WeChat, the most popular messaging app in China, now warns users that it actively stores a whole range of private data and will readily share them with the Chinese authorities if needed. (Matthew Robertson/Epoch Times)WeChat, the most popular messaging app in China, now warns users that it actively stores a whole range of private data and will readily share them with the Chinese authorities if needed. (Matthew Robertson/Epoch Times)

China’s most popular messaging app WeChat now warns users in a privacy statement about how much of their private data the company shares with the Chinese regime. To no one’s surprise, it’s just about everything users type into the app.

Developed by the Chinese internet company Tencent, WeChat is China’s equivalent of WhatsApp and is used by 662 million mobile users, which makes it the dominant messaging app in China and one of the largest in the world.

WeChat users who updated to the latest patch are greeted with a new prompt that requires them to accept the privacy policy in order to continue using the app. Upon careful reading, the new privacy policy acknowledges that WeChat collects a whole range of data from its users, and to comply with “applicable laws or regulations” would readily share them with the Chinese regime.

Private log data from users such as “information about what you have searched for and looked at while using WeChat,” and “people you’ve communicated with and the time, data and duration of your communications” are among the things that WeChat freely stores and uses to customize advertisement and direct marketing.

WeChat users who updated to the latest patch are greeted with a new prompt that requires them to accept the privacy policy in order to continue using the app. (Screenshot captured by Twitter user @lotus_ruan)

WeChat users who updated to the latest patch are greeted with a new prompt that requires them to accept the privacy policy in order to continue using the app. (Screenshot captured by Twitter user @lotus_ruan)

WeChat also admits that it would “retain, preserve or disclose” users’ data to “comply with applicable laws or regulations.” Because China’s law enforcement agencies and security apparatus do not need a search warrant to seize a citizen’s property or private data, the Chinese regime would essentially have access to just about everything WeChat users send through the app.

Users who refuse to accept the latest privacy policy would be unable to access WeChat with their accounts, until they change their mind and click the “accept” button. However, because users can resume using the app anytime with their pre-existing data intact, WeChat likely plans to store all the data for a prolonged period, even when a user explicitly refuses to let WeChat manage his or her own data anymore.

The new privacy policy contains few surprises for those that have long been criticizing WeChat for lacking privacy and security protections for its users. After all, observers have attributed the dominance of WeChat in China to the company’s close collaboration with the Chinese regime in implementing self-censorship and surveillance mechanisms in the app.

WeChat certainly got an assist from the Chinse regime when it started a partial blocking of WhatsApp in July. The blocking of WhatsApp eliminated one of the few remaining messaging apps available for users in China that was not controlled by the authoritarian regime.

The Chinese regime also recently announced on Sept. 7 a new regulation mandating that the participants of WeChat message groups be responsible for managing the information posted in their respective groups. Essentially, this means that a user in a message group could be held liable and even persecuted for information that others post in the group.

It has long been noted that WeChat is among the most heavily censored messaging apps. A 2016 survey done by Amnesty International that ranks the world’s most popular messaging apps in terms of privacy protection for users gave WeChat a score of 0 out of 100, meaning that users of WeChat receive little or no encryption protection for their communications and the app is completely exposed to censorship and surveillance by the Chinese regime.

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Delivery workers sort parcels for their customers in Beijing, China on “Singles Day,” a holiday that has grown into the world’s busiest day for e-commerce, Nov. 11, 2016. (AP Photo/Andy Wong)Delivery workers sort parcels for their customers in Beijing, China on “Singles Day,” a holiday that has grown into the world’s busiest day for e-commerce, Nov. 11, 2016. (AP Photo/Andy Wong)

NEWS ANALYSIS

China, the world’s largest e-commerce market, counts more than 400 million online shoppers even as half the country remains offline, but eager Canadian businesses face significant hurdles to gain market share.

Chinese e-commerce giants Alibaba and JD.com are making a big push in Canada trying to get more Canadian businesses to join their platforms and sell to the Chinese.

