Category Archives: Technology

Canada Finally Bans Huawei From Its 5G Networks

CANADA’S DECISION TO ban Huawei and ZTE from providing equipment for the country’s 5G network suggests that flesh is, at last, being put on the bones of the comprehensive new approach to China that Prime Minister Justin Trudeau has been promising since last year.

Nor can it be a coincidence, this Bystander suspects, that the announcement comes in the wake of the United States preparing sanctions against Hikvision and ahead of US President Joe Biden’s trip to US allies in Asia, where he will unveil the United States’ long-awaited Indo Pacific Economic Framework.

Canada’s decision brings Ottowa in line with the other members of the ‘Five Eyes’ intelligence-sharing community (the United States, United Kingdom, Australia and New Zealand). 

The decision to ban Huawei and ZTE had been expected once China freed two Canadian citizens last September who had been ensnared in the diplomatic row caused by Ottawa acceding to a request from Washington to detain Huawei’s CFO, Meng Wanzhou, on suspicion of sanctions evasion.

Concerns among Canadia’s telecom operators about the extent of re-equipping that the bans will make necessary may have caused the subsequent delay. They will now have two years to remove any 5G equipment from the two Chinese companies already installed and five years to replace any used for current 4G service. However, there will be no government money to do so.

Beijing’s response has been boilerplate, accusing Ottowa of political manipulation and colluding with Washington. The Chinese embassy in Ottowa said in a statement:

China will comprehensively and seriously evaluate this incident and take all necessary measures to safeguard the legitimate rights and interests of Chinese companies.

That suggests some foot-stamping but likely little if any material retaliation.

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Policy Shift Will Favour China’s Tech Platform And Real Estate Firms

THERE IS LITTLE doubt that China’s economic managers are ruffled. The combination of economic headwinds from the war in Ukraine to Covid’s resurgence with its large-scale lockdowns and the uncertainty over the global economy caused by inflation, supply chain chaos and tightening monetary policy are as disruptive as they were unanticipated.

The readout from Friday’s Politburo meeting was a clear recognition that the leadership understands the straitened state of the economy. Thus it is switching the balance of policy priorities from regulation and structural change back to growth.

Evidence of that can be seen in the Politburo’s signalling of an end of the campaign to ‘rectify’ the platform tech companies that started in late 2020, and its declaration that there needs to be liquidity support for beleaguered property development firms.

The English-language version of the readout put less emphasis on continuing regulation of the tech sector than the Chinese version, which, similarly, was clearer that controls on real estate speculation would continue. 

If that was an attempt to send different messages to domestic and international audiences, it strikes this Bystander as cack-handed.

Many international investors have recently turned bearish about China and moved capital out, believing the economy is in worse shape than even the official figures suggest, exacerbated by adherence to the zero-Covid policy.

However, they will judge the concrete support for the ‘healthy’ development of the platform tech and real estate sectors on its merits rather than its promise. That support will come sooner rather than later.

The government wants both sectors to thrive, especially now, but in a way that serves central policy objectives more directly than before. 

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China Starts To Bring The Metaverse Into Line

THE METAVERSE IS increasing concerning authorities as a new playground of fraudsters and scam artists.

The metaverse — immersive 3D virtual environments accessed through virtual and augmented reality and seen as the next disruptive iteration of the internet — is attracting hype and investment in equal measure, fertile ground for swindlers and other criminals. 

On February 18, the China Banking and Insurance Regulatory Commission and more than a dozen government agencies warned of phoney metaverse projects and that scams were multiplying amid the frenzy that the metaverse is generating. 

The commission gave four common examples:

  • pitching fake metaverse projects to investors and then disappearing with the funds invested;
  • bogus play-to-earn games that coax players to invest heavily in the game’s tokens in the hope of outsized returns later;
  • fake cryptocurrencies presented as ‘the next big thing’ that investors need to rush to buy before it is too late ‘to get in on the ground floor’; and
  • hyping plots of land on the metaverse falsely to inflate their value. In December, state media had carried warnings about the risks in virtual property sales.

The rush to the metaverse in China has been frenetic. Last year, more than 1,000 Chinese firms, including Alibaba, Baidu, Huawei and Tencent, reportedly applied for around 10,000 metaverse-related trademarks. 

China has banned cryptocurrency trading and mining, but it has allowed the development of metaverse and non-fungible tokens (NFTs) and allowed leeway to metaverse projects with some crypto involvement. 

Now, as with other tech sectors, that space is being narrowed. Starting with cracking down on fraudsters, authorities will likely next make it clear to metaverse companies that they will not be allowed unfettered growth. 

There will be no ‘disorderly’ allocation of capital in the metaverse any more than in the real world. 

