USA: Olympic boycott + 20 years of WTO accession + IPOs overseas
Disappointment after 20 years after China’s WTO accession
IPOs overseas cause a stir
No US diplomats at Beijing Winter Games
Is Evergrande facing restructuring?
EU extends China sanctions
Power from the desert: 200 gigawatt project takes shape
WHO requests patent clearance
State-run logistics group to tackle supply chain problems
Tools: Improving supplier quality
Executive Moves: Alibaba is restructuring
Dear reader,
The USA is escalating the brewing conflict with China. They now have announced to not send any government representatives to the Olympic Games in Beijing. President Joe Biden is thus sending a very unwelcoming message. China will have to react accordingly to this diplomatic boycott; after all, Xi Jinping has styled himself and his country as strong and assertive. This announcement regarding a sporting event won’t be the end of the story. Further disruptions in global trade are now absolutely possible.
This gives Germany’s new foreign minister, Annalena Baerbock, an opportunity to promote her own human rights-based foreign policy. She has announced that she will not ignore the situation in Xinjiang and will seek transatlantic coordination. If Germany actually follows the US into the boycott, however, the impact would not be as severe as it is now. China could blame this on the poor influence of the US and continue relations for the time being. After all, China needs allies. However, it is now quite clear that the era of intense geopolitical conflicts did not end with the Trump era.
Just how much the attitude towards China has changed over the years becomes evident by a look at the history of the country’s WTO membership. “Change through trade” was a popular sentiment among China optimists in the early 2000s. If “the West” included China in the international trade order and increased both imports and exports, China would soon play by international rules and develop into a market economy. That was the idea. In retrospect, this seems rather naive. On the 20th anniversary of China’s accession to the World Trade Organization (WTO), the results are mixed, reports Felix Lee. Although global trade has grown, the West has lost many manufacturing jobs, and entire regions of the US are left in shambles. And the hopes foreign companies had placed in China were often left disappointed. On the other hand, many segments of the Chinese market remain closed off to foreigners.
The backlash against Chinese companies by the US shows just how intense the resulting frictions are. Washington is excluding more and more Chinese companies from its financial market and has now announced tighter supervision. Ning Wang analyzes how this fits into the overall disputes.
I hope you enjoy today’s issue!
Your Nico Beckert
Feature
20 years of China’s WTO accession: Clinton’s big mistake
Speaking to both houses of the U.S. Congress, the then US president promoted China’s accession to the World Trade Organization (WTO). The world would no longer be the same, he promised. The world’s most populous country would open its markets. And the US, with its wheat and corn, Hollywood movies, Fords and GMs, would be at the forefront. With more free trade, there would also be a freer China, Clinton said confidently. But things turned out differently.
These days mark the 20th anniversary of China’s accession to the WTO. The communist regime continues to rule with an iron fist. For the US and other industrialized nations, the promise of a new market has been fulfilled. But China has benefited far more. Today, more than 80 percent of refrigerators sold worldwide are made in the People’s Republic, 70 percent of all mobile phones and every second pair of shoes. While the trade balance between China and the USA was still largely balanced in 2003, the USA, in particular, is recording new record deficits in trade with China year after year. And China is by no means flooding the world with just cheap products. Laptops, flat screens, drones, electric cars – in 2020 alone, China will haveexported more than half a trillion US dollars more than it imported.
China had two decisive advantages
“Yes, China’s WTO accession was a success, as expected,” says Pascal Lamy. He was the EU’s Commissioner for Trade between 1999 and 2004 and, as WTO Director-General from 2005, was also heavily involved in negotiations with Chinese leaders after China’s accession. “The global economy was let off the leash,” he said on Friday at a webinar hosted by Berlin-based China think tank Merics on “China’s 20th WTO Anniversary – Cause for Celebration?” China imported heavily and modernized its economy, said Lamy. Consumers elsewhere benefited from lower prices because China knew how to produce cheaply and in large quantities with a huge army of workers. For Lamy, it’s clear: “A win-win.”
In fact, China had two main advantages at the turn of the millennium: Low labor and environmental regulations and a vast army of workers willing to toil at wages unthinkable in the West. At the same time, the world grew smaller as shipping costs dropped to next to nothing and the Internet connected the most distant places. China’s exports skyrocketed, as did its standard of living. Whereas one in four Chinese were living below the poverty line before joining the WTO, today the figure is less than ten percent. A third of the population can afford their own car, an apartment, and travel around the world. Foreign companies have also profited from this new prosperity. But China’s entry also created many losses in industrialized nations. The US in particular lost those exact manufacturing jobs that developed in China.
A mixed record
From a German perspective, the results are mixed. Germany itself is an export nation and has benefited the most from China’s integration into the world market among the OECD countries. Joerg Wuttke, Head of the EU Chamber of Commerce and Managing General Representative in China for chemical giant BASF since 2017, explains during the Merics webinar from Beijing: “When I arrived, BASF had sales of less than $2 billion in China. Now we are over 11 billion. And we have a $10 billion project underway.” None of this would have been possible without China’s accession to the WTO.
Nevertheless, certain expectations have not been fulfilled, even from the point of German business: The inclusion was supposed to act as a “catalyst for far-reaching structural reforms” and “promote free entrepreneurial activity in China”, writes the industry association BDI in a recent paper. “These hopes were largely disappointed.” What particularly upsets the BDI is that since 2016 at the latest, China should have been treated as a market economy and no longer enjoy the benefits granted to developing countries in international trade. This was explicitly provided for in the accession regulations.
BDI: Beijing is using WTO rules to its advantage
As much as WTO accession boosted China’s economy, it is still not free. In fact, China knows how to open its markets only to the extent that it benefits the country. The EU Chamber of Commerce complains regularly that foreign companies constantly get the short end of the stick in China. “The common expectation that the country would actually develop into an open and primarily market-based economy has not been realized,” the BDI writes in its paper.
“The Chinese government knows how to use the margins of WTO rules to its own advantage and often does the minimum to meet commitments.” In addition, contrary to its pledge, the Chinese government is also exerting “excessive influence on economic activities,” for example through price controls, subsidies, and judicial interference. The majority of 99 of the 100 largest listed companies in China are still state-owned. This, too, was agreed upon differently, complains the BDI.
