage exclusively or primarily interests in business in the public interest can be clearly • the government has the power to appoint defined as “not for profit” entities and are not directors who do not constitute a majority on subject to the CPTPP rules. the board of directors (or the members in an According to a 2015 document released equivalent governing body) by the State-owned Assets Supervision and In other words, if a party wishes to exempt Administration Commission (SASAC) on the an enterprise from the rules of Chapter 17 by classification of SOEs, the definition of public relinquishing control over it, this definition interest SOEs is “to protect people’s livelihood, provides such an option. Inevitably, there is still serve the community, and provide public goods an undue advantage in the loopholes since the and services as the main objectives, and the price government can control an enterprise even if it is a of necessary products or services can be regulated minority shareholder and does not have a majority by the government.” of seats on the board of directors. But under the This definition can be further interpreted transparency rules, either party can require the as “not for profit,” with the quantity and price other party to disclose a special shareholding, of output controlled by the government. It also special voting rights, or other interest in an clarifies the exact meaning of “not for profit,” the enterprise. methods of evaluating the performance of these enterprises, and procedures for entering and exiting this category. Significance to China The system needs to be regulated. In addition, There is neither any official authoritative as I mentioned in my previous Caixin column, interpretation of the CPTPP’s definition of an it is worth studying whether such enterprises SOE, nor indications of how parties apply it to should be directly converted to public institutions their own SOEs. If the above interpretations are or have their SOE status withdrawn, because in sound, it at least will have an influence on China China there is already a distinction between public in two aspects. institutions and SOEs. First, an SOE in a fully competitive sector However, it is true that not all “public interest can be free from the CPTPP rules if it intensifies SOEs” can be free from the CPTPP’s definition

58 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 59 SOEs are a sticking point for China if it wants in on the CPTPP trade pact, but it might be able to reform its way out of the problem.

of SOEs. Still, there is no public information on If China continues stepping up its efforts to reform SOEs this yet. While some enterprises, such as those providing urban public services, are certainly in in fully competitive sectors, the number of enterprises the category, there is a need to further limit the that meet the CPTPP’s definition of SOEs could be reduced scope. As noted earlier, if an SOE is allowed by the dramatically. state to seek cost recovery rather than profit, it is in effect receiving a subsidy from state shareholders. If such an enterprise competes in the same market as one that must provide a market-level rate of For example, the total number of nonfinancial return to its shareholders (including enterprises in SOEs (state-owned and state-controlled) in 2018 other countries), it is unfair to the latter. was 203,000, of which 22,000 alone were in Therefore, the concept of “public interest the real estate sector. If 90% of SOEs in the real SOEs” must not be abused. It is important to estate sector could be converted to state-invested prevent some enterprises from using the public enterprises, the total number of enterprises under interest as a pretext to free ride while gaining from the CPTPP’s definition of SOEs could be reduced unfair competition in the market. by 10%. Compared with the total number of SOEs, If the construction, wholesale and retail, the number of enterprises that can be defined restaurant, social services, and scientific and as “not for profit” is definitely small. However, technological services were also considered fully the majority of SOEs are likely to be in fully competitive sectors, and 90% of the 90,000 SOEs competitive fields, and if the above reforms could in these sectors were converted to state-invested be implemented, the number of Chinese SOEs enterprises, the total number of firms under the defined by the CPTPP should be significantly CPTPP’s definition of SOEs could be reduced by smaller than the current number. another 40%. As to how small it would be depends on how Considering that there are still about 40,000 the “fully competitive sector” is defined and how SOEs in extractive industries, manufacturing, many of these SOEs could be converted to state- and agriculture, forestry, animal husbandry and invested enterprise, the rough picture of which fishery, most of the 203,000 SOEs may no longer can be drawn from the Ministry of Finance’s SOE qualify as SOEs as defined by the CPTPP if these statistics. reforms are implemented.