It is to be expected that authorities will police the metaverse, aware of its potential social risks and fearing a threat to national security. The China Institutes of Contemporary International Relations, a think tank associated with the Ministry of State Security, issued a report last November warning that the metaverse might bring national security risks. 

It recommended that the government play a coordinating and supervisory role in developing the metaverse, including as a vehicle for delivering public services and a way to monitor and shape public opinion.

Like other tech companies, metaverse companies are on notice that they need to be aligned with other policy goals.

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China’s New Tech Order

AFTER NEARLY TWO years of crackdowns on various tech industry sectors, a series of policy plans have emerged that collectively outline a path of re-organisation and gradual but not disruptive development into the middle of this decade.

They bring some cohesion to the loosely connected regulatory measures taken since late 2020. The steady implementation of a clear regulatory and policy framework will replace what has looked like abrupt and random regulatory interventions.

This will be a cornerstone of the recently issued five-year plans for national informatisation and the digital economy,

China’s goal is to streamline private tech businesses from fintech firms to app platforms and enmesh them with state-owned enterprises and investment vehicles to ensure greater policy control. There is a particular focus on data and aligning the tech sector with the ‘common prosperity’ and ‘dual circulation’ development agendas.

It will be a balancing act. Beijing needs to avoid squashing innovation as it pushes to develop an indigenous tech sector that can improve economic self-reliance and be internationally competitive.

Policymakers want to use digital technologies to enhance service capacity and quality across the economy and serve underserved populations, for example, by expanding social services to rural consumers or extending credit to small and medium-sized enterprises. Yet, they also want to ensure state control of the data generated by private businesses and that those businesses do not use oligopolistic power to exploit the troves of data they collect from consumers and citizens.

The plans align with the intent to redress ‘the disorderly expansion of capital’. As with the admonition to the real estate industry that housing is for living in, not speculation, the tech sector is being schooled that it has to fulfil the needs of the real economy.

In particular, that means contributing to national innovation to help transform legacy industries in manufacturing and agriculture and playing a more significant role in generating access to and delivery of government and public services.

That message is being strongly sent to fintech firms, in particular. The idea is that fintech should be incorporated into the existing banking system, not disrupt it.

Financial instability remains a worry. Authorities are increasingly concerned that fintech products for consumers risk adding a layer of unsustainable household debt on top of existing corporate debt. Concerns about threats to the financial system were one of the reasons that authorities banned cryptocurrencies last year.

For tech companies as a whole, Beijing is making it clear that it rejects the digital economy model of large, winner-takes-all platforms as seen in the West and embraces new business models that enmesh state and private actors.

The era of unregulated growth is over. Tech firms will now be expected, for which read required, to contribute to the Party’s other policy objectives — tackling financial risk, supporting social objectives and development goals, improving market regulation and data security — and their shareholders, patriotically, to bear the costs.

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The Chips Are Down

BY VALUE, CHINA imports more semiconductors than oil. For the past two years, chips have been the country’s most valuable import.

That, in itself, tells this Bystander how much of a foundational challenge China still faces in becoming a technological rival to the United States until it is the leading provider of chips, the bricks of the digital economy, and especially the most advanced designs.

The national drive for self-sufficiency in the design and fabrication of semiconductors is long-standing. Domestic production is being ramped up rapidly, and the pace has accelerated since the US imposed sanctions to deny it access to US chipmaking technology.

Domestic output rose by one-third last year over 2020’s level, to reach 359.4 billion units, according to data newly released by the National Bureau of Statistics, having grown by 16% in 2020 over 2019.

However, last year’s production was still less than imports, which reached 432.5 billion units.

More significantly, China still does not yet produce the most advanced chips. The indigenous chip industry is still only nibbling at the edges of the leadership of foreign chipmakers like TSMC, Samsung, and Intel in cutting-edge chips. It is also an industry in which economies of scale favour the market leaders.

That adds to the risk of China’s strategy to leap-frog to compound semiconductors or ‘third-generation’ chips. Chipmaking is an industry ill-suited to decoupling.

Investment of some $26 billion in production facilities in 2021 — and the mobilisation of state planning resources on the scale of the development of the atom bomb in Mao’s time — is moving China’s chip makers up the technological ladder and reducing the country’s vulnerability to sanctions and external shocks.

The Covid-19 disruption to supply chains was a further wake-up call in that regard if any was needed. However, supply chains in the sector are complex and transnational, making self-sufficiency in chips beyond China (and indeed any country) for the foreseeable future.

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Reining In All Round

Screenshot of China Cinda Asset Management web site captures on January 16, 2022

IT TAKES SOME deft reading between the lines to understand the unexpected decision by China Cinda Asset Management, a bad-debt manager controlled by the finance ministry, to drop its backing for the restructuring of Ant’s consumer finance business.