The Merics webinar was also joined by former Deputy Assistant US Trade Representative for China Audrey Winter. Despite everything that happened, she tried to draw positives from the experience. “We learned a lot about China and its system and how it interfaces with our systems during that time.” That’s important to know, she says, because in trade negotiations the devil is always in the details. And more negotiations are underway, after all. An important lesson from her perspective: “We learned that China has no intention of becoming a true market economy at all.”
It is tax havens like the Cayman Islands that Chinese companies use to disguise their true structures. There, they set up variable interest entity (VIE) companies in order to go public overseas. Alibaba, Baidu, Didi, Tencent – almost all major Chinese tech companies listed on US exchanges use this construct. The goal? To circumvent Beijing’s restrictions that make it difficult for foreign investors to invest in Chinese tech companies.
This is because foreign investors are in fact prohibited from participating in the technology sector of the People’s Republic. Beijing wants to stay one step ahead in this sector to expand its global influence. But VIE constructs make investments by foreigners possible (China.Table reported).
Beijing had long tolerated IPOs in the US
Authorities in Beijing had long looked the other way when tech companies were raising capital on US exchanges. According to Bloomberg’s calculations, a total of 34 Chinese companies raised about $13 billion from investors through IPOs on US exchanges in the first seven months of this year. This is despite the fact that since 2018, Chinese companies are encouraged to place their shares on exchanges in Hong Kong or China instead of overseas.
The news that the CCP wants to completely ban its tech companies from going public abroad caused an uproar last week. The Beijing Securities Regulatory Commission (CSRC) immediately dismissed this and simply labeled the report as “fake news”. What is remarkable is that one day after the Chinese announcement, the US Securities and Exchange Commission announced that it would soon reserve the right to delist foreign public companies listed in the United States if their auditors failed to comply with requests for information from the US regulators’ requests for information.
SEC chief Gary Gensler defended this move by saying that China and Hong Kong do not cooperate with the US accounting regulator Public Company Accounting Oversight Board (PCAOB) and refuse audits. Beijing argues that if it would cooperate with the auditor board, sensitive data from Chinese companies could be leaked to foreign governments or competitors.
China’s stock market regulator turns the tables
The Chinese stock market regulator felt compelled to publish its own statement on its website on Sunday. It is to be considered a reaction to media reports that China is planning to ban companies from going public on foreign stock markets through variable interest entities (VIEs).
In the statement, China’s stock market regulator criticized the US: “In fact, both sides have been cooperating on audit oversight of US-listed Chinese companies, and worked together on pilot inspection programs to find a more efficient way of cooperation, which has laid a good foundation for future cooperation. In recent years, however, certain political fractions in the U.S. have turned capital market regulation into part of their politicizing tools, waging unwarranted clampdowns on Chinese companies and coercing them into delisting from U.S. stock exchanges.”
SEC issues new guidelines
For months, the issue of so-called VIEs has been heating the minds of foreign investors who have invested in Chinese companies such as Alibaba, Tencent, Didi, or Baidu. They feel cheated. Because VIEs are really just shell companies without any value.
“These shell companies (…) raise capital on US exchanges, but they do not transfer ownership from the operating company to American investors,” US Securities and Exchange Commission chief Gary Gensler wrote in a Wall Street Journal editorial in September. Investors are not protected, nor do they hold shares in the companies in China. The SEC eventually took action and raised the barriers for Chinese IPOs in the US in September. Only when new financial statement requirements have come into force that allows investors to identify the risks of VIE structures, will Chinese companies be approved for IPOs in the USA.
Stricter regulations after financial statement fraud
Following the accounting scandal of the Chinese coffee house chain Luckin 2020, which was listed on the US technology exchange NASDAQ, former US President Donald Trump had further tightened financial statement requirements for listed foreign companies. Against the backdrop of Trump’s trade dispute with the People’s Republic, the statement requirements are aimed primarily at Chinese companies.
However, there is a three-year transition period before the new regulation is implemented, which is why experts still do not trust the figures by Chinese companies.
Is DiDi’s withdrawal from Wall Street a precedent?
Ride-hailing service provider, DiDi, is also responsible for Beijing’s rapid rethinking of foreign listings. The company had pushed through its stock market debut in New York in June (China.Table reported), despite the concerns expressed by Chinese authorities. Didi has been under investigation for data protection violations ever since, and most recently, Beijing had announced its intention to bring parts of the company under state control.
Last Thursday, DiDi Chuxing announced plans to withdraw from Wall Street (China.Table reported). Instead, it said it would push for a Hong Kong stock market debut by March. “Chinese ADRs face increasing regulatory challenges from both US and Chinese authorities,” said fund manager Wang Qi of MegaTrust Investment. “For most companies, it will be like walking on eggshells trying to please both sides. Delisting will only make things simpler.”
DiDi raised $4.4 billion in its IPO on Wall Street. It was the second-largest IPO of a Chinese group in the US since e-commerce giant Alibaba’s new issue in 2014, but since then, DiDi shares have dropped 44 percent in the US.
Beijing has already been reprimanding its tech companies for more than a year. They are accused of monopoly abuse, non-compliance with worker protection rules, but also a bad influence on China’s youth and violations of consumer rights. Companies like DiDi not only had to pay fines but also suffered painful losses in value. DiDi’s stock market value, for example, plummeted by $42 billion after the cyber regulator banned new users from registering over the app.
Under the pretext of data security
But DiDi’s forced departure from the New York Stock Exchange stands only as an example for many other companies to follow. And Beijing’s main concern is the data collectedby companies from their users during the boom years. Back in July, the cyberspace authority CAC announced that any company planning an overseas IPO that had more than one million users would have to apply for permission.
Washington’s latest move plays into Beijing’s hands – because now the government can justify the measures under the pretext of data protection and also present itself as a fighter for a “long-term and healthy development of the platform economy”.
Chinese Communist Party
CSRC
Data protection
Finance
IPO
Stock Exchange
USA
News
Is Evergrande facing a restructuring?
According to insiders, Chinese real estate developer Evergrande is about to restructure its debt. This would include offshore bonds and private debt obligations, Bloomberg reported, citing people familiar with the matter. This would make the restructuring one of the largest in China’s history.
