Simone: Hello everyone, welcome to Zooming In China Chat. I am Simone Gao. More Chinese companies have been removed from global indices recently. Is that trend irreversible? Will DIDI set off a US-China capital market decoupling, and does the Biden administration have the power and will to rein in Wall Street? I had these discussions with Roger Robinson. He is chairman of the Prague Security Studies Institute and former Chairman of the Congressional US-China Economic and Security Review Commission. He earlier served as Senior Director for International Economic Affairs at the National Security Council under President Reagan.
Simone: We see on the U.S. side at least Congress is being tough on investment in Chinese companies. On the Chinese side, the CCP is also showing a toughening stance. For example, the central leadership is not forgiving Didi. Just a few days ago, they sent multiple agencies, including the national security agency, into Didi to investigate whether and what data they have provided to the foreigners, or in risk of being obtained by foreign governments. So, do you think the Didi debacle will set off a U.S./China capital market decoupling?
Roger: Well, I think that it certainly was, uh, it certainly spooked Wall Street players, as it should. I mean it made fools of the, to some extent, of the major U.S. firms that were managing the Didi Global IPO. It certainly wasn’t a brilliant day for them. And, uh, I think it underscores the capriciousness and intrusiveness of the Chinese Communist Party, its unpredictability, its willingness to intervene, just like it did with the Ant IPO which, as you know, got scuttled two days before it was supposed to go public at $37 billion. And there are other cases. They’ve gone after Tencent. This China tech crackdown is in full swing, as you know, and there’s going to be a lot of casualties along the trail in the terms of American shareholders if we’re not careful. And I think Congress is very upset about the way the Didi Global deal went down. You’re gonna see legislative action and maybe hearings because of that fact. So, but let’s get to what China really has in mind. China says it’s trying to protect its data.
What it’s really trying to do is leverage those companies, in part, to get as much user data out of them as it possibly can for their own credit scoring system and surveillance state activities. I mean, they’re the ones that want to force the Chinese tech giants to share all of their user data with the CCP, and I think those companies were prudently trying to resist for a time and, of course, they ran into a buzzsaw. Uh, look at Jack Ma. Look at others that have double-crossed the Chinese Communist Party. They have been, they have been summarily, in effect, exiled at some level. So, the point is that I’m not going to take at face value China trying to protect its, its data as the reason for this, this crackdown. I think that they are a bit paranoid. I think they see these large tech companies as individual power centers that might be competing with the CCP. I think there’s no question that they viewed Alibaba and Ant Group that way. That’s my strong feeling. With a billion users, believe me that got Xi Jinping pretty paranoid right there, and then they wanna twist their arms and make life tough for them so they can get their hands on that precious user data. Sorry to be a bit cynical, but I see those as more compelling reasons than the ones that they’re offering.
Simone: Yeah, I agree with you. The real reason is that Xi Jinping will not share his power with the private sector, especially since a big share of these companies are actually held by his political enemies. So, the next question. I think now, the bigger picture is that if you look at the foreign direct investment and indirect investment in China, America is no longer a big investor. It’s the Asian countries and, for many years, Hong Kong is the biggest investor. Now things may change, but still, U.S. is not a big investor in China. So, some critics say that if you ban U.S. investment in China, the only people, the only entity that will be hurt will be the U.S. investors since the vacancies they left will be filled by other countries. So, the Chinese companies will actually not be hurt. What do you think?
Roger: I think it’s laughable. You know, the detractors, the critics are trying to say if we miss this opportunity, somebody’s just going to take us, uh, take our place. If we start to get tough, in terms of asking for compliance of our federal securities laws, we’re gonna damage the competitiveness of the U.S. capital markets in the world, and we’re gonna be sending those IPOs and all the fees to Hong Kong and elsewhere. Better not do that. Right? This is, this is nonsense. The U.S. capital markets are roughly the size of the rest of the world’s combined. We hold about 66% or so of the world’s investable capital and liquidity. Our dollar is the world’s reserve currency. We move hundreds of billions of dollars to China, uh, routinely, that they are using for desperately needed, dollar-based financing without which they can’t prosper, and they can’t keep that growth rate up. We’re the only market that’s deep enough and voluminous enough in the world to provide that kind of critically needed dollar financing. For example, my old commission, the U.S.-China Economic and Security Review Commission, which I chaired, states that there’s 248 Chinese companies on U.S. exchanges. Well, maybe NASDAQ and the New York Stock Exchange. What about the hundreds, the 700 or more, that are in the over-the-counter market?
