GLOBAL FINANCE: CHINA COURTS GLOBAL CAPITAL, ON ITS OWN TERMS / THE ECONOMIST

Global finance

China courts global capital, on its own terms

It is looking to reduce its dependency on the West, while increasing the West’s dependency on it

Ever since the start of the trade war between America and China, investors, politicians and businesses have been trying to gauge how far and how fast the world’s two biggest economies will decouple from each other. 

The pattern in finance is becoming clearer with the news that Didi Global, a Chinese ride-hailing firm, plans to delist its shares from New York, just six months after an initial public offering (ipo) there.

It is likely that all the $2.1trn of other mainland Chinese firms’ shares traded in the Big Apple will eventually follow suit, with the approval of the Chinese Communist Party. 

Yet do not imagine that China’s rulers seek financial isolation. 

For at the same time, they are busy welcoming Wall Street firms into the mainland’s financial system. 

China is pursuing a strategy of asymmetric decoupling: reducing its dependence on the West even as it seeks to increase the West’s dependence on China. 

Didi will not be the last example of this approach.

For decades China’s government tolerated and sometimes encouraged companies to raise capital in distant markets. 

When the first Chinese firm went public in New York in 1993, cross-border listings were endorsed by authorities, which acknowledged that American markets offered a lower cost of capital, more sophisticated investors and better corporate governance. 

Mainland regulators even turned a blind eye to fiddly legal work arounds, known as variable interest entities (vies), that allowed ambitious Chinese tech firms to circumvent arcane mainland restrictions on foreign ownership.

Over the past two years the mood has shifted. In 2019 Alibaba, the most valuable Chinese firm listed in New York, sought an additional listing in Hong Kong: in effect, a financial plan B. Now Didi will go further by leaving New York altogether. 

It is said to be under pressure from the Cyberspace Administration of China to shift its listing, probably to Hong Kong, which is increasingly under the direct supervision of the mainland government. 

Meanwhile, it seems likely that new vies will be banned.

One reason for the shift is an American law, targeted at Chinese firms, which requires foreign companies to reveal the gory details of their audits or be forced off American exchanges. 

Do not mistake this as a defeat for China. 

It is not severing links with global finance. 

Instead it is opening up the mainland markets and coaxing Western banks, insurers and fund managers to enter and play by its rules. 

Many Wall Street firms are being given new licences and are expanding their operations in China. 

JPMorgan Chase’s cross-border exposure to the country has risen by 9% since 2019. 

Foreign portfolio investors’ holdings of stocks and bonds have almost doubled over the past three years, to $1.1trn. 

Even as Xi Jinping, China’s president, unleashed a war on big tech and tycoons under the banner of “common prosperity”, more than $100bn flowed into mainland markets in the first nine months of 2021.

China hopes it can have the best of both worlds—access to global funds and know-how, but under its direct supervision. 

There are obvious risks, from a Chinese perspective.

China’s domestic markets are still unfamiliar territory in some ways, and foreign investors may not commit as much capital because they are worried about currency controls, unfair treatment at the hands of regulators and the risk of expropriation. 

Yet ultimately the vast size of China’s market and depth of its corporate scene mean they find it hard to say no.

Asymmetric decoupling raises two questions. 

One is whether America’s approach is effective. 

The more it punishes Chinese firms, whether those listed in America or those that buy American high-tech components, the more China develops its own capabilities, undermining American pre-eminence and creating alternatives for third countries to use. 

That could leave America with less global influence, not more.

The other question is where else China will apply its asymmetric strategy. 

It can already be seen in the commodities industry, with more trading happening on the mainland, and in tech, where China is trying to develop home-grown semiconductors. 

But the most glaring dependence of all that China has is on America’s currency, which is used for most cross-border payments and which exposes it to sanctions and the threat of exclusion. 

If Mr Xi cannot tolerate a ride-hailing firm being listed in New York, it is a good bet that he is even less keen on China being subordinate to the greenback. 

He is surely doing everything within his powers to develop an alternative.