Last Friday, Evergrande had for the first time acknowledged the need to restructure its foreign debt. However, many details remained unclear in the brief stock exchange announcement, according to Bloomberg. The real estate group has $19.2 billion of foreign debt outstanding, as data from the financial services company show.
“Evergrande’s been trying to sell assets to repay debt, but Friday’s statement basically says it is going to ‘surrender’ and needs help,” said Conita Hung, investment strategy director at Tiger Faith Asset Management. “This sends a very bad signal.”
Yesterday also saw the end of the payment deadline on two dollar bonds. At the end of Asian business hours, two bondholders claimed they had not yet received payments from Evergrande. Evergrande had frequently serviced its bonds in recent weeks shortly before deadlines expired. “Everybody is waiting to see if this time will be the first real trigger event,” Reuters quoted a financial analyst as saying. Further details are still pending
Evergrande also set upa “risk management committee” yesterday, Reuters reports. The committee includes state officials. It is expected to play an important role in “mitigating and eliminating future risks”. Analysts told Reuters that the concerted efforts by the authorities indicated that Evergrande had probably already entered an orderly debt restructuring process. China’s central bank assured that the risk of a spread was under control. nib
Evergrande
Finance
Real Estate
EU extends sanctions
The European Union has extended its sanctions against four Chinese officials and one organization for human rights violations in Xinjiang. The punitive measures will now apply until the end of December 2022, the EU Council announced on Monday. The EU had agreed on the sanctions in March. Beijing had reacted with counter punitive measures. The CAI investment agreement has been shelved ever since.
The EU sanctions target Zhu Hailun, former Vice Chairman of the Chinese Communist Party in Xinjiang, and Wang Junzheng, Party Secretary of the Xinjiang Production and Construction Corps (XPCC), an economic and paramilitary organizational unit in Xinjiang that reports to the central government in Beijing. According to the EU, it is also responsible for the administration of detention camps.
The sanctions also target Wang Mingshan, a member of the Xinjiang CPC Standing Committee, and Chen Mingguo, Director of the Xinjiang Public Security Bureau (XPSB), the regional security agency in the province. The XPSB, which is part of the XPCC, is also listed separately as an organization on the sanctions list.
Those on the list are barred from entering the EU and their assets will be frozen. Furthermore, they are not allowed to receive any financial means or economic support from organizations or individuals in the European Union. ari
EU
Human Rights
Sanctions
Xinjiang
China pushes ahead with renewable energies mega project
China is pushing ahead with the expansion of renewable energies in China’s deserts. Just months after Xi Jinping unveiled a massive desert project with a capacity of up to 200 gigawatts (China.Table reported), the second phase of the expansion is now underway. China’s National Energy Administration has called on provinces to submit individual projects by mid-December, Bloomberg reports. According to the report, each individual project must have a capacity of at least one gigawatt. Construction of the wind and solar power plants is scheduled for 2022 and is planned to be completed in 2023. However, the grid connection may not be finished until 2024.
The power plants are to be built near existing power lines so that only a small amount of electricity is lost. They are also to be built near coal and gas-fired power plants, which are to act as a substitute during so-called dark doldrums when there is no sun and no wind, as Bloomberg reports. Like other nations, China is facing a major overhaul of its power systemdue to climate change concerns. The country’s high dependence on coal-fired power and concerns about grid security pose major challenges (China.Table reported). nib
Climate
Energy
Renewable energies
Solar
Sustainability
WHO asks China for patent release
The World Health Organization (WHO) has asked two Chinese manufacturers of Covid vaccines to release their vaccine patents, South China Morning Post reported. “We are in touch with the two big companies that have the vaccines approved by the World Health Organization,” said Erika Dueñas Loayza, head of the intellectual property unit in the WHO division for access to medicines and health products. The goal is to improve access to vaccines for countries in the global south. So far, only 7.3 percent of the population in African countries have been fully vaccinated against Covid.
The vaccines from Sinovac and Sinopharm are approved by the WHO for emergency use. In addition to the two companies, the WHO had also contacted the Chinese representation in Geneva. However, Dueñas Loayza stressed that it would not be a free release. “It would be a release in exchange for royalties,” Dueñas Loayza said.
The WHO would act as a platform and identify potential vaccine manufacturers capable of producing the Chinese companies’ vaccine. The World Health Organization could help speed up production and get the vaccines to countries in the global South quickly, he said.
According to Dueñas Loayza, however, Sinopharm and Sinovacare more interested in bilateral agreements with individual countries. The Indian company Bharat Biotech had made its technologies for Covid vaccines available to the WHO platform. It was hoped that Chinese suppliers would follow suit. Western pharmaceutical companies such as Pfizer, Moderna, Johnson & Johnson, and AstraZeneca havealsoso far given the WHO the cold shoulder concerning the release of patents, SCMP stated. nib
Corona Vaccines
Coronavirus
Health
WHO
USA boycotts Winter Games in Beijing
The USA has decided not to send diplomatic or official representatives to Beijing, effectively boycotting the Winter Olympics. Washington is refraining from sending a diplomatic delegation “given the PRC’s ongoing genocide and crimes against humanity in Xinjiang and other human rights abuses,” White House press secretary Jen Psaki said on Monday. However, the athletes will participate in the Games as planned, Psaki stressed. “We will support the athletes from home,” the spokeswoman said. However, given the situation in Xinjiang, “business as usual” cannot take place.
The U.S. will continue to address human rights abuses in Xinjiang, Psaki announced. The diplomatic boycott is only part of the commitment to the region. When asked why the government was not implementing a complete boycott, Psaki replied that “penalizing” athletes was not the right move.
China has previously threatened the U.S. with a break in trade relations in the event of an Olympic boycott. The government in Beijing will then take “countermeasures,” the Chinese Foreign Ministry said on Monday. “If the U.S. insists in willfully clinging to its course, China will take resolute countermeasures,” Foreign Ministry spokesman Zhao Lijian said. Those who called for staying away should stop “so as not to affect the dialogue and cooperation between China and the United States in important areas.”