What about hundreds, if not a thousand, more that are in the exchange-traded funds of Wall Street through having been purchased in A shares out of Shenzhen and Shanghai and moved directly into the portfolios of the American people with no diligence, no regulatory oversight? The back door, as I call it, of U.S. indices and exchange-traded funds. Look, the fact is that it’s, the United States is unique in this respect in that we have most of the money in the 21st century. China does not have a convertible currency. The U.S. utterly dominates the global financial domain, and that’s it. I mean, there’s not a whole lot you can do about that. So, the notion that we, uh, that they can go somewhere else, they’re trying to go to Hong Kong, right? But Hong Kong can’t get them the liquidity and the volume of, of cash, dollars, that they need annually. And further, here they are eviscerating freedoms and even the legal reputation of Hong Kong, which is a centerpiece of its existence as a global financial hub.
I mean, they’re tearing into Hong Kong every day at the very moment that they’re relying on Hong Kong to offset the U.S. capital markets? Really? It’s not going to work, Simone. I mean, we stand alone. There is, there is no elsewhere when it comes to global capital, and anybody that says, well, they’ll just go off to what. To what? Hong Kong, Singapore, Frankfort, London, Milan? This is, this is nonsense. So, I just take a very different view. I think that anybody that’s suggesting that they can simply go elsewhere and we’re going to be net disadvantaged doesn’t understand this issue very well, and they certainly don’t understand the fact that we’re dealing with national security and fundamental human rights.
Simone: So, then, how do you understand that U.S. foreign indirect investment into China is not taking a big share of the overall foreign indirect investment in China anymore?
Roger: Well, I think that sentiment, business sentiment, has changed radically. I mean, for decades, it was the promise of this kind of breakthrough where you’re gonna find a billion new customers or more for your products. I think a lot of that naivete has been swept away. A lot of American companies have been burnt to a crisp by their intellectual property having been stolen, their manufacturing techniques. All they did was create competitors that came back and crushed them, even in the U.S. market much less globally. So, this has been a very serious set of backfires, if you will, for American firms, and I think that they see the writing on the wall that Xi Jinping’s aggressiveness is not conducive to a harmonious, stable, bilateral relationship of the type that they were hoping for. A predictable environment. One that would be, uh, the Communist Party would be sensitive to the needs of business and markets like the capital markets. That’s not the way this is turning out, so we are gonna see a downturn in U.S. direct and indirect investment in China on the one hand, but you’re not going to see China, anytime soon, pulling away from the effort to get their hands on as many dollars annually as they possibly can.
And if they can do that without being listed in the U.S. markets through indices and exchange-traded funds, then the Congress is going to have to close that back door. And I think they’re in the process of already doing that. So, I would not say that Beijing is in a strong position in this matter.
Simone: Hmm. That’s interesting. So, you see the capital market decoupling is already happening.
Roger: I do. I think it’s detectable now. It’s been slow, and because they were dragged, they’re being dragged, I mean BlackRock and Vanguard and MSCI and FTSE Russell and a number of others, are being dragged out of this kicking and screaming, even though it involves such matters as genocide, concentration camps and funding the People’s Liberation Army. I don’t know how to put this to you, Simone, except to say they think that’s somebody else’s job, would be the kindest way I could put it. I could say they don’t give a damn, which might also be true. Their job is not patriotism. They see that as something the government needs to worry about, and they don’t want the contraction of their investable universe. They don’t want to see Chinese companies out of bounds, in terms of purchases, because of pesky national security and human rights abuses.
They think that that gets better yield and return on investment for their exchange-traded funds and other investment products, and that’s what they care about. And they also care about those huge fees bringing them to IPOs and bond offerings and other, uh, other fundraising activity. So, there’s very different interests here between Wall Street and Washington and Main Street, with Main Street being the victims, and Washington waking up and trying to protect those victims, and Wall Street looking about as far ahead as “what’s my next fee?” So, that’s a problem, and I think, I’m cautiously optimistic that with the bipartisanship of the Congress and the resolve shown today by the Biden administration, and its preservation of the previous administration’s momentum, and even strengthening of that momentum on the capital markets and the sanctions category, the tide has turned.