Alibaba’s billionaire chairman Jack Ma will be making his pitch to Canadian business—alongside Canadian Prime Minister Justin Trudeau—at an event in Toronto called “Gateway 17” on Sept. 25. 

The Toronto Region Board of Trade hosted JD.com in July for a business roundtable with more than 50 Canadian companies.

Canadian products have an excellent reputation in China. The growing Chinese middle class is leery of cheap Chinese goods and values the quality of Canada’s manufacturing and pristine environment for agro-food products.

More broadly, China is undergoing a lengthy transformation from an investment-oriented economy to a consumption-based one—away from heavy industry and toward the service sector. E-commerce has a vital role to play in the Chinese government’s strategy.

“E-commerce platforms are really helping to standardize market access in China to people of all income groups, which is an important priority in China,” said Jan De Silva, president and CEO of the Toronto Region Board of Trade, in a phone interview.

Reasons for Concern

E-commerce might simplify certain aspects of doing business in China, but pervasive challenges like lack of rule of law and intellectual property (IP) violations are but a couple of the difficulties foreign businesses face.

U.S. President Donald Trump initiated a probe into China’s IP theft, which is estimated to be responsible for between 50 and 80 percent of all IP violations that harm the U.S. economy, according to the IP Commission Report. The U.S. Chamber of Commerce estimates 86 percent of all counterfeit goods come from China and Hong Kong.

Bottles of wine from Clear Lake Wineries, an export operation of Ontario wines to China. (Courtesy Mary Whittle)

Bottles of wine from Clear Lake Wineries, an export operation of Ontario wines to China. (Courtesy Mary Whittle)

“A lot of product on Alibaba is counterfeit. Consumers know that too,” said Mary Whittle in a phone interview. She is the CEO of Clear Lake Wineries, a family-run business that exports Ontario wines to China. 

However, China is cracking down on IP violations for good reason. It realizes that some of its companies can be global champions provided other companies don’t plunder their IP. So they must be protected. The number of settlements in the last few years is up roughly fourfold under the stronger judicial framework, says De Silva. 

IP violations aren’t limited to fake goods. They can derail a business when an unscrupulous company learns of the legal name of a legitimate business and becomes the first to register or use that name in China. It then files a claim against the genuine business when it tries to register or use the name in China. 

The Canadian Trade Commissioner Service (CTCS) warns that patents and trademarks registered in Canada or other countries are not usually protected in China and that regulatory enforcement can still be unsatisfactory. The CTCS website even has an extensive section on business risks related to corruption in China.

A lot of product on Alibaba is counterfeit. Consumers know that too.

— Mary Whittle, CEO, Clear Lake Wineries

Another warning from the CTCS, in a section titled “An Introduction to E-Commerce in China,” states: “Government policies regulating the marketplace are dense, complicated, and prone to changes without notice.” 

An extreme example of China’s opaque regulatory enforcement is the case of John Chang and Allison Lu, owners of Lulu Island Winery based in B.C., who are facing a minimum of 10 years—and possibly life—in prison for alleged wine smuggling into China. The winery said it believed it had followed all the applicable laws, yet Chang has already been serving jail time.

“The arrest of Mr. Chang and Ms. Lu for a fabricated customs violation is an assault on their basic rights, a breach of China’s international trade obligations, and China’s own customs laws,” Conservative international trade critic Gerry Ritz said, as reported by the CBC in May.

In an email to The Epoch Times, Brianne Maxwell, spokesperson for Global Affairs Canada said: “We are following the case of Mr. Chang and Ms. Lu closelyCanadian officials are in contact with the relevant Chinese authorities and are providing consular assistance to Mr. Chang, Ms. Lu and their familyCanadian representatives have raised the case with Chinese authorities at high levelsTo protect the privacy of the individuals concerned, further details on this case cannot be released.

Rule of law is necessary for business to thrive in a legitimate manner. Clearly it still has a long way to go in China.

The Chinese e-commerce giants are basically facilitation and delivery mechanisms. But doing business in China is much more than filling an order. The Chinese consumer is bombarded with options and a variety of marketing schemes. The reality is that many countries are trying to sell to the Chinese, which makes marketing efforts to distinguish products costly. Competition is intense.