The future German foreign minister also left a boycott of the Olympics possible in an interview with China.Table. Annalena Baerbock had also announced that she wanted to coordinate her policy more closely with traditional allies such as the United States or EU neighbors. On Monday, Baerbock once again reiterated her position of seeing Germany in system competition with China and drawing the appropriate consequences. “In addition to cooperation, however, we are also competitors when we look at the key economic policy issues of our time,” the Green Party politician said at a party meeting regarding the coalition agreement. She spoke out in favor of a joint EU policy toward China. ari/rtr/fin
Boycott
Geopolitics
Sports
USA
New logistics group to address supply chain issues
China is looking to get a better grip on supply chain issues through the merger of five companies into a state-owned logistics group. The new group, called China Logistics Group, will develop international trade links and freight services to organize global supply chains, state broadcaster CCTV reported on Monday.
China Railway Materials, China National Materials Storage and Transportation Group, the Shenzhen subsidiary of Huamao International Freight Ltd, China Logistics, and China National Packaging Corporation have been merged. In addition, China Eastern Airlines, COSCO Shipping, and China Merchants Group will join as strategic partners.
By Renaud Anjoran, China Manufacturing Consultants (CMC)
A survey by the American Society for Quality showed that the biggest hurdle buyers face in improving their supply chain quality is “working together with suppliers to improve performance.” That was in 2016, and we believe very little has changed.
Many companies have tried various approaches to improve their key suppliers. This is especially difficult when these companies need to change to a so-called “zero defect” goal and their suppliers refuse to even take the first step.
What is Zero Defect?
Zero Defect is a quality goal that refers to improving manufacturing systems to the point where zero or nearly zero defects are shipped to buyers. It is a way of not only satisfying buyers but also eliminating all wasted activities and materials associated with defective manufacturing. Zero Defect can eventually become a mindset where the entire organization does not tolerate any form of poor quality.
Based on our experience guiding our clients through transformation projects, you will find our practical advice below. It starts with the buyer acting decisively. When consultants are involved, we also share some good practices.
What the buyer must do
If the buyer has no influence over the supplier and if the buyer is not willing to make consistent decisions, the switch to zero-defect conditions is not likely. Let us explain this in detail.
We should mention that there is one important requirement. As a buyer, you want your supplier to be fully aware of your quality standard and agree with your assessment of their product quality. Without this prerequisite, the supplier’s teams will focus on differences in their assessment and the definition of defect rather than working on improvements.
We have observed buyers taking several approaches that have been successful in convincing key suppliers to initiate a quality improvement program and ultimately move to a zero-defect mindset.
Here are examples of successful approaches.
Let the supplier know that they are at risk of losing your business:
Develop at least one backup source and make sure they can provide good quality.
Collect data on the number of PPM (parts per million) defects and make sure the supplier knows this. Also make sure to communicate your target.
Warn the supplier: If there is no significant improvement over the next six months, reduce their business by X percent (e.g., by 20 percent after six months, then by another 20 percent after 10 months, etc.).
In parallel, offer to help them improve their systems and processes.
Make the situation uncomfortable for the supplier:
Secure a backup source (as is usually the case in automotive supply chains).
Collect data about the number of PPM defects, but also about all the costs it causes to your company.
Charge the supplier for some/all of these costs.
Also, if you encounter multiple defects, force the supplier into containment (meaning they pay an inspection agency to inspect 100 percent of the parts/products until that agency finds zero defects).
Switch from traditional acceptance sampling (based on AQL or Acceptance Quality Limits) to an acceptance on zero plan. Your inspectors will then need to review fewer samples, and you will save on evaluation costs.
In parallel, we offer to help them improve their systems and processes.
There are ways to ensure that these approaches are more likely to succeed:
The buyer notifies the supplier of any costs incurred due to defects.
A buyer’s representative (who can be a consultant) spends a few days in the factory explaining how poor quality adds cost to the factory’s bottom line. Note: The supplier may not formally acknowledge these comments for fear that the buyer’s procurement staff will use this information to drive down prices. As a rule, when representatives of the buyer’s procurement department are involved, the supplier tends to be less open, provides fewer data, and is not as willing and ready to acknowledge the results.
A buyer representative begins to aid the supplier with some process and quality development work required to improve quality. This may take the form of go/no-go gauges, test fixtures, inspection equipment, etc. The supplier rarely opposes such assistance if there is a direct and measurable impact on the percentage of defects and if it does not add significant cost to their operation.
In some cases, to achieve Zero Defect, the buyer’s designers must make significant changes to their operations. Heeding factory difficulties and creating simpler designs can go a long way toward showing good will and getting a supplier to cooperate.
A good process for consultants to support the transition
If you decide to involve consultants, taking some “best practices” to heart can go a long way.
The lead consultant should arrange a management meeting at the factory to introduce his team and explain how he can aid the factory to achieve its goals.
Careful preparation and good communication are key:
Management needs to feel that consultants understand their operational problems (which requires a fairly thorough initial assessment) and have the expertise to address these issues.
If the factory’s management opens up and shares their challenges and goals, this can form the basis for a successful plan. In general, it is better to take a path that is important to the factory’s top management to reach their strategic goals, if this is a way to move much closer to zero defect. The breadth and depth of change required within the organization is only possible with the full support of its owners and managers.
How do I begin?
Many companies lack the confidence to apply pressure on some of their key suppliers. This is understandable.
A good start is to engage directly with your key suppliers and find a contact who is motivated – for example, senior management will become aware that change is necessary, and there is the prospect of additional business when their performance improves.
Once a project with one supplier has shown positive results, you’ll have more confidence to push your other suppliers harder. And as you gain experience implementing operational change in one part of your supplier base, you will be better at selecting the right candidates and convincing them to go the way you want.
Supply chains
Trade
Executive Moves
Toby Xu will become Alibaba’s Chief Financial Officer from April. He succeeds Maggie Wu, according to a company announcement. Wu will remain loyal to Alibaba and serve as an Executive Director on the internet giant’s board.
Jiang Fan will be the head of a newly created digital commerce team at Alibaba. He will be responsible for international markets. Trudy Dai will take over the same position for the domestic market.
Dessert
Wreaths of flowers instead of champagne for the inauguration of the more than 1,000-kilometer-long train route from Kunming, the capital of the southwestern Chinese province of Yunnan, to Laos. The final section between the China-Laos border town of Boten and Vientiane, the capital of Laos, has been put into operation. The project, which came about as part of the Belt and Road Initiative, cost $5.9 billion (China.Table reported).
