Does Didi’s crash point to the future of U.S.-China financial frictions? by TOKUCHI Tatsuhito

“API Geoeconomic Briefing” is a weekly analysis of significant geopolitical and geoeconomic developments that precede the post-pandemic world. The briefing is written by experts at Asia Pacific Initiative (API) and includes an assessment of burgeoning trends in international politics and economics and the possible impact on Japan’s national interests and strategic response. (Editor-in-chief: Dr. HOSOYA Yuichi, Research Director, API & Professor, Faculty of Law, Keio University)

This article was posted to the Japan Times on September 5, 2021:

API Geoeconomic Briefing

September 5, 2021

Does Didi’s crash point to the future of U.S.-China financial frictions?

TOKUCHI Tatsuhito,
Senior Fellow, Asia Pacific Initiative (API)




Didi Global Inc., China’s largest ride-hailing app operator, went public on the New York Stock Exchange on June 30, pricing its initial public offering at the top of its range at $14 (¥1,540), meaning its total market value would reach some ¥8 trillion.

It is not surprising that the market welcomed the debut, considering the company’s rapid growth in the roughly nine years after its launch, making full use of artificial intelligence and data systems as its business strategy.

But shock waves hit the market only a few days later. Didi shares fell as much as 25% compared to the closing price from the previous week, after Chinese regulators on July 4 ordered app stores to remove the company’s app, citing serious legal violations regarding its collection and usage of personal information, and the Chinese government announced on July 6 it would tighten oversight of companies listed overseas.

The Didi crash, along with the suspension of the Chinese fintech giant Ant Group’s listing — dubbed the largest listing in a century — on the Nasdaq-style STAR Market in Shanghai and also in Hong Kong in November, made Wall Street investors worry about where the financial friction between the United States and China will lead.


‘Chimerica’ structure

Although the United States and China are said by some to be in the midst of a “new Cold War,” financial businesses linking the two nations are, ironically, thriving.

According to the Nikkei business daily, the U.S.’ securities investments in China total some $1.2 trillion (¥130 trillion), of which 75% is invested in stocks.

China’s securities investments in the U.S. total about $2.1 trillion (¥230 trillion), more than that of the U.S. in China. More than 90% of the investment is made in U.S. Treasury bonds, making China the second largest foreign holder of such bonds after Japan.

China’s huge financial business is supported by major U.S. financial institutions which are eager to get a share of the profits driven by the rapidly growing Chinese financial market.

Seemingly quite unconcerned about the New Cold War, they are intently expanding personnel in mainland China and Hong Kong.

In May, Goldman Sachs Asset Management set up a wealth management firm jointly with China’s largest bank, Industrial and Commercial Bank of China (ICBC), with Goldman Sachs offering a 51% funding contribution ratio and ICBC 49%.

The news attracted global attention, being a joint venture between a top global money-making investment bank and a commercial bank with the largest amount of funds in the world.

While Wall Street is said to be leaning toward the Democratic Party, which maintains a harsh stance against China, the U.S. and Chinese financial industries have continued to complement each other, maintaining what some have dubbed a “Chimerica” relationship, being joined at the hip.


Data sovereignty

There are two issues to focus on regarding the financial conflict between the U.S. and China.

One is the issue of Chinese firms listing their shares in the U.S.

Currently, there are some 200 China concept stocks — shares of companies that operate in mainland China — listed in the U.S., with their total market value topping $2 trillion.

Chinese companies that first started listing their shares in the New York Stock Exchange in the mid-1990s were mainly state-owned firms, but recently more private companies have been getting listed as the Chinese economy grows, topping state firms.

Chinese coffee chain Luckin Coffee Inc., which was listed on the Nasdaq in 2019, disclosed in April last year that its chief operating officer fabricated the company’s sales, leading to concerns over China’s auditing system regarding firms listed overseas.

In December, the Holding Foreign Companies Accountable Act was signed into law in the U.S., prohibiting foreign companies from listing their securities on any of the U.S. exchanges if an identified issuer’s auditor cannot be inspected by the Public Company Accounting Oversight Board (PCAOB). The primary impact of the law will be on Chinese issuers whose audit papers cannot be inspected by the PCAOB because of local laws that prevent inspections by foreign agencies.

The Chinese government has maintained that it will not grant foreign authorities direct access to the accounting documents of Chinese companies.

And then the Didi incident happened.

The Chinese government, which claims data sovereignty — all data within China, including that held by companies, belongs to the state — now requires Chinese companies seeking to list overseas to go through strict regulatory screening by the Chinese Communist Party’s Central Cyberspace Affairs Commission if they have 1 million or more users with registered personal information.

In response to such a move, the U.S. Securities and Exchange Commission issued a statement on July 30 saying it would not allow Chinese companies to list on U.S. exchanges unless they disclose the risk of Beijing interfering in their businesses.

Why is China taking such a harsh stance, when such a response by the U.S. was easily predictable?

It seems to be making decisions based on three standpoints.

