Xi’s Big Mistake

But there’s a bigger problem here. The Didi IPO was not a normal IPO, at least as we think of them in the West. US investors who bought these “shares” don’t actually own equity. They own pieces of a Caymans “variable interest entity,” (VIE) which has a contract with the parent company. This structure is necessary because under Chinese law foreigners can’t own Chinese shares directly.

Didi (DIDI) duly warned investors in its US offering (see risk factors in their registration statement) that they had no shareholder rights and the Chinese government had final control. This isn’t new. US-listed Chinese companies since at least Alibaba (BABA) in 2014 have used the VIE structure. It’s one of those things that works great until it doesn’t.

This arrangement did have a key advantage, though, at least for the Chinese. It let Chinese enterprises rake in foreign capital while giving up no ownership and reserving the right to leave their own “investors” high and dry. This method may now be approaching its expiration date but it worked well for a long time.

That’s how Xi and the Chinese Communist Party operate. They do things that look capitalist but really aren’t, lacing them with unnoticed poison pills for later use. It’s similar to their appropriation of US technology, trademarks, and other intellectual property. We are literally selling them the rope.

“Prepare for War”

We should distinguish between Chinese business leaders and the Chinese government. I think the former are mostly just trying to run their companies the right way. They are like entrepreneurs everywhere, trying to grow their businesses to the best of their ability. The latter group makes it difficult and sometimes impossible.

This can be hard to grasp. Xi and the other communists really believe they can have it both ways, conducting “business” while also maintaining iron-like control over everything. They may not exercise their control, but they want to have it.

Those VIE companies are a good example. Some experts say the whole structure is illegal under Chinese law, yet it is widely used. The government looks the other way. But by doing so, the authorities give themselves a giant weapon they can use any time. The business executives are aware of this and modify their behavior accordingly. (Note that verb “modify.”)

In theory, this could still end well. Having successfully allowed people a taste of capitalism and its benefits, the government might think it can continue. Meanwhile those capitalist benefits might gradually usurp the Communist ideology.

Recent events say that’s unlikely, though. Beijing appears to be concluding it has squeezed all the advantage it can from capitalism. Is Didi any more a technological risk than scores of other companies? Not really. Sometimes you have to create object lessons to keep everyone in line.

In hindsight, things seem to have gone wrong after the 2008 financial crisis. Facing potential social unrest, China responded with massive debt-financed investment in infrastructure, housing, and other projects. Some were needed, others were make-work distractions. But all the debt was real. And over time, it has become a heavier burden.

Xi Jinping inherited this situation when he took power in 2013. What is his plan? According to Cai Xia, a Chinese professor and high-level CCP member and now expatriate dissident living in the US, Chinese Communism hasn’t changed. She wrote a lengthy paper under the auspices of the Hoover Institution. She maintains Xi is merely dropping the pretense.

Here’s Ambrose Evans-Prichard in a recent Telegraph column, writing a useful summary.

Like many amateur observers of China, I had assumed that Xi Jinping’s iron-fist policies at home and abroad were a break with the more emollient approach from Deng to Hu Jintao (if you can call the Tiananmen Square massacre emollient), when China seemed to be softening from a totalitarian to an authoritarian regime. Cai Xia makes clear that the fundamental character of the CCP has been unchanging.

The party has merely dropped the facade and dispensed with Deng Xiaoping’s tactical dictum: “bide your time, and hide your strength” (韬光养晦). It has also acquired the means of totalitarian control that Hitler and Stalin could only dream of, whether face recognition technology or digital tracking through the Social Credit System.

The long list of Xi’s affronts, from the Nine Dash Line to the South China Sea, to the pitiless asphyxiation of Hong Kong, to the intimidation of Australia, to the Uighur camps, are by now well-known, culminating in wolf warrior diplomacy and state-sponsored disinformation on COVID-19.

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Disclaimer:The Mauldin Economics website, Yield Shark, Thoughts from the Frontline, Patrick Cox’s Tech Digest, Outside the Box, Over My Shoulder, World Money Analyst, Street Freak, Just One ...

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William K. 3 months ago Member's comment

Keep in mind that China IS a Police State, as all communist countries must be in order to stay communist. And the police state has lots of power, And understand also that power corrupts, and absolute power corrupts absolutely. That is both unfortunate and totally true.

Worse yet, the Police State government does not make many mistakes, and those that it does make, it has the power to force on people anyway. And even worse, that Police State has the skill and resources to win the war even without bullets. Stealth and deceit are far less damaging to valuable infrastructure than bombs and bullets. The future will certainly be "interesting."

Rob Contano 3 months ago Member's comment

Why did we list $DIDI again since we are going to delist $BABA?