Disappointment after 20 years after China’s WTO accession
IPOs overseas cause a stir
No US diplomats at Beijing Winter Games
Is Evergrande facing restructuring?
EU extends China sanctions
Power from the desert: 200 gigawatt project takes shape
WHO requests patent clearance
State-run logistics group to tackle supply chain problems
Tools: Improving supplier quality
Executive Moves: Alibaba is restructuring
Dear reader,
The USA is escalating the brewing conflict with China. They now have announced to not send any government representatives to the Olympic Games in Beijing. President Joe Biden is thus sending a very unwelcoming message. China will have to react accordingly to this diplomatic boycott; after all, Xi Jinping has styled himself and his country as strong and assertive. This announcement regarding a sporting event won’t be the end of the story. Further disruptions in global trade are now absolutely possible.
This gives Germany’s new foreign minister, Annalena Baerbock, an opportunity to promote her own human rights-based foreign policy. She has announced that she will not ignore the situation in Xinjiang and will seek transatlantic coordination. If Germany actually follows the US into the boycott, however, the impact would not be as severe as it is now. China could blame this on the poor influence of the US and continue relations for the time being. After all, China needs allies. However, it is now quite clear that the era of intense geopolitical conflicts did not end with the Trump era.
Just how much the attitude towards China has changed over the years becomes evident by a look at the history of the country’s WTO membership. “Change through trade” was a popular sentiment among China optimists in the early 2000s. If “the West” included China in the international trade order and increased both imports and exports, China would soon play by international rules and develop into a market economy. That was the idea. In retrospect, this seems rather naive. On the 20th anniversary of China’s accession to the World Trade Organization (WTO), the results are mixed, reports Felix Lee. Although global trade has grown, the West has lost many manufacturing jobs, and entire regions of the US are left in shambles. And the hopes foreign companies had placed in China were often left disappointed. On the other hand, many segments of the Chinese market remain closed off to foreigners.
The backlash against Chinese companies by the US shows just how intense the resulting frictions are. Washington is excluding more and more Chinese companies from its financial market and has now announced tighter supervision. Ning Wang analyzes how this fits into the overall disputes.
I hope you enjoy today’s issue!
Your Nico Beckert
Feature
20 years of China’s WTO accession: Clinton’s big mistake
Speaking to both houses of the U.S. Congress, the then US president promoted China’s accession to the World Trade Organization (WTO). The world would no longer be the same, he promised. The world’s most populous country would open its markets. And the US, with its wheat and corn, Hollywood movies, Fords and GMs, would be at the forefront. With more free trade, there would also be a freer China, Clinton said confidently. But things turned out differently.
These days mark the 20th anniversary of China’s accession to the WTO. The communist regime continues to rule with an iron fist. For the US and other industrialized nations, the promise of a new market has been fulfilled. But China has benefited far more. Today, more than 80 percent of refrigerators sold worldwide are made in the People’s Republic, 70 percent of all mobile phones and every second pair of shoes. While the trade balance between China and the USA was still largely balanced in 2003, the USA, in particular, is recording new record deficits in trade with China year after year. And China is by no means flooding the world with just cheap products. Laptops, flat screens, drones, electric cars – in 2020 alone, China will haveexported more than half a trillion US dollars more than it imported.
China had two decisive advantages
“Yes, China’s WTO accession was a success, as expected,” says Pascal Lamy. He was the EU’s Commissioner for Trade between 1999 and 2004 and, as WTO Director-General from 2005, was also heavily involved in negotiations with Chinese leaders after China’s accession. “The global economy was let off the leash,” he said on Friday at a webinar hosted by Berlin-based China think tank Merics on “China’s 20th WTO Anniversary – Cause for Celebration?” China imported heavily and modernized its economy, said Lamy. Consumers elsewhere benefited from lower prices because China knew how to produce cheaply and in large quantities with a huge army of workers. For Lamy, it’s clear: “A win-win.”
In fact, China had two main advantages at the turn of the millennium: Low labor and environmental regulations and a vast army of workers willing to toil at wages unthinkable in the West. At the same time, the world grew smaller as shipping costs dropped to next to nothing and the Internet connected the most distant places. China’s exports skyrocketed, as did its standard of living. Whereas one in four Chinese were living below the poverty line before joining the WTO, today the figure is less than ten percent. A third of the population can afford their own car, an apartment, and travel around the world. Foreign companies have also profited from this new prosperity. But China’s entry also created many losses in industrialized nations. The US in particular lost those exact manufacturing jobs that developed in China.
A mixed record
From a German perspective, the results are mixed. Germany itself is an export nation and has benefited the most from China’s integration into the world market among the OECD countries. Joerg Wuttke, Head of the EU Chamber of Commerce and Managing General Representative in China for chemical giant BASF since 2017, explains during the Merics webinar from Beijing: “When I arrived, BASF had sales of less than $2 billion in China. Now we are over 11 billion. And we have a $10 billion project underway.” None of this would have been possible without China’s accession to the WTO.
Nevertheless, certain expectations have not been fulfilled, even from the point of German business: The inclusion was supposed to act as a “catalyst for far-reaching structural reforms” and “promote free entrepreneurial activity in China”, writes the industry association BDI in a recent paper. “These hopes were largely disappointed.” What particularly upsets the BDI is that since 2016 at the latest, China should have been treated as a market economy and no longer enjoy the benefits granted to developing countries in international trade. This was explicitly provided for in the accession regulations.
BDI: Beijing is using WTO rules to its advantage
As much as WTO accession boosted China’s economy, it is still not free. In fact, China knows how to open its markets only to the extent that it benefits the country. The EU Chamber of Commerce complains regularly that foreign companies constantly get the short end of the stick in China. “The common expectation that the country would actually develop into an open and primarily market-based economy has not been realized,” the BDI writes in its paper.
“The Chinese government knows how to use the margins of WTO rules to its own advantage and often does the minimum to meet commitments.” In addition, contrary to its pledge, the Chinese government is also exerting “excessive influence on economic activities,” for example through price controls, subsidies, and judicial interference. The majority of 99 of the 100 largest listed companies in China are still state-owned. This, too, was agreed upon differently, complains the BDI.
