1. CAC mandates cybersecurity review for most overseas IPOs
On Saturday, the Cyberspace Administration of China (CAC) revised its rules for cybersecurity review.
The headline: Regulators can now block a company from listing abroad if it doesn’t pass a cybersecurity review.
That was quick. Just last week, the Party called to patch up this regulatory loophole for overseas IPOs.
The juiciest detail: CAC clarified that all companies with a million users or more must successfully complete a cybersecurity review before pursuing an international IPO.
- That’s virtually every Chinese tech company with an IPO plan!
But it looks like companies seeking to list in Hong Kong won’t be affected (Caixin):
- “Companies that pursue IPOs in Hong Kong are not subject to the provisions of the cybersecurity review.”
The new rules are already making companies change their plans (Caixin):
- “[Podcast platform] Himalaya has basically given up its US IPO and may turn to Hong Kong.”
- “[Bike-sharing platform] Hellobike has suspended its overseas listing plan.”
Get smart: Given all the regulatory uncertainty around listing overseas, Hong Kong may be the only viable IPO choice for Chinese tech companies in the short term.
Get smarter: This is not financial decoupling (at least not yet).
- Markets on the mainland and in Hong Kong simply can’t absorb all the domestic demand for IPOs – and Chinese companies still need to depend on overseas equity markets as important sources of capital.
- Regulators are trying to walk a fine line – gaining better oversight of overseas listings without disrupting the growth of Chinese tech start-ups.
2. Foreseeable and unforeseeable storms
On Friday, Xi Jinping chaired a meeting of the Central Committee for Comprehensively Deepening Reform (CCCDR).
Some context: The CCCDR was established as part of the broad institutional reforms that took place in March 2018.
- It’s the Party’s most important policymaking body.
Xi instructed those gathered to make swift progress on his New Development Concept (NDC), noting that it (Xinhua):
- “Is a strategic measure…to ensure our survival, competitiveness, development capacity, and sustainability through various foreseeable and unforeseeable storms.”
More context: Xi began fleshing out the NDC in 2015 as his overall approach to economic development. Key aspects include:
- Pursuing independent innovation
- Expanding domestic demand
- Promoting greener development
- Continuing financial and trade opening
- Addressing inequality
The meeting also approved a trio of documents on:
- Protecting the domestic seed industry
- Delivering sustainable, green development on the Qinghai-Tibetan plateau
- Further opening the economy to trade via free trade pilot zones
Xi also admonished officials, warning that they:
- “Must not avoid hard tasks, nor should they try to do everything for the sake of political achievement while ignoring conditions.”
Get smart: Xi wants a stormproof system, but poor implementation remains one of the biggest risks to his reform agenda.
3. Oh, for the good old days
On Friday, Vice President Wang Qishan presided over an event commemorating the 50th anniversary of then-National Security Adviser Henry Kissinger’s secret trip to China.
- 98-year-old Kissinger attended via videolink.
History lesson: Kissinger’s 1971 trip to Beijing paved the way for US President Richard Nixon’s famous 1972 visit, marking the beginning of Sino-American rapprochement.
Wang hailed Kissinger’s visit as the start of a great journey (MoFA):
- “Over the past 50 years, China-U.S. ties forged ahead…bringing massive benefits to the two peoples.”
He also blamed the US for risking the progress of the last 50 years:
- “U.S. China policy should avoid turning into a vicious cycle of misjudgment and misguidance.”
Kissinger expressed his own worries about fraying bilateral ties (Nikkei):
- “Conflict between the United States and China will divide the whole world.”
- “Attempts to line up nations on one side or the other will create…pressures that will become increasingly difficult to solve.”
Get smart: Beijing is intentionally harking back to a time when US-China relations transitioned from hostility into partnership.
Get smarter: Shared fear of the Soviet Union was the main driver of US-China rapprochement.
- Absent an alien invasion or zombie apocalypse, a second Kissingerian thaw between Washington and Beijing simply isn’t on the cards.
4. The other type of US listing
On Friday, 23 Chinese companies got listed in the US.
- Unfortunately for them, it was on the Commerce Department’s Entity List.
This unlucky bunch got blacklisted for the usual set of reasons:
- 14 for supposed ties to human rights abuses in Xinjiang
- Five for supporting China’s military modernization drive
- Four for violating US sanctions by doing business with blacklisted companies
US Commerce Secretary Gina Raimondo didn’t pull any punches in her comments on the list’s expansion:
- “The Department of Commerce remains firmly committed…to target[ing] entities that are enabling human rights abuses in Xinjiang or that use U.S. technology to fuel China’s destabilizing military modernization efforts.”
Predictably, Chinese Foreign Ministry Spokesperson Wang Wenbin blasted the development (MoFA):
- “The so-called ‘entity list’ [is] a tool for suppressing…industries in China under the pretext of human rights, and [a] means the US uses to destabilize Xinjiang.”
- “China will take all necessary measures to resolutely safeguard the legitimate rights and interests of Chinese companies.”
Reality check: As much as Chinese leaders wish they would go away, US sanctions are here to stay.