58 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 59 OPINION

Pascal Lamy, former director-general of the World precautionism, as opposed to protectionism. Trade Organization from 2005 to 2013, is chair of Protectionism protects producers from foreign competition, precautionism protects people from the Paris Peace Forum. risks of various kinds, whether they be safety, security, health, or environment. This is the new frontier of international exchange, regulation and openness. This is not unknown. For quite some time we’ve been Regulate the Data-Driven adjusting regulatory standards, for safety, security, certification, pesticides, qualifications for nurses, and car emissions, etc. Yet, the world of data raises Globalization much more challenging issues. As obstacles to trade in the world of data stem from different collective preferences about The U.S., China and EU need to collaborate to avoid excessive precaution, they translate into discrepancies fragmentation of global digital trade in levels and administration of precaution. It becomes a sort of patchwork that hampers economies of scale, and risks increasing the north- south digital divide which we already know is a problem. So, the word of digitized international exchange will not be as open as the previous world of international exchange. Because digitalization is a case in point of precautionism, given the wide array of safety and security concerns related to hatever views we have about what the post- exchanging data. W Covid world will look like, and there are The differences in the way countries see many, one thing for certain is that the crisis will safety and security precautions in data, or about have accelerated the digitalization of our planet, infrastructure, telecommunications, internet, a digitalization we knew about but which is again and data regimes, are about addressing cyber influencing international exchange. vulnerabilities. We’ve moved progressively year after year This triggered an international conversation in human history from exchanging goods to many years ago. The first WTO work program exchanging services. And in modern times, to dates back to 1998 and has moved in the World exchanging data. This is a historic, extremely fast Trade Organization into a negotiation, which is transformation and might obviously be difficult to now going on. track. But we’ve also seen other forms of trade As the value of production systems moves relations, such as bilateral trade, entering into this from artifacts, things we make, to intangible issue of “how do you create the necessary rules so things, which relate to information, the difference that trade can remain open?” between a book and an e-book is a very difficult We have a rather strong disposition in this question to answer. respect with the CPTPP in the Pacific region, we Yet we know that this flow of data is the main have a set of principles in the recently adopted characteristic of the new reality we are in, even RECP, and we have quite a lot of bilateral if how data transforms in euros, in dollars, or in agreements, starting with what Singapore yuan, remains, to be frank, a bit mysterious. has launched with many countries, which are I have my doubts whether this new phase of specifically devoted to opening trade in the digital globalization, data-driven international exchange, area. will remain as open as the previous wave of Now if we look at where we are in this globalization. international conversation, what I see is a few For the past 30 or 40 years, we’ve known about convergences and quite a lot of divergences. a huge increase in international exchange because We have a few convergences in areas like of openness, a phase which had mostly to do with electronic contracts, online consumer protection, protectionism, that is protecting people from authentication of signatures, and in areas like foreign competition, protecting producers from payment safety. foreign competition. On the other side, we have a lot of divergences In my view, we’re moving now to a totally on issues like data circulation localization, privacy different game, which is coping with what I call protection, fiber security, internet neutrality, and

60 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 61 Pascal Lamy

software source protections where the preferences the past, we should aim at organizing a proper of countries diverge a lot. This is something which coexistence. is here to stay. There are three possibilities to get us there. In my view, these divergences are unlikely to The first is through a medium which combines be resolved in a level playing field comparable to some single and valuable geometry for a digital what we had in the previous phase of globalization rules-based change system in a pyramid shape. with goods and services. It has a large ground floor with least common And the reason why these divergences are denominator commitments for as many countries unlikely to be resolved is because they relate as possible and then moves upwards to the top for too deep political, philosophical, cultural, and countries accepting a much deeper set of rules and cognitive differences which are at the root of the commitment. differences in collective preferences. A second possibility would be to establish What I see is a triangle with three very different an interface between different systems. This is system: a U.S.-driven system, a China-driven complex — a combination of two systems with a system, and a European Union-driven system. sort of safe harbor. The U.S. system is one where the ideology, the And third, is a mutual recognition between basis of regulation, is that data is merchandised systems: you trust that my system could work. You and is what you can soon exchange at a price. The have your system. I have my system. I trust that Chinese system is very different. It’s one where your system could work. So, we establish a sort of data roughly is under state control. equivalence of two different systems. And the EU system is one in which data is sort So to conclude, I think this digitalization of of a part of an individual, the part which people international exchange raises problems which individually possess and is their property. Hence, are much larger than trade and which trade this huge attention to data privacy which has led negotiators have a hard time addressing because to the EU stance on the protection of personal it’s not where I give you something, you give me data, the famous General Data Protection something, and then we’re happy. Regulation, which is now in force and imposes The fundamental challenge of globalization in specific standards on people operating in or with this coming phase of data-driven globalization is the European Union. to find the right balance between competition and This triangle is unlikely to shrink to a single cooperation. And it is also about reinventing new point, and this is my last point, which is why rules for globalization. So, I hope that collectively we need to avoid an excessive fragmentation. we will be wise enough to address it so that this We should not aim at convergence; contrary to world of data does not fracture.