The Merics webinar was also joined by former Deputy Assistant US Trade Representative for China Audrey Winter. Despite everything that happened, she tried to draw positives from the experience. “We learned a lot about China and its system and how it interfaces with our systems during that time.” That’s important to know, she says, because in trade negotiations the devil is always in the details. And more negotiations are underway, after all. An important lesson from her perspective: “We learned that China has no intention of becoming a true market economy at all.”
It is tax havens like the Cayman Islands that Chinese companies use to disguise their true structures. There, they set up variable interest entity (VIE) companies in order to go public overseas. Alibaba, Baidu, Didi, Tencent – almost all major Chinese tech companies listed on US exchanges use this construct. The goal? To circumvent Beijing’s restrictions that make it difficult for foreign investors to invest in Chinese tech companies.
This is because foreign investors are in fact prohibited from participating in the technology sector of the People’s Republic. Beijing wants to stay one step ahead in this sector to expand its global influence. But VIE constructs make investments by foreigners possible (China.Table reported).
Beijing had long tolerated IPOs in the US
Authorities in Beijing had long looked the other way when tech companies were raising capital on US exchanges. According to Bloomberg’s calculations, a total of 34 Chinese companies raised about $13 billion from investors through IPOs on US exchanges in the first seven months of this year. This is despite the fact that since 2018, Chinese companies are encouraged to place their shares on exchanges in Hong Kong or China instead of overseas.
The news that the CCP wants to completely ban its tech companies from going public abroad caused an uproar last week. The Beijing Securities Regulatory Commission (CSRC) immediately dismissed this and simply labeled the report as “fake news”. What is remarkable is that one day after the Chinese announcement, the US Securities and Exchange Commission announced that it would soon reserve the right to delist foreign public companies listed in the United States if their auditors failed to comply with requests for information from the US regulators’ requests for information.
SEC chief Gary Gensler defended this move by saying that China and Hong Kong do not cooperate with the US accounting regulator Public Company Accounting Oversight Board (PCAOB) and refuse audits. Beijing argues that if it would cooperate with the auditor board, sensitive data from Chinese companies could be leaked to foreign governments or competitors.
China’s stock market regulator turns the tables
The Chinese stock market regulator felt compelled to publish its own statement on its website on Sunday. It is to be considered a reaction to media reports that China is planning to ban companies from going public on foreign stock markets through variable interest entities (VIEs).
In the statement, China’s stock market regulator criticized the US: “In fact, both sides have been cooperating on audit oversight of US-listed Chinese companies, and worked together on pilot inspection programs to find a more efficient way of cooperation, which has laid a good foundation for future cooperation. In recent years, however, certain political fractions in the U.S. have turned capital market regulation into part of their politicizing tools, waging unwarranted clampdowns on Chinese companies and coercing them into delisting from U.S. stock exchanges.”
SEC issues new guidelines
For months, the issue of so-called VIEs has been heating the minds of foreign investors who have invested in Chinese companies such as Alibaba, Tencent, Didi, or Baidu. They feel cheated. Because VIEs are really just shell companies without any value.
“These shell companies (…) raise capital on US exchanges, but they do not transfer ownership from the operating company to American investors,” US Securities and Exchange Commission chief Gary Gensler wrote in a Wall Street Journal editorial in September. Investors are not protected, nor do they hold shares in the companies in China. The SEC eventually took action and raised the barriers for Chinese IPOs in the US in September. Only when new financial statement requirements have come into force that allows investors to identify the risks of VIE structures, will Chinese companies be approved for IPOs in the USA.
Stricter regulations after financial statement fraud
Following the accounting scandal of the Chinese coffee house chain Luckin 2020, which was listed on the US technology exchange NASDAQ, former US President Donald Trump had further tightened financial statement requirements for listed foreign companies. Against the backdrop of Trump’s trade dispute with the People’s Republic, the statement requirements are aimed primarily at Chinese companies.
However, there is a three-year transition period before the new regulation is implemented, which is why experts still do not trust the figures by Chinese companies.
Is DiDi’s withdrawal from Wall Street a precedent?
Ride-hailing service provider, DiDi, is also responsible for Beijing’s rapid rethinking of foreign listings. The company had pushed through its stock market debut in New York in June (China.Table reported), despite the concerns expressed by Chinese authorities. Didi has been under investigation for data protection violations ever since, and most recently, Beijing had announced its intention to bring parts of the company under state control.
Last Thursday, DiDi Chuxing announced plans to withdraw from Wall Street (China.Table reported). Instead, it said it would push for a Hong Kong stock market debut by March. “Chinese ADRs face increasing regulatory challenges from both US and Chinese authorities,” said fund manager Wang Qi of MegaTrust Investment. “For most companies, it will be like walking on eggshells trying to please both sides. Delisting will only make things simpler.”
DiDi raised $4.4 billion in its IPO on Wall Street. It was the second-largest IPO of a Chinese group in the US since e-commerce giant Alibaba’s new issue in 2014, but since then, DiDi shares have dropped 44 percent in the US.
Beijing has already been reprimanding its tech companies for more than a year. They are accused of monopoly abuse, non-compliance with worker protection rules, but also a bad influence on China’s youth and violations of consumer rights. Companies like DiDi not only had to pay fines but also suffered painful losses in value. DiDi’s stock market value, for example, plummeted by $42 billion after the cyber regulator banned new users from registering over the app.
Under the pretext of data security
But DiDi’s forced departure from the New York Stock Exchange stands only as an example for many other companies to follow. And Beijing’s main concern is the data collectedby companies from their users during the boom years. Back in July, the cyberspace authority CAC announced that any company planning an overseas IPO that had more than one million users would have to apply for permission.
Washington’s latest move plays into Beijing’s hands – because now the government can justify the measures under the pretext of data protection and also present itself as a fighter for a “long-term and healthy development of the platform economy”.
Chinese Communist Party
CSRC
Data protection
Finance
IPO
Stock Exchange
USA
News
Is Evergrande facing a restructuring?
According to insiders, Chinese real estate developer Evergrande is about to restructure its debt. This would include offshore bonds and private debt obligations, Bloomberg reported, citing people familiar with the matter. This would make the restructuring one of the largest in China’s history.