Whittle says she was told by JD.com that a business could spend $400,000 on a marketing campaign for a month and there’s no guarantee the message would register with consumers.

“It is a very difficult market to penetrate and you can do a lot of things right and it’s still hard, very difficult to break through the noise, competing against every other country and every other product,” Whittle said.

The e-commerce giants may be trying to put dollar signs in the heads of Canadian businesses, but there are many factors for success that are beyond their control. 

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(Shutterstock)(Shutterstock)

Chinese investments in the United States reached a new record in 2016, more than tripling the previous year’s. However, the pace of investments has begun to cool in 2017, following a crackdown in China on capital outflows.

In reaction to massive capital outflows and the resulting downward pressure on the Chinese currency, Beijing tightened its controls on many outbound mergers and acquisitions (M&A) deals, writes research firm Rhodium Group in a recent report.

In particular, outbound investments in real estate, entertainment, and deals outside investors’ core businesses are now under much more scrutiny, and Chinese investors, wary of having their deals struck down by Beijing, have been more reluctant to bid.

With these recent changes, the pace of newly announced investments in the United States has already begun to slow.

“In the first quarter of 2017, the volume of announced acquisitions fell by 20 percent compared to the fourth quarter of 2016. The combined value of announced deals decreased by about half,” stated the Rhodium report.

Chinese Buying Spree

The investment activity that peaked last year started in 2010, when China relaxed rules on outbound investment for institutional investors in order to expand its political and economic influence abroad.

Since 2010, Chinese companies have invested more than $100 billion in the United States across a wide range of industries, with the real estate and hospitality industries attracting nearly 30 percent of the total.

Capital flight from China skyrocketed in 2016 in particular, with mounting economic problems at home and a devaluation of the yuan.

Last year alone, Chinese firms invested a record $46 billion in the United States. The huge jump in investment was driven by a significant number of mega deals, including aviation and shipping giant HNA’s acquisition of U.S. technology and supply chain company Ingram Micro for $6 billion.

The HNA logo is seen on a building in Beijing on Feb. 18, 2016. (GREG BAKER/AFP/Getty Images)

The HNA logo is seen on a building in Beijing on Feb. 18, 2016. (GREG BAKER/AFP/Getty Images)

And U.S. real estate, which is considered a safe haven, was the biggest beneficiary of Chinese investments. The top deals included Anbang’s purchase of 15 properties from Strategic Hotels & Resorts for $5.5 billion and HNA’s $2 billion acquisition of Carlson hotels.

Foreign direct investment by U.S. firms in China, by contrast, stayed flat compared to previous years, at $13.8 billion. Hence, the gap between Chinese investment in the United States and U.S. investment in China widened dramatically last year, stated the Rhodium report.

U.S. Real Estate as Safe Haven

The easing of restrictions over the past few years allowed insurance companies based in China to invest up to 15 percent of their total assets in offshore real estate.

As a result, U.S. real estate, particularly hotels and office spaces, has become attractive for Chinese insurers seeking high returns and portfolio diversification.

Investment in the U.S. real estate market soared after the stock market crash in China in June 2015. The sharp decline in returns at home led investors like Anbang Insurance, China Life Insurance, and Fosun Group to look for safe havens.

However, since the tightening of capital controls in late 2016, “the pace of real estate investment has slowed markedly,” stated the Rhodium report, “but activity has not collapsed.”

There are few pending real estate deals, including HNA’s acquisition of a stake in Hilton for $6.5 billion. HNA also bought 245 Park Ave. in New York for $2.2 billion, one of the highest prices ever paid for a Manhattan office tower.

Uncertainties Ahead

While Chinese investment in the United States continues, it is unlikely to reach the levels seen in 2016, as Chinese investors are now more cautious, according to experts.

“Up until six months ago, corporate investors from China were aggressively outbidding their rivals in cross-border M&A deals,” said a senior executive at a U.S. private equity firm, who wished to remain anonymous.