The only public reason that China Cinda has given for backing out late last week from its announced 6 billion yuan ($940 million) participation in a 22-billion-yuan funding round for the reformulated version of Ant’s consumer finance business is “further prudent commercial consideration and negotiation.”

As part of the ‘rectification‘ of Jack Ma’s Ant Group that commenced with regulators pulled the rug from under the group’s planned blockbuster $37 billion initial public offering in November 2020, Ant’s two consumer finance businesses, Huabei and Jiebei, were to be consolidated as Chongqing Ant Consumer Finance, in which Ant’s stake would be capped at 50% and regulatory oversight extended.

Authorities are pruning back the growth of China’s tech platforms for various policy reasons, from reining in financial risk to concerns about misuse of consumer data, overweening market power and a feeling that the platforms and their billionaire owners are just getting too big for their boots.

Yet authorities also have concerns about the four bad-debt managers straying from their core mission, especially now their cash flows are being squeezed and debt ratios rising. After all, there is still a potential real-estate sector meltdown to worry about. There is no appetite to repeat the bailout of China Huarong Asset Management, the largest of the four state-backed bad-debt managers established in the late 1990s to clean up the ugly parts of the large state-owned banks’ loan books.

The China Banking and Insurance Regulatory Commission (CBIRC) recently instructed the bad-debt managers to return to their core businesses of managing bad loans and distressed assets.

China Cinda already owns 15% of Chongqing Ant through its wholly-owned subsidiary Nanyang Commercial Bank. Expanding that to become the second-largest shareholder in China’s largest consumer finance company does not fit CBRIC’s mandate.

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China Continues To Welcome Foreign Capital But On Beijing’s Terms

THE DETAILS OF China’s well-signalled coming restrictions on overseas listings by its start-ups are slowly becoming clearer.

A consultation paper issued on December 24 by the China Securities and Regulatory Commission lays out a regime that would require any company wanting to sell shares abroad to register with it. The commission would review the listing plans and coordinate with other relevant agencies.

Authorities would have the power to block any overseas listing they considered a threat to national security, which would encompass compliance with the country’s new data protection regime.

The new rules fall short of a blanket ban on overseas initial public offerings (IPOs), which some had feared. However, they would give authorities blanket veto power over any proposed IPO or secondary listing considered undesirable. Chinese firms will be free to continue to take foreign capital where it is supportive of, or at the least, does not conflict with China’s national goals.

More surprisingly, perhaps, the new regime would not kill off variable interest entities (VIEs), the governance structure often adopted by Chinese companies to get around strict restrictions on Chinese companies taking foreign investment. While VIEs have long existed in legal limbo, they will be allowed to register with the securities regulator providing they are legally compliant.

The legal compliance could well refer to not falling afoul of a blacklist that comes into effect on January 1 of sensitive sectors that would be off-limits to foreign investors.

The regulatory uncertainty has already had a chilling effect on overseas listings, especially since ride-hailing app company Didi Chuxing incurred the wrath of regulators when it pushed ahead with its $4.4 billion IPO in New York in June.

Authorities were cracking down on the tech sector, and Didi’s blanking of their advice to pull the listing led to a series of retaliatory measures and, earlier this month, an announcement that it would delist from New York and switch to a Hong Kong share listing.

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The Chips Are Down For US Companies In China

THE APOLOGY TO China by US semiconductor manufacturer Intel for asking its suppliers not to use products and labour from Xinjiang due to human rights abuses against Uighurs is the latest example of a multinational company finding how uncomfortable it is to balance its reliance on Chinese suppliers and markets with the need to comply with US laws and sanctions and maintain its reputation in the West.

Its apology, posted on its Chinese social media accounts, that its commitment to avoid supply chains from Xinjiang was an expression of compliance with US law, rather than a statement of its position on the issue, was criticised for being insincere at best and duplicitous at worst in both China and the United States. The days when what is said in Chinese on Weibo of WeChat stays in China are long gone.

The nature of Intel’s product makes it less likely that it will suffer a consumer boycott in the way that Beijing punished fashion and sporting apparel companies H&M, Burberry, Adidas and Nike for similar perceived transgressions. Furthermore, like other countries, China is short of chips right now. However, the incident will reconfirm for policymakers their wisdom in expanding indigenous production to reduce reliance on US technology.

The greater risk to Intel is of retaliation against its operations in China, where it employs 10,000 people and generates a quarter of its revenue. Arbitrary administrative actions are the perpetual concern of foreign companies operating in China.

Late last month, Vice-Foreign Minister Xie Feng, whose portfolio is North America, met with representatives of US businesses operating in China, urging them to lobby against the Biden administration’s hardline stance against Beijing. None too subtly, he said that US companies that stayed silent could not expect to prosper in China. 

Speaking out in the way Intel did was not what he had in mind.

There is an emerging divide between US businesses that trade with China or source from it and those operating within the Chinese market. 

