James Lee
NEW YORK: Since India spearheaded a wide-scope ban of Chinese apps over the summer, a couple of other democracies have followed suit to safeguard their national security, amid the covert invasion of their digital border by the CCP. Such efforts reached a new milestone in September when the White House proposed to restrict WeChat and TikTok in the United States. Despite that the path has not been all clear of obstacles, and the two apps have received a temporary reprieve thanks to the independent judicial system of the US. However, the march must carry on because the ban carries more implications than just a tech war or an election gimmick.
Yes, the process thus far has been confusing, and the credibility of the US national security apparatus has been undermined given all the commercial angles the Trump administration has been tinkering with, but there are many critically important reasons for the ban to proceed forward. This is not the time to retreat.
Banning WeChat and other Chinese apps can help shore up defence against Chinese propaganda going into the presidential election in November. It prevents metadata of the democratic citizens from feeding into CCP’s AI algorithms—a practice many publicly listed Chinese software companies have touted as the core business strategy. It is a fair act of reciprocity, given competing technologies have been banned in China for years—only those who bend to CCP demands are allowed in to satisfy their thirst for profits. One of the crucial but least covered implications, however, is the effect on the currency war angle within the grander construct of the US-China struggle.
Among all the battlegrounds fought between the US and China, currency war could be the most critical to the outcome of the next global order. At the centre of the conflict is the United States Dollar (USD). This reserve currency of the world is the source of economic power for the US to enjoy “exorbitant privileges,” a term coined by Valéry Giscard d’Estaing, the French Minister of Finance in the 1960s. The insatiable need for China’s leveraged economy to tap external funding leaves the CCP vulnerable to a weaponized USD if the US so chooses to turn off the tap.
China with a highly leveraged economy has a severe USD shortage that can cause a detrimental devaluation of its own currency. The CCP knows its financial chokepoint is controlled by the US, and has strategically been building momentum in alternative systems for years, such as the Chinese RMB-based oil contracts (one day to replace USD-based pricing mechanism) and the DCEP, the world’s first sovereign digital currency by a major country. The rapid stockpiling of physical gold from 2014 to 2019 is yet another clear sign the middle kingdom has been gearing up for a currency war.
The US is starting to take steps to restrict flows of USD to the CCP. In the midst of the Covid-19 pandemic earlier this year, the US Federal Reserve provided USD swap lines to multiple central banks including the Reserve Bank of India to ease funding squeeze on local economies, but not to the People’s Bank of China. Recent examples included measures to discourage investment by US pension funds in CCP entities, many of which help build Chinese aircraft carriers; and discussion to delist Chinese stocks traded on US exchanges that are not compliant with accounting rules.
Chinese stocks listed abroad have always been enticing to the Wall Street. CCP therefore has cleverly used the stock market as an effective way to suck up much needed USD. It is important to understand that all Chinese companies are an extension of the CCP, a relationship further strengthened under President Xi Jinping. Money given to Chinese companies is money given to the CCP. At one time during the TikTok negotiations over the past two weeks, it was floated the company would list in the US stock market as a solution—that would have been playing right into CCP’s hands by providing the authoritarian regime with more USD.
Antonio Coppola from Harvard University recently concluded that Americans had an astonishing exposure of $695 billion in Chinese companies in 2017—an amount most certainly has grown since. This year alone these companies took in almost US$7 billion of proceeds from January to September 9 via IPO and secondary offerings in the US according to Rifinitiv. In Hong Kong where the currency is pegged to the USD, more than $10 billion have been raised in the first six months this year according to a recent report by Citibank. This is a lot of money given to a geopolitical and ideological foe of the liberal order.
The typical pitch by investment bankers who broker deals to funnel USD into the CCP usually highlight the unprecedented economic growth of China, the monopolistic nature of its national champions that are expanding globally, and the cheaper valuation versus other stocks in the world. All of which can translate to handsome investment profits, despite these favourable investment conditions being created by unfair and oftentimes immoral practices of the CCP.
Profit is the primary incentive of capital allocators in the free world. It is helpful to have administrative guidelines and moral callings on the investment industry to discourage giving money to Chinese companies, but given the complexity of the financial world, it is an imperative to go to the root of the profit incentive. The fundamental “pitch” of these Chinese companies needs to be challenged to make their stock less appealing to a typical investor. This is where the app ban comes in.
Technology shares, which are the primary components of Chinese companies listed abroad, enjoy high valuations due to the perceived high growth trajectory. The higher the growth, the higher the valuation premium, the more USD can be raised from the stock market. CCP has sanctioned these companies to be monopolies in China without foreign competition, and that is why they can spend unfair amounts of profits to acquire growth abroad. However, with every incremental country that joins India in the app ban, the destruction to such valuation premium racks up exponentially because soon there will be no more room to grow. These companies will go from growth stocks to no-growth value stocks that are worth much less in the stock market, and this in turn limits CCP’s access to USD via capital markets.
The story does not stop here. There is no such thing as value stocks in technology. When a tech company stops growing, it can easily slide into the reverse gear and shrink into non-existence—who still remembers Blackberry? When cheap capital is no longer available, a hyper-growth firm can also run into financial troubles quickly—WeWork’s failed IPO that turned into a debt crisis is one perfect example. The valuation of this office-sharing company shrunk from $47 billion to the low of $2.9 billion USD within one year—this is the magnitude of financial destruction that can be brought upon CCP, if the app ban is carried out more broadly among democracies.
The CCP’s economic machine could crumble given enough USD drain from their system, and one additional USD funding channel closed is one step closer to that eventuality. The app ban is more than what it appears, it is a crucial tactical manoeuvre in the currency war with CCP. All democratic countries must join and push forward the ban.
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