Crackdown on Didi and companies like it could cost China up to $ 45 trillion by 2030

It was a week of clarification for global investors – or anyone concerned with authoritarian capitalism – how much the Chinese Communist Party (CCP) would be willing to pay to ensure its dominance.

The answer, according to a rough calculation from a new partnership formed by the Rhodium Group and the Atlantic Council, is up to $ 45 trillion in new capital in and out of China by 2030, if the party was ready. to pursue serious reforms. It is an immeasurable loss of economic dynamism.

Graphic courtesy of the Rhodium Group and the China Pathfinder project of the GeoEconomics Center of the Atlantic Council

What is clear is that Chinese President Xi Jinping, during this month’s celebration of the CCP’s 100th anniversary, sent an unequivocal message at home and abroad about who is in charge.

Chinese domestic companies, especially those rich in technology and data, will be more likely to avoid Western capital markets and adhere to party preferences. Foreign investors, too happy to accept the risk for the proven rise in Chinese stocks, must now factor in a growing risk premium as Xi tightens the screws.

“Wall Street must now recognize that the risk of investing in these companies cannot be known, let alone disclosed,” written Josh Rogin in the Washington post. “Therefore, American investors should not entrust their future to China Inc.”

The story that caused a stir this week is the global company’s US $ 4.4 billion initial public offering (IPO) the biggest carpooling and food delivery service, Didi. The repercussions could be long-lasting and far-reaching for the lucrative relationship between China and Wall Street. Dealogic shows that Chinese companies have lifted $ 26 billion new registrations in the United States in 2020 and 2021.

Until this week, the biggest worry among investors was that the new US accounting rules would hamper this flow. It is now more likely that it is the Chinese regulators themselves who are blocking the tap.

The facts are that Didi Global started trading on the New York Stock Exchange on June 30, under good auspices a day before the CCP’s centennial celebration.

A first sign of the problem was that the company minimized the list of blockbusters. Not only have company officials resisted the usual routine of ringing the opening bell. They took it a step further by asking their employees not to draw attention to the event on social media.

Still, Didi’s shares rose 16% on the second trading day, pegging the company’s market value at nearly $ 80 billion.

But on July 2, Chinese regulators subjected Didi to a cybersecurity review, banned it from accepting new users, and then the following days went even further by asking app stores to stop offering it. application of Didi.

This is all due to a mix of increasingly authoritarian policies, regulatory concerns about data privacy and US markets, and the continued expansion of fronts in US-China competition.

The cost to investors on Friday was down to just 67% of the stock’s original value. If that is as far as the downside goes and the regulatory retaliation against Didi ends where it is, this week could still be called a victory by Didi leaders.

The most serious problem is the broader deterrent effect, occurring against the backdrop of a series of stalled or reversed Chinese economic and marketing reforms.

The latest came on Thursday, when the Wall Street Journal reported that the Chinese Cyberspace Administration, which reports to Xi, police all listings in foreign markets.

On the same day, Chinese medical data company LinkDoc became the first Chinese company to abandon its IPO after Didi’s announcement. Expect more Chinese companies to put aside planned registrations and many more to withdraw them from the exam.

Of all the billions of lost investment capital this could entail in the short term, the highest cost is that which could be measured in trillions of dollars of threatened potential as Xi steadily moves away from market liberalizations that ‘he once seemed to be defending.

The story couldn’t be written more clearly than through the flanking chart of Rhodium and the Atlantic Council’s Geoeconomics Center. From 2000 to 2018, China’s economic growth rocked the world by increasing its share of global gross domestic product (GDP) from 4% to 16%. China has experienced similar growth in exports and imports of goods.

Graphic courtesy of the Rhodium Group and the China Pathfinder project of the GeoEconomics Center of the Atlantic Council

At the same time, however, China’s inbound portfolio investment fell from near zero to just 2% of the world total, while its outbound portfolio investment fell from near zero to just 1%. This is not only an unrealized potential of the past – it is now also the deeply threatened potential for the future which could reach the estimate of 45 trillion dollars until 2030.

Must read Analysis of the Chinese economy in Foreign AffairsDaniel Rosen, a non-resident senior partner of the Atlantic Council, who is also a founding partner of Rhodium Group, says China under Xi has repeatedly tried to reform the Chinese economy, only to then pull out. The attached table provides a useful overview of what has become a habit.

Graphic courtesy of the Rhodium Group and the China Pathfinder project of the GeoEconomics Center of the Atlantic Council

“The consequences of this failure are clear,” writes Rosen. Since Xi took control, total debt has fallen from 225% to at least 276% of GDP. It now takes 10 yuan of new credit, compared to 6 previously, to create a yuan of growth. GDP growth fell to 6% in the year before the pandemic, from 9.6%.

Rosen writes: “At some point, the Chinese leadership must face this compromise: [S]sustainable economic efficiency and political omnipotence do not go hand in hand.

Conventional wisdom has it that the West was naïve to think that China’s economic growth and modernization, which it has so enthusiastically supported, would ultimately lead to political liberalization. Now, the conventional wisdom is that China has shown that it can be both brutally authoritarian and economically dynamic.

What is probably truer is that Xi may soon face the contradictions between his simultaneous desire for economic dynamism and increased authoritarian control. History shows he can’t have both, but for now Xi seems willing to risk the momentum in favor of control.