Last Friday, Evergrande had for the first time acknowledged the need to restructure its foreign debt. However, many details remained unclear in the brief stock exchange announcement, according to Bloomberg. The real estate group has $19.2 billion of foreign debt outstanding, as data from the financial services company show.
“Evergrande’s been trying to sell assets to repay debt, but Friday’s statement basically says it is going to ‘surrender’ and needs help,” said Conita Hung, investment strategy director at Tiger Faith Asset Management. “This sends a very bad signal.”
Yesterday also saw the end of the payment deadline on two dollar bonds. At the end of Asian business hours, two bondholders claimed they had not yet received payments from Evergrande. Evergrande had frequently serviced its bonds in recent weeks shortly before deadlines expired. “Everybody is waiting to see if this time will be the first real trigger event,” Reuters quoted a financial analyst as saying. Further details are still pending
Evergrande also set upa “risk management committee” yesterday, Reuters reports. The committee includes state officials. It is expected to play an important role in “mitigating and eliminating future risks”. Analysts told Reuters that the concerted efforts by the authorities indicated that Evergrande had probably already entered an orderly debt restructuring process. China’s central bank assured that the risk of a spread was under control. nib
Evergrande
Finance
Real Estate
EU extends sanctions
The European Union has extended its sanctions against four Chinese officials and one organization for human rights violations in Xinjiang. The punitive measures will now apply until the end of December 2022, the EU Council announced on Monday. The EU had agreed on the sanctions in March. Beijing had reacted with counter punitive measures. The CAI investment agreement has been shelved ever since.
The EU sanctions target Zhu Hailun, former Vice Chairman of the Chinese Communist Party in Xinjiang, and Wang Junzheng, Party Secretary of the Xinjiang Production and Construction Corps (XPCC), an economic and paramilitary organizational unit in Xinjiang that reports to the central government in Beijing. According to the EU, it is also responsible for the administration of detention camps.
The sanctions also target Wang Mingshan, a member of the Xinjiang CPC Standing Committee, and Chen Mingguo, Director of the Xinjiang Public Security Bureau (XPSB), the regional security agency in the province. The XPSB, which is part of the XPCC, is also listed separately as an organization on the sanctions list.
Those on the list are barred from entering the EU and their assets will be frozen. Furthermore, they are not allowed to receive any financial means or economic support from organizations or individuals in the European Union. ari
EU
Human Rights
Sanctions
Xinjiang
China pushes ahead with renewable energies mega project
China is pushing ahead with the expansion of renewable energies in China’s deserts. Just months after Xi Jinping unveiled a massive desert project with a capacity of up to 200 gigawatts (China.Table reported), the second phase of the expansion is now underway. China’s National Energy Administration has called on provinces to submit individual projects by mid-December, Bloomberg reports. According to the report, each individual project must have a capacity of at least one gigawatt. Construction of the wind and solar power plants is scheduled for 2022 and is planned to be completed in 2023. However, the grid connection may not be finished until 2024.
The power plants are to be built near existing power lines so that only a small amount of electricity is lost. They are also to be built near coal and gas-fired power plants, which are to act as a substitute during so-called dark doldrums when there is no sun and no wind, as Bloomberg reports. Like other nations, China is facing a major overhaul of its power systemdue to climate change concerns. The country’s high dependence on coal-fired power and concerns about grid security pose major challenges (China.Table reported). nib
Climate
Energy
Renewable energies
Solar
Sustainability
WHO asks China for patent release
The World Health Organization (WHO) has asked two Chinese manufacturers of Covid vaccines to release their vaccine patents, South China Morning Post reported. “We are in touch with the two big companies that have the vaccines approved by the World Health Organization,” said Erika Dueñas Loayza, head of the intellectual property unit in the WHO division for access to medicines and health products. The goal is to improve access to vaccines for countries in the global south. So far, only 7.3 percent of the population in African countries have been fully vaccinated against Covid.
The vaccines from Sinovac and Sinopharm are approved by the WHO for emergency use. In addition to the two companies, the WHO had also contacted the Chinese representation in Geneva. However, Dueñas Loayza stressed that it would not be a free release. “It would be a release in exchange for royalties,” Dueñas Loayza said.
The WHO would act as a platform and identify potential vaccine manufacturers capable of producing the Chinese companies’ vaccine. The World Health Organization could help speed up production and get the vaccines to countries in the global South quickly, he said.
According to Dueñas Loayza, however, Sinopharm and Sinovacare more interested in bilateral agreements with individual countries. The Indian company Bharat Biotech had made its technologies for Covid vaccines available to the WHO platform. It was hoped that Chinese suppliers would follow suit. Western pharmaceutical companies such as Pfizer, Moderna, Johnson & Johnson, and AstraZeneca havealsoso far given the WHO the cold shoulder concerning the release of patents, SCMP stated. nib
Corona Vaccines
Coronavirus
Health
WHO
USA boycotts Winter Games in Beijing
The USA has decided not to send diplomatic or official representatives to Beijing, effectively boycotting the Winter Olympics. Washington is refraining from sending a diplomatic delegation “given the PRC’s ongoing genocide and crimes against humanity in Xinjiang and other human rights abuses,” White House press secretary Jen Psaki said on Monday. However, the athletes will participate in the Games as planned, Psaki stressed. “We will support the athletes from home,” the spokeswoman said. However, given the situation in Xinjiang, “business as usual” cannot take place.
The U.S. will continue to address human rights abuses in Xinjiang, Psaki announced. The diplomatic boycott is only part of the commitment to the region. When asked why the government was not implementing a complete boycott, Psaki replied that “penalizing” athletes was not the right move.
China has previously threatened the U.S. with a break in trade relations in the event of an Olympic boycott. The government in Beijing will then take “countermeasures,” the Chinese Foreign Ministry said on Monday. “If the U.S. insists in willfully clinging to its course, China will take resolute countermeasures,” Foreign Ministry spokesman Zhao Lijian said. Those who called for staying away should stop “so as not to affect the dialogue and cooperation between China and the United States in important areas.”