The former group seek to maintain as light a footprint in China as possible to minimise the ever-present risks against their operations and staff. Where possible, they operate arm’s length business relationships with local firms or licence their brands, products and services within the country.

The latter set has scant interest in the United States taking a harder line with China over commercial and technology issues, intermingling trade policy with national security, and the nascent decoupling of the two economies, most visible in capital markets and technology. 

Those companies, it should be said, show no indications of withdrawing from China. Yet they will have to become increasingly embedded in the ‘domestic circulation’ side of China’s ‘dual circulation’ development model, with all that that entails, and adjust their risk tolerance for damaging their reputation in international markets accordingly.

Given the changing attitudes in the United States and Europe towards China among lawmakers and corporate stakeholders like employees and customers, striking that balance may prove not only uncomfortable but impossible. 


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VIEs’ Grey Zone Darkens

VARIABLE INTEREST ENTITIES (VIEs) have always existed in a grey area between legal and illegal.

It has been a happy ambiguity for Chinese companies wanting to skirt the restrictions on foreign ownership and for authorities when they wanted Chinese companies to acquire foreign capital and access to foreign, particularly US technology.

Now priorities have changed. Decoupling from foreign capital markets is the order of the day and the sensitivity that foreign ownership could result in the disclosure or compromise of mass Chinese user data has become acute, perhaps on it-takes-one-to-know one grounds. Thus new rules are being prepared to control tightly which companies can use the VIE governance structure to list on overseas markets and thus end up with foreign shareholders.

While that has been known for some months, the new information emerging is that the mechanism will be a blacklist, which can be played administratively like a concertina. As we noted earlier, the restrictions are likely to vary in intensity by sector. VIEs will be out of reach for any startup that collects data, which means all of them. A national security provision will provide a catch-all for regulators.

Given the political and economic incentives available to force domestic technology firms to list within Beijing’s jurisdiction (including Hong Kong), if there is any surprise, it is that authorities feel the need to take coercive powers. The slights and rebuffs they received earlier touched a nerve.

Existing VIEs will likely be left untouched, if not alone. Tech giants like Alibaba and Tencent that used them but are being reined in by other means.

Nor will VIEs move out of their grey zone status by being banned. They will remain an option for Chinese companies wanting to raise foreign capital where and when that is deemed in China’s national interests.

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Chastened Didi Chuxing Will Head To Hong Kong

Didi Chuxing logo

RIDE-HAILING APP Didi Chuxing incurred the wrath of regulators when it pushed ahead with its $4.4 billion initial public offering (IPO) in New York in June in the face of their advice not to, even as others fell into line as China prepared to crack down on its tech companies.

A series of retaliatory measures rapidly followed, including online app stores being ordered not to offer Didi’s app because it violated regulations on collecting user data and the company being banned from signing up new users. The Cyberspace Administration of China (CAC) launched an investigation of the firm on the grounds of national security and public interest.

Now the company has announced, abruptly, that it will delist its Didi Global American Depositary Receipts (ADRs) from the New York Stock Exchange and switch to a Hong Kong share listing. Existing shareholders will be able to convert their ADRs into freely tradeable shares on the new bourse. This implies the Hong Kong listing will come before the New York delisting is finalised, probably sometime between spring and summer next year.

Japan’s SoftBank is Didi’s largest shareholder with a stake of some 20%. Tencent and US venture capitalists Sequoia also have significant holdings. All will be covered by the six-month lock-up following the IPO, which will end at the end of December. Big shareholders may well consider the financial hit they will take on their holdings to be worth it if delisting draws a line under Didi’s punishment by authorities.

The lock-up will also cover company executives who face significant losses on their holdings. Didi’s shares have fallen 40% since their listing as the measures taken against them, which also included new protections for the millions of ride-hailing drivers, took their financial toll. The company also abandoned plans to expand in the EU and the United Kingdom.

The Didi IPO was the biggest by a Chinese company since Alibaba in 2014, but there has been growing pressure from the United States to deny Chinese firms access to US capital markets.

On Thursday, the US Securities and Exchange Commission said it had finalised rules under legislation the US Congress passed last year that put US-listed foreign companies at risk of delisting if their auditors do not comply with requests for information from US regulators.

Driving capital market decoupling from the other end, Chinese regulators need to approve any plans by a Chinese company to list overseas and are making the approval process more stringent. Particular scrutiny is being applied to any company that holds data that Beijing deems sensitive.

Regulators also intend to close the loophole through which Chinese tech companies can go public on foreign stock markets via variable interest entities (VIEs). That was the governance structure that Didi Global used. VIEs are unlikely to be banned outright, but will get sector-specific new rules for when and how they can be used.

Even without those new rules, Didi’s complete climbdown will have a chilling effect on any other Chinese tech company still harbouring thoughts of a New York listing — if there is one.


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