Simone: Right, right. Well, you talked about Vanguard and BlackRock. Uh, Vanguard recently closed their China offices. So, does that mean much? I mean, Vanguard closed their offices, but BlackRock did not. What’s the difference between those two companies and closing offices? Does that mean a lot?
Roger: Well, not necessarily. We can talk about that, but BlackRock is, you know, hardcore in the China market. I mean, if you wanna choose two entities that, that are rather diehard about not wanting to appreciate the new realities of the material risk associated with national security and human rights violations, you don’t need to look a lot further than BlackRock and MSCI. They’re, they’re gonna be holdouts, it seems to me. And as far as closing an office, it’s an interesting development, that’s for sure. There’s been a U.S. interagency advisory, as you know, in the past week just issued on doing business in Hong Kong with Chinese companies and a strong cautionary note. There was another interagency advisory on anything out of Xinjiang, any companies that are in American supply chains, and, uh, that too has been a chilling effect on some companies, Vanguard perhaps among them. I think Vanguard cares about its brand. I think it cares about the principles and values of its founder.
I don’t think that they want to be implicated in some of the abuses that we’ve talked about in this interview. But, the real test is not whether you open or close a representative office that has a few people in it. The real test is what about the U.S. sanctioned Chinese companies and other Chinese corporate human rights and national security abusers in their investment products? What about the entity list companies? What about the executive order 14032 OFAC list? What about the Pentagon PLA list? Are they holding those companies? Well, we’ve just done, we’ve just taken a look, and the answer is of course they are. And so, and they still are. And not a few. Many. So, if you wanna show me the divestment of those kinds of companies, then I’m going to sit up, pay close attention and offer some praise to Vanguard for doing the right thing, but not before.
Simone: Right. Okay, that’s interesting point. What do you think, how do you, I mean, how do you evaluate the Biden administration’s attitude on China? Do you think they will hold the line on China?
Roger: Yes, I’m cautiously optimistic they will. I think that they see it as politically perilous to appear soft on China. That’s not where the country is. I wouldn’t be surprised if in the high 70s, low 80s percent of the American people are feeling very cautious and even negative toward China today. Uh, that is the Chinese Communist Party. No, nothing toward the Chinese people who we all understand are victims of that system, of that authoritarian police state. So, it’s not the Chinese people that are in the sights of Americans. It’s the Chinese Communist Party. I just think that needs to be clear. But that said, and you rarely see a bipartisan consensus in Congress as powerful as this one. This doesn’t even take account of Covid-19. Uh, this was happening before that, certainly the way Covid was deliberately spread by the Chinese Communist Party by allowing those Wuhan flights and too many others to, uh, instances to name. That’s certainly not endearing the American people, either. So, this is not a time, uh, that I think the Biden administration wants to signal a softening, and I also think that they actually believe in things. I think that the Secretary of State, for example, is a long-time human rights advocate, and I think that others in that administration really do understand that the funding, aiding and abetting of these horrific atrocities and abuses, like those taking place in Xinjiang and around the country with forced labor and too many other offenses to name, not to mention the national security litany of challenges, uh, that we’re ending up funding, or partially funding. I think they care about that. I don’t think it’s just politics. And so, uh, and they don’t have a Treasury Secretary as powerful as Mnuchin that will hold the tide for Wall Street with the effective way that he, that he did. So, that’s why I see optimism vis-a-vis this administration.
Simone: Interesting. Last question, Roger. What do you think of the China/Europe investment agreement? Do you think there is any possibility that that agreement could be eventually signed?