The future German foreign minister also left a boycott of the Olympics possible in an interview with China.Table. Annalena Baerbock had also announced that she wanted to coordinate her policy more closely with traditional allies such as the United States or EU neighbors. On Monday, Baerbock once again reiterated her position of seeing Germany in system competition with China and drawing the appropriate consequences. “In addition to cooperation, however, we are also competitors when we look at the key economic policy issues of our time,” the Green Party politician said at a party meeting regarding the coalition agreement. She spoke out in favor of a joint EU policy toward China. ari/rtr/fin
Boycott
Geopolitics
Sports
USA
New logistics group to address supply chain issues
China is looking to get a better grip on supply chain issues through the merger of five companies into a state-owned logistics group. The new group, called China Logistics Group, will develop international trade links and freight services to organize global supply chains, state broadcaster CCTV reported on Monday.
China Railway Materials, China National Materials Storage and Transportation Group, the Shenzhen subsidiary of Huamao International Freight Ltd, China Logistics, and China National Packaging Corporation have been merged. In addition, China Eastern Airlines, COSCO Shipping, and China Merchants Group will join as strategic partners.
By Renaud Anjoran, China Manufacturing Consultants (CMC)
A survey by the American Society for Quality showed that the biggest hurdle buyers face in improving their supply chain quality is “working together with suppliers to improve performance.” That was in 2016, and we believe very little has changed.
Many companies have tried various approaches to improve their key suppliers. This is especially difficult when these companies need to change to a so-called “zero defect” goal and their suppliers refuse to even take the first step.
What is Zero Defect?
Zero Defect is a quality goal that refers to improving manufacturing systems to the point where zero or nearly zero defects are shipped to buyers. It is a way of not only satisfying buyers but also eliminating all wasted activities and materials associated with defective manufacturing. Zero Defect can eventually become a mindset where the entire organization does not tolerate any form of poor quality.
Based on our experience guiding our clients through transformation projects, you will find our practical advice below. It starts with the buyer acting decisively. When consultants are involved, we also share some good practices.
What the buyer must do
If the buyer has no influence over the supplier and if the buyer is not willing to make consistent decisions, the switch to zero-defect conditions is not likely. Let us explain this in detail.
We should mention that there is one important requirement. As a buyer, you want your supplier to be fully aware of your quality standard and agree with your assessment of their product quality. Without this prerequisite, the supplier’s teams will focus on differences in their assessment and the definition of defect rather than working on improvements.
We have observed buyers taking several approaches that have been successful in convincing key suppliers to initiate a quality improvement program and ultimately move to a zero-defect mindset.
Here are examples of successful approaches.
Let the supplier know that they are at risk of losing your business:
Develop at least one backup source and make sure they can provide good quality.
Collect data on the number of PPM (parts per million) defects and make sure the supplier knows this. Also make sure to communicate your target.
Warn the supplier: If there is no significant improvement over the next six months, reduce their business by X percent (e.g., by 20 percent after six months, then by another 20 percent after 10 months, etc.).
In parallel, offer to help them improve their systems and processes.
Make the situation uncomfortable for the supplier:
Secure a backup source (as is usually the case in automotive supply chains).
Collect data about the number of PPM defects, but also about all the costs it causes to your company.
Charge the supplier for some/all of these costs.
Also, if you encounter multiple defects, force the supplier into containment (meaning they pay an inspection agency to inspect 100 percent of the parts/products until that agency finds zero defects).
Switch from traditional acceptance sampling (based on AQL or Acceptance Quality Limits) to an acceptance on zero plan. Your inspectors will then need to review fewer samples, and you will save on evaluation costs.
In parallel, we offer to help them improve their systems and processes.
There are ways to ensure that these approaches are more likely to succeed:
The buyer notifies the supplier of any costs incurred due to defects.
A buyer’s representative (who can be a consultant) spends a few days in the factory explaining how poor quality adds cost to the factory’s bottom line. Note: The supplier may not formally acknowledge these comments for fear that the buyer’s procurement staff will use this information to drive down prices. As a rule, when representatives of the buyer’s procurement department are involved, the supplier tends to be less open, provides fewer data, and is not as willing and ready to acknowledge the results.
A buyer representative begins to aid the supplier with some process and quality development work required to improve quality. This may take the form of go/no-go gauges, test fixtures, inspection equipment, etc. The supplier rarely opposes such assistance if there is a direct and measurable impact on the percentage of defects and if it does not add significant cost to their operation.
In some cases, to achieve Zero Defect, the buyer’s designers must make significant changes to their operations. Heeding factory difficulties and creating simpler designs can go a long way toward showing good will and getting a supplier to cooperate.
A good process for consultants to support the transition
If you decide to involve consultants, taking some “best practices” to heart can go a long way.
The lead consultant should arrange a management meeting at the factory to introduce his team and explain how he can aid the factory to achieve its goals.
Careful preparation and good communication are key:
Management needs to feel that consultants understand their operational problems (which requires a fairly thorough initial assessment) and have the expertise to address these issues.
If the factory’s management opens up and shares their challenges and goals, this can form the basis for a successful plan. In general, it is better to take a path that is important to the factory’s top management to reach their strategic goals, if this is a way to move much closer to zero defect. The breadth and depth of change required within the organization is only possible with the full support of its owners and managers.
How do I begin?
Many companies lack the confidence to apply pressure on some of their key suppliers. This is understandable.
A good start is to engage directly with your key suppliers and find a contact who is motivated – for example, senior management will become aware that change is necessary, and there is the prospect of additional business when their performance improves.
Once a project with one supplier has shown positive results, you’ll have more confidence to push your other suppliers harder. And as you gain experience implementing operational change in one part of your supplier base, you will be better at selecting the right candidates and convincing them to go the way you want.
Supply chains
Trade
Executive Moves
Toby Xu will become Alibaba’s Chief Financial Officer from April. He succeeds Maggie Wu, according to a company announcement. Wu will remain loyal to Alibaba and serve as an Executive Director on the internet giant’s board.
Jiang Fan will be the head of a newly created digital commerce team at Alibaba. He will be responsible for international markets. Trudy Dai will take over the same position for the domestic market.
Dessert
Wreaths of flowers instead of champagne for the inauguration of the more than 1,000-kilometer-long train route from Kunming, the capital of the southwestern Chinese province of Yunnan, to Laos. The final section between the China-Laos border town of Boten and Vientiane, the capital of Laos, has been put into operation. The project, which came about as part of the Belt and Road Initiative, cost $5.9 billion (China.Table reported).