60 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 61 OPINION

Yan Xuetong is the distinguished professor and dean of the Institute of International Relations at Tsinghua University in Beijing. Avoiding China-U.S. Ideological Rivalry

Keeping ideology out of China-U.S. strategic competition will help to prevent proxy wars

.S. Secretary of State Mike Pompeo delivered rivalry has become a strategic principle of the U a speech on July 23, in which he claimed the Chinese government since the early 1980s when Trump administration will create an anti-China reform and opening up were gaining momentum, coalition based on ideology. and is significant in multiple ways. The next day, Foreign Minister Wang Yi First, avoiding this kind of competition pointed out during a meeting with his German maintains an international environment favorable counterpart that “[s]ome anti-China forces in to national rejuvenation in the long term. The the U.S. lately have been deliberately creating Communist Party Central Committee issued ideological confrontation ... China still hopes to the Resolution on Certain Questions in the achieve no conflict, no confrontation, mutual History of Our Party Since the Founding of the respect, and win-win cooperation with the U.S. … People’s Republic of China in 1981, summarizing China will neither dance to the U.S.’ tune nor let the historical experience and lessons since the the U.S. have its way.” founding of the People’s Republic. The most Hence, the strategic significance of preventing important diplomatic lesson is to avoid ideological the China-U.S. ideological rivalry from rivalry with other countries. intensifying, and specifically how this can be The resolution states: “The road of revolution prevented, is worth discussing. and construction suited to the characteristics of a The rise of China has challenged the United country has to be explored, decided on and blazed States’ aim of maintaining its hegemony, resulting by its own people. No one has the right to impose in inevitable strategic competition between the his views on others. Only under these conditions countries. can there be genuine internationalism. Otherwise, However, where the countries should compete there can only be hegemonism. We will always and where they shouldn’t is an important strategic adhere to this principled stand in our international decision. Competition in some fields — such relations.” as science and technology, economy, military, Following the principle of avoiding diplomacy, and education — will decide the ideological rivalry, our country has won strategic success of China’s national rejuvenation and is opportunities over more than 30 years of peaceful therefore necessary. construction. This principle was further embodied On the contrary, engaging in ideological in 2017, when the government asserted it “will rivalry will have a negative impact on China’s not ‘import’ a foreign model, nor ‘export’ China’s rejuvenation. Therefore, avoiding ideological model, and will not require other countries to

62 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 63 ‘copy’ China’s practices.” Deng Xiaoping once Second, it reduces political obstacles to suggested: “Don’t criticize international cooperation. The principle of others or accuse others avoiding ideological rivalry has secured long-term casually; don’t speak too strategic opportunities for the rise of China, much; don’t do too much.” because the principle helps our country avoid political obstacles caused by ideological rivalry to international cooperation. For example, in 1989, Western countries headed by the United States imposed sanctions on China for ideological reasons. In response, Deng Xiaoping met with former U.S. President Richard Nixon and told him: “When considering relations between states, we should mainly proceed from our national strategic interests, focusing on long-term own strategic interests and respecting that of the other. We should not raise a great fuss about historical grievances, or about differences in social systems and ideology.” Since China insisted on avoiding ideological rivalry, the relationship between China and Western countries was restored in 1993. Third, it strengthens international strategic credibility and maintains the stability of strategic relations. Avoiding ideological rivalry means that China’s basic stance on cooperation with any country will not change because of the changes in the other side’s political system or ideology. Maintaining the continuity of policies can enhance China’s international strategic credibility, thereby maintaining the continuation of cooperation. For example, in the late 1980s, third countries. The Chinese government clearly Gorbachev, then general secretary of the Central understands the danger of a new cold war also Committee of the Communist Party of the caused by ideological rivalry, and points out: “The Soviet Union, proposed liberal “new thinking” U.S. Secretary of State Pompeo delivered a speech and carried out shock therapy reforms, which is a few days ago, trying to trigger ideological rivalry different from China’s socialist reform approach. and lead the world to a new Cold War.” Responding to that, Deng Xiaoping proposed: If a new cold war happens, a large number of “No matter what happens in the Soviet Union, we proxy wars will be carried out. This will not only should calmly develop our relations with it on the bring great difficulties to China’s rejuvenation but basis of the five principles of peaceful coexistence. may even risk ending the rejuvenation. Restricting That should include our political relationship and China-U.S. strategic competition outside of the we should not hold any debate on ideology.” ideological realm will help to prevent China-U.S. In 1991, after the dissolution of the Soviet proxy wars caused by ideological rivalry. Union, Boris Yeltsin reformed Russia’s political The Chinese government has made it clear to system. In this regard, China consistently stuck to the international community that the United States the principle of avoiding ideological rivalry, which “deliberately provoked ideological rivalry” and contributed to Yeltsin’s four visits to China during “China will not be drawn in by the few anti-China his tenure as president. This did not only maintain forces in the United States.” When China puts this the bilateral strategic cooperation but also put position into specific policies and actions, it will forward the establishment of the “Shanghai Five” disrupt the U.S.’ strategy to provoke ideological forum mechanism in 1996, which developed into rivalry. Since the U.S. deliberately provoked the Shanghai Cooperation Organization in 2001. ideological rivalry, China can only take unilateral Fourth, it prevents a new cold war and proxy action to prevent it from leading to a new cold war. wars. The Cold War between the United States and the Soviet Union was mainly carried out through proxy wars, with the nations supporting Do not engage in ideological rivalry forces with the same ideology as their own in There are currently more than 200 political