Roger: Well, I certainly was worried about the first iteration. As you know, it was stampeded through at the end of last year. I looked at the, the documentation that took place prior to its suspension, and it had language like, uh, under the discrimination category, you know China always loves to feel discriminated against, that’s one of their favorite negotiating tools, and they, they had in there the prohibition of any future investment bans, by name, meaning read capital market sanctions. And in that seven-page in-principle agreement, Europe just signed up to that as though it was nothing. And it would have meant that for the better part of twenty years, China could put any kind of human rights or national security abuser into the investment portfolios of the European fund managers and capital markets, and it would be just fine. You, you’d be unable to excise those companies because of, uh, of the bilateral investment agreement. That’s what Beijing was going for. So, thank goodness in a ham-handed fashion, in a political mistake, they went after, by name, went after the European parliamentarians and sanctioned them because of human rights concerns. I mean those parliamentarians expressing human rights concerns. They found that so offensive that they sanctioned them.
These are the same people that were gonna be voting on the bilateral investment treaty. So, thank goodness they made a mistake there, and hopefully this is in deep freeze, and if it ever does come out, it’s going to have to be scrutinized and rewritten, because the first drafts of that that were racing down the pike were perilous and irresponsible.
Simone: Right. So, you think this is, there is still a possibility that this agreement could be renegotiated and discussed, even.
Roger: I mean, does Europe really ever give up doing that kind of thing? I don’t think so. I mean, you know what I mean? It’s, uh, they’ll give it a go. That would be my guess. As soon as the dust settles. But I think that, uh, I hope wiser heads prevail. I hope they’re watching what’s happening in the United States and realizing that basically, as always, China’s trying to split off Europe from the U.S. It’s a typical strategic maneuver and one that we need to resist ferociously. And I think that the chances are now better, because Europe is starting to realize that something is terribly amiss with the China picture.
Simone: Right. I mean, talking about Europe wants to make deals with China. Angela Merkel is going to be gone very soon. Would that affect Germany’s decision? What about her successors? I mean Germany and France, these other two countries we worry about, right?
Roger: Well, if the Green Party has its way. Ironically, they’ll be more disciplined than Merkel’s party. I think that, uh, look, it’s the difference between David Cameron and Boris Johnson. You remember David Cameron and his chancellor, Osborne. They were heralding the Golden Age of British/Chinese relations. All it did was it took Britain to the cleaners and was a golden invitation for technology theft and other games by China. I think the bloom is off the rose now in Britain. I think it’s going to become a similar story in Germany. Of course, selling those cars is always compelling, and Germany is known for, frankly, sometimes putting national security, and even our fundamental values, behind profits and jobs. I’m sorry to say that, but I go back with our German friends to the Reagan days and the Siberian gas pipeline with the Soviet Union and learn the hard way. And so do they, by the way. That, uh, that kind of instinct is not going to be a lead to transatlantic harmony.
Simone: That said, would you say you were cautiously optimistic about Europe?
Roger: Very cautiously, but yes. I do believe so. And, in part, it’s because I’m witnessing China overplaying its hand as dramatically as it is.
Simone: Okay. Alright. Thank you very much, Mr. Robinson. Do you have anything else to add?
Roger: Well, I don’t think so. I think that my only parting thought would be that I can understand that many investors in the U.S., Europe, and Asia are becoming increasingly hesitant and uncomfortable with holding any Chinese companies in their investment portfolios because of the intrusiveness, control and unpredictability of the Chinese Communist Party that again is so vividly on display vis-a-vis the tech sector and the crackdown there. But those investors that have a higher risk appetite and want to continue to hold Chinese companies in their investment portfolios, it seems to me that it’s only financially prudent for them to not include in those investments U.S. and E.U. sanctioned Chinese companies or known human rights and national security corporate bad actors. I think that’s a bridge too far, and I think that material risk, the material risk involved, is asymmetric, is inordinately high, it’s fiduciarily irresponsible. And, and I think it’s also morally repugnant. So, I hope that for even those that are resolved to stick with Chinese companies, I would only ask that they differentiate between which Chinese companies. It makes a big difference.
Simone: Thank you. Thank you, Mr. Robinson. I really appreciate it.
Roger: Thank you, Simone.
Simone: This concludes our program for today. Please like, share and subscribe to our channel if you like our production. Also, please sign up for my membership website. We will provide video, audio and transcripts of our shows. There will also be member-only articles and in-depth reports and live Q&A with me. The website is zoomingin.tv. $5 a month or $50 a year. You can also donate to me on my website, zoomingin.tv. Thanks for watching. I’m Simone Gao, and I’ll see you next time.