The big question: How much punishment is Beijing prepared to accept before striking back with its growing anti-sanctions toolkit?
5. Remaking grassroots governance
Best Sunday ever.
The weekend ended on a real high note when on Sunday the Party’s Central Committee and the State Council dropped new opinions on improving grassroots governance.
The regs couldn’t underscore enough the importance of grassroots governance (Xinhua):
- “Grassroots governance is the cornerstone of national governance.”
That’s why, over the next five years, the plan called for (Gov.cn):
- “Establishing…a primary-level governance system led by the Party organizations, with law-based duty performance by the government, cooperation from various kinds of organizations, and participation from the public.”
The end goal: In another 10 years the modernization of the system should be “basically achieved.”
The gist of the improved system:
- The Party’s leadership over grassroots governance should be improved.
- Rules should be adjusted to local conditions.
- The grassroots governance model should be built on a foundation of self-governance, rule of law, and “rule of virtue.”
- The burden on local officials should be reduced.
Get smart: This document attempts to address two perennial, and related, problems in Chinese governance.
- Local officials not doing what Beijing wants
- Hamstringing local officials with central edicts that are not suited to local conditions
The rub: Addressing one of those problems tends to exacerbate the other.
The bottom line: Xi Jinping has spent eight and a half years trying to retool the Party into a more effective and efficient organization. There’s still a lot more work to be done.
6. Yunnan COVID-19 outbreak continues
China saw an uptick of domestically transmitted COVID-19 cases over the past week.
As of Sunday, authorities had reported that in the past week there were:
- 56 new domestically transmitted confirmed cases, up from three in the previous 7-day period
- Eightnew domestically transmitted asymptomatic cases, up from zero in the previous 7-day period
Some context: All of the above cases except one domestically transmitted asymptomatic case were found in Ruili, a city in Yunnan province along China’s border with Myanmar.
- About half of the cases are Myanmar nationals.
More context: This is the second outbreak in Ruili this year – and this time it looks harder to contain.
- Early reports indicate that some of the patients are sick with the Delta variant – which is believed to be more contagious.
Authorities are not thrilled with the repeated flare-ups in Ruili.
A number of senior officials have dropped in to try to whip things into shape, including:
- Yunnan Governor Wang Yubo
- Sun Yang, the Deputy Director of the National Administration of Disease Prevention and Control
- A working group from the prefecture’s disciplinary commission
Get smart: That last one is going to sting – a visit by the prefecture’s disciplinary commission almost guarantees local officials’ heads are going to roll.
Get smarter: We expect Ruili will be made an example of to serve as a warning to officials everywhere that the pandemic is not over, and that China cannot let its guard down.
agriculture and rural affairs
7. Seeds of change
At Friday’s Central Committee for Comprehensively Deepening Reform (CCCDR) meeting (see entry #2), top leaders approved a Seed Industry Revitalization Action Plan.
Xi wants China’s seed industry to be more self-sufficient. He said that:
- “It is more urgent than ever to ensure independent control over seed sources, and food security is stretched tighter than ever before.”
A line in the meeting readout caught our eye, calling to:
- “Accelerate implementation of major scientific and technological projects in agricultural biological breeding.”
Our take: This suggests a breakthrough on domestic approval of genetically modified (GM) crops is imminent.
More context: China is home to some of the world’s best GM crop research – but the country hasn’t approved a GMO crop for commercial planting domestically since Bt cotton in 1997.
Here’s another signal: Also on Friday, the agriculture ministry kicked off a project to increase public understanding of GMOs.
Get smart: Public fear of GM crops – along with broader food safety concerns – have been the primary barriers to regulators approving these varieties domestically.
Get smarter: Sorry Monsanto – we expect that GM crops developed by domestic companies will be prioritized for commercial approval.
8. Is ASF back?
Last Friday, international media reported that China’s largest pig farming province – Sichuan – is battling a local outbreak of African swine fever (ASF).
Some context: China reported its first ASF case in summer 2018. Over the next year, the disease wiped out nearly half of the domestic swine herd in the world’s largest pork producing nation.
- By 2020, most pig farmers had sorted out how to guard against the disease.
- The pig population is now back to normal levels.
- Industry sources say the outbreak started in June.
- It is reportedly hitting small farms.
We’ll admit it – the Sichuan ASF outbreak isn’t keeping us up at night, for a couple of reasons.
First, it’s not bothering regulators:
- Local and national ag bureaus aren’t reporting a major outbreak, nor are they deploying special teams to control the disease.
- Instead, just last week, Sichuan projected its pig farming industry would slaughter 58 million pigs in 2021 – up 10 million from last year’s total.
Second, it’s not showing up in the data:
- Local pork prices are low, and local feed prices are still sky high.
- Sometimes low pork prices can signal panic-selling. But if ASF was killing their pigs, farmers wouldn’t be buying up pig feed at record prices.
Get smart: ASF isn’t “back” because it never went away – small farms battling minor local outbreaks is the new normal in China.
Get smarter: Some of these stories are driven by industry sources that are truly worried about the risk of ASF, but others are spread by sources that stand to benefit from outbreak rumors.