62 Caixin - China Economics & Finance January 2021 January 2021 Caixin - China Economics & Finance 63 OPINION

entities in the world, and very few have ideologies As China’s economic recovery and pandemic and political systems similar to China’s. Under containment are better off than other countries, these circumstances, avoiding ideological rivalry choosing not to compare the effects of different will be more beneficial than harmful to China. political systems has an even greater significance. Since the U.S. is deliberately provoking This not only shows China’s respect for the ideological rivalry, it will inevitably point its finger autonomy of other countries in choosing their own at China’s internal affairs. Faced with the reality political systems, but also avoids stimulating anti- that a large number of countries in the world China sentiment in other countries. In order to adopt ideologies and political systems similar strengthen friendly relations between China and to those of the United States, China should other countries, related governmental departments maintain its current practice of not responding must respect the different political systems of or otherwise dancing to the U.S.’ tune in the other countries, and suppress the arrogance of current China-U.S. ideological conflict, for the belittling the political systems of other countries. sake of undermining the United States’ effort to make an anti-China coalition under the excuse Promote the peaceful coexistence of ideological differences. In ideological conflicts The white paper China’s Peaceful Development, with other countries, China needs to adopt an published in 2011, stated: “Dialogues and inclusive strategy, and take the initiative to resolve exchanges among civilizations should be any differences and conflicts. encouraged to do away with ideological prejudice and distrust, and make human society more harmonious and the world more colorful.” Do not criticize other countries Human thinking is very diverse, and it is In response to the ideological differences between impossible to eliminate ideological differences China and the Soviet Union, Deng Xiaoping between countries. Therefore, in order to prevent once suggested: “Don’t criticize others or accuse ideological differences from negatively affecting others casually; don’t speak too much; don’t do China’s foreign relations, related governmental too much.” This lesson is also applicable to all departments should strictly implement the countries that engage in ideological conflict with principle of avoiding ideological rivalry, and China. establish institutional confidence based on the In response to American ideological logic that only our system is suitable for China’s provocation, the Chinese government stated: “It is development. both unnecessary and impossible for each side to In 2011, Hu Jintao, then the general secretary change the other. Instead, we should respect the of the Central Committee of the Communist independent choices made by the other party.” Party of China, pointed out: “The socialist system Since the U.S. is not able change China, China with Chinese characteristics is the fundamental should not worry about the U.S.’s ideological institutional guarantee for the development and attacks. Meanwhile, China has no intention to progress of contemporary China, and it embodies change the U.S., so there is no need to criticize the the characteristics and advantages of socialism U.S. on human rights or its domestic policies. with Chinese characteristics.” This approach can also be applied to other In other words, we firmly believe that the countries that have ideological differences with Chinese system can bring progress to China, but China. Thus, we can make it so the ideological we do not assume that foreign systems are inferior. provocations of others amount to nothing, simply In order to strengthen friendly relations between by not responding. China and other countries, we must respect the different political systems of other countries and restrain the arrogant mentality that demeans their China’s external publicity political systems. The cultural tradition of self- China has always advocated: “All countries and confidence in China is “not to reach out to teach, the people of all countries should enjoy dignity. but also not to reject the one who comes to learn,” The sovereignty and dignity of all countries, which means that we do not try to export our whether big or small, strong or weak, rich or ideology or political system, but we also do not poor, must be respected; their internal affairs hide them from those who want to learn from us. must allow no interference; and they have the Government departments must firmly right to independently choose their social system implement the central government’s policy of and development path. As the old saying goes, avoiding both ideological rivalry and the export of you can’t know if the shoes fit until you put them political systems, which can differentiate China’s on. Only the people of a country can comment stance on ideological differences from that of the on whether their country’s development path is U.S., while at the same time effectively avoiding a appropriate or not.” new cold war.

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