China: A Reset on US Trade, and the Ant IPO

Published on November 6, 2020

A top-level official in China commented on background yesterday on the very tenuous but now likely attempts by Beijing to reset China-US economic and trade relations after the US presidential elections, with former Vice-President Joe Biden now looking increasingly certain to be sworn in as the next President of the United States on January 20, 2021 (see SGH 11/4/2020; “US Elections: The Big Picture”).

We share those comments with you below, as well as some color from a separate Beijing source on the delayed Ant IPO.

Renewing the Strategic Economic Dialogue

Beijing had already been preparing to “reset” its tattered relationship with the United States under either post-election outcome, and from what we understand, President Xi Jinping will mark the transition to a new US presidential term by appointing a new ambassador to Washington “in an effort to maintain relatively stable” bilateral relations.

Once, as is now widely expected, Biden is officially pronounced the winner of the presidential elections, President Xi will then send a standard congratulatory note, and Beijing will seek to set up a phone call between the two heads of state as soon as possible. On a more material level, Xi has also made it clear that he would like the two countries to resume the US-China Strategic Economic Dialogue that was started under the Bush administration, “in order to ensure the relative stability of bilateral relations amid fierce competition.”

And dangling out the prospects for greater access to Chinese markets, an official from China’s top leadership pointedly notes that “the establishment of a normal China-US economic and trade mechanism will consolidate or even expand the share of US products in the Chinese market.”

Trade and Technology Still in the Crosshairs

To emphasize his point, this official cites analysis from the Ministry of Commerce showing that since the trade wars with US began, 837 companies, including 514 Chinese and 37 small American firms, left China to set up factories in Southeast Asia and other locations. However, as of the end of September, 206 of these had closed their Southeast Asia operations to return to China. The reason, the Ministry claims, was China’s still lower overall cost of production and sales, explaining the nearly 6% Foreign Direct Investment year on year growth levels for the first three quarter of 2020.

And regarding Beijing’s support for the “Phase One” Trade Deal that was laboriously concluded with the administration of President Donald Trump, this official predicts continued adherence at least for now to the accord, despite difficulties in implementing and meeting the targets of the deal, while repeating a frequent complaint from Beijing over US restrictions of high-tech exports to China.

But the accord, this official concedes, was a matter of expediency to avoid a further escalation of the trade wars, and in the unlikely event either a returning Trump administration or a Biden presidency further escalate the technological war with China, he warns, Beijing will retaliate with a series of measures including the newly passed “Export Control Law.” The prospects for any “Phase Two” accord, which was pretty much dead on arrival already, remains nil.

And for all the efforts to “reset” bilateral economic relations, the “decoupling” trend started under Trump is powerful, and potentially here to stay. As this official defiantly predicts, “the proportion of China-US trade in our country’s total foreign trade is likely to decline further during the 14th Five-year Plan period.”

“In the next five years,” he notes, “there are three main priorities for China’s foreign trade development: One, trade with neighboring countries such as [the ] ASEAN [bloc], Russia, South Korea, Japan and Kazakhstan; two, trade with the European Union; and three, trade with Belt and Road Initiative countries. The US has fallen into fourth place…[and] if the technology war between China and the US continues to escalate, the China-US bilateral trade volume may shrink again.”

Ant: A Three to Four Month Delay

On a separate note, the decision on Monday by Chinese authorities to postpone Ant Group’s IPO after four major regulators interviewed CEO Jack Ma sent shockwaves through the financial community, and raised questions over whether Beijing’s intent was to engineer a political smackdown of the outspoken Ma, or to send a policy signal that goes considerably deeper than that. 

As is often the case in these instances, the answer appears to be a bit of both.

Well-placed Chinese officials note that the three main reasons for delaying Ant’s IPO were that; one, Ant Technology’s  current financial leverage does not meet the new regulatory requirements of the People’s Bank of China, two, officials saw “something wrong” with the content of its listed sector that needed to be readjusted, and three, there was a problem with the IPO valuation.

Our understanding is that over a dozen financial institutions – ostensibly all competitors — had complained to regulators and urged them to postpone Ant’s IPO, including one complaint that went all the way to President Xi Jinping. Most to the point, officials believe it will take about three to four months now for Ant to cure the three problems above, after which a pared down IPO will be listed on the Shanghai and Hong Kong exchanges at the same time.

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