  1. Data sovereignty is a key issue that cannot be compromised amid U.S.-China friction.
  2. Even if Chinese firms are delisted in the U.S., they can be taken care of at exchanges in China and Hong Kong.
  3. It is the U.S. financial industry and investors, more than those in China, who will be affected by any delisting.

All of these points are true.


Complex and intertwined

Many Chinese shares have been listed on the Hong Kong Stock Exchange in recent years, attracting a large flow of funds from investors around the world, making it one of the major fundraising centers along with the New York Stock Exchange and Nasdaq.

Chinese shares listed in the U.S. are mostly held by foreign private equity funds and investors mainly on Wall Street, and those investing from mainland China are limited to founders and some other investors.

Didi’s biggest investor is SoftBank Group Corp.’s Vision Fund.

If Chinese firms are delisted in the U.S., foreign investors might be the ones who will be most troubled.

It will be difficult to avoid more Chinese firms from being delisted, considering a variety of complex and intertwined issues, including China’s strong stance and the U.S.’ uncompromising approach, a dispute over data sovereignty, the Chinese government’s increasing pressure on internet platformers and the U.S.’ sanctions around Chinese military firms.

We should pay attention to how China and the U.S. will act regarding the following policies:

  1. Will China judge as illegal a structure known as Variable Interest Entities (VIE), created decades ago to allow Chinese companies to circumvent Chinese rules and get listed in the U.S.?
  2. Will the U.S. issue any order to investors in the U.S. not to invest in delisted Chinese firms?

Since major Chinese companies listed in the U.S. use the VIE scheme for setting up an offshore company for overseas listing purposes, if the Chinese government decides to regard that as illegal, their shares will in theory become worthless, representing China’s declaration of a financial war against the U.S.

And it would not be easy for the U.S. to issue an order that would choke American investors.


Financial sanctions

The other issue to focus on is the U.S. imposing financial sanctions on Chinese firms for national security concerns, like in the case of Huawei Technologies Co., or over human rights abuses against Uyghurs in China’s Xinjiang region, as well as for doing business with Beijing officials involved in the crackdown on Hong Kong.

Financial sanctions carry the risk of triggering a retaliatory cycle, such as China selling U.S. Treasury bonds, the U.S. freezing Chinese financial assets and excluding Chinese banks from the dollar-based payment system among financial institutions and companies. Such retaliatory measures could lead the global economy into tremendous chaos.

Such full-scale financial sanctions, if imposed, could even prompt China to invade Taiwan, much like how the U.S. ban on oil exports to Japan contributed to those countries entering World War II.

Because financial sanctions are intended to pressure companies in all aspects — including foreign exchange, money transfers and deposits — the U.S., with the dollar as the key currency, has an overwhelming advantage.

Being well aware of the situation, China appears to be concentrating on the following policies:

  1. Try to buy time by maintaining the status quo as much as possible.
  2. If the U.S. imposes financial sanctions, take decisive retaliatory measures to raise the costs of U.S. sanctions and remove them.
  3. Build its own international financial system.

Although building its own international financial system will take time, there are two developments that should be noted.

One is the Cross-border Interbank Payment System (CIPS), an independent onshore yuan clearing and settlement system China launched in 2015 and backed by the People’s Bank of China.

More than 900 financial institutions across the world, including major banks in Japan and Western nations, are already participating in the system.

The value of payment transactions conducted through the system in a year rose steadily from 4.36 trillion yuan (¥70 trillion) in 2016 to 45 trillion yuan (¥720 trillion) in 2020, but the yuan-denominated system still lags far behind the dollar-denominated currency system.

The other development to watch is the establishment of the digital yuan, which is also attracting attention in Japan.

China plans to officially launch the digital currency in time for the 2022 Beijing Winter Olympics. If realized, it will become the world’s largest-scale digital currency issued by a central bank.

Concerns are rising outside China that the creation of the digital yuan could threaten U.S. dollar hegemony, as Facebook CEO Mark Zuckerberg said at a congressional hearing in October 2019: “If America doesn’t innovate, our financial leadership is not guaranteed.”

However, there is only a small possibility that this will happen in the near future, since the digital yuan is so far only a cash-like digital payment system used within China by individuals, and the system by itself will not lead to the globalization of the yuan.

To globalize a currency, a nation needs to have a free foreign-exchange policy and a system that guarantees liquidity of financial assets, something totally different from the creation of the digital yuan.

Therefore, if the digital yuan is to expand outside China, it will be limited to some countries in Central and Southeast Asia that are under the influence of the Chinese economy and where the use of the yuan is available.


Nondollar deals

The biggest challenge for Western nations will be the possibility of blockchain technology and the system of the digital yuan becoming a de facto standard.

If that happens, they will have to cope with data protection risks and the increase of nondollar deals.

This is why central banks of industrialized countries, which had been slow to act on this issue, are starting research and development of digital currencies.

While China is actively advancing a strategy to break dollar hegemony, it remains an uphill battle for the nation. We can say that there is no rationale for China to start a financial war now.


The views expressed in this API Geoeconomic Briefing do not necessarily reflect those of the API, the API Institute of Geoeconomic Studies or any other organizations to which the author belongs.