But for the last six months, investors have been less active, he said. Transaction volume fell by 12 percent in the United States in the first quarter of 2017, according to the real estate firm Jones Lang LaSalle.

“For the first time in two years, New York has lost its spot as the world’s most traded city. Leading the pack is London, regaining the spot it lost in 2015,” said an Jones Lang LaSalle report released in April.

According to another report by real estate brokers Cushman & Wakefield, Beijing is blocking all deals involving investments of more than $10 billion until September 2017, in an effort to regulate international investments.

In 2016, 62 percent of the investments abroad were over $1 billion. Now, M&A transactions valued at more than $1 billion that are outside Chinese investors’ core businesses, and foreign real estate deals by state-owned companies, are being restricted, leading to the investment lag in recent months.

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March 30, 2017

A photo of the state-owned China National Offshore Oil Corp. (CNOOC) platform outside its headquarters in Beijing, China. After Canada approved CNOOC’s takeover of Canadian oil and gas producer Nexen, it vowed to reject any future foreign takeovers in the oil sands sector by state-owned companies. (AP Photo/Andy Wong)A photo of the state-owned China National Offshore Oil Corp. (CNOOC) platform outside its headquarters in Beijing, China. After Canada approved CNOOC’s takeover of Canadian oil and gas producer Nexen, it vowed to reject any future foreign takeovers in the oil sands sector by state-owned companies. (AP Photo/Andy Wong)

Canada’s need to attract foreign capital and China’s desire for strategic investments abroad are playing an elaborate game of cat and mouse.

Business ties between the two are deepening. Canada and China are currently engaged in free-trade talks and Canada proposes to invest $256 million over five years to join the China-led Asian Infrastructure Investment Bank (AIIB). Two years ago, the two countries opened the first North American renminbi trading hub in Toronto.

The Globe and Mail recently reported that as part of China’s free-trade talks with Canada, Beijing seeks “unfettered access for Chinese state-owned firms to all key sectors of the Canadian economy.” But experts say state-owned enterprise (SOE) investment disadvantages Canada from both economic and—coming from China—ethical perspectives.

“When it comes to Chinese investment, the biggest issue is state-owned enterprises,” said Jack Mintz, President’s Fellow of The School of Public Policy at the University of Calgary, in a phone interview.

On March 27, the Liberals reversed a 2015 Harper government ruling that prevented a Chinese takeover of Montreal high-tech firm ITF Technologies due to national security concerns. The newly approved purchase by O-Net Communications gives China an edge in weapons technology.

Foreign investment has historically been a critical component of building Canada, said Bank of Canada Governor Stephen Poloz in a speech at Durham College in Oshawa on March 28. His speech pushed for open economies and noted that foreign investment is needed to fund infrastructure in Canada given the inadequate domestic savings base and relatively small population with its vast geography.

Last fall, the Liberal government created a new federal body, the “Invest in Canada Hub,” to better coordinate efforts to attract foreign capital. The government also raised the threshold for the review of foreign purchases of Canadian companies to $1 billion in 2017—two years sooner than originally planned—and published new rules regarding takeovers with national security concerns.

When it comes to Chinese investment, the biggest issue is state-owned enterprises.

— Jack Mintz, The School of Public Policy, University of Calgary

Finance Minister Bill Morneau is beating the drum, saying Canada is a great place to invest given the sound banking system, highly educated and skilled workforce, rule of law, and low business tax costs.

SOEs

Open borders and foreign investment increase competition and put pressure on Canadian businesses to perform better. With foreign capital could come new technologies and better management.

But when it is SOEs doing the acquiring, given their tax breaks and other subsidies, it creates an uneven playing field, said Mintz.

“There’s an economic argument that we don’t want to just have high valuations for companies simply because somebody’s willing to buy them up because of some state incentive,” Mintz said.

Considerable debate surrounded the December 2012 Harper government approval of Nexen’s takeover by the state-owned China National Offshore Oil Corporation (CNOOC).

Duanjie Chen, formerly an economist at The School of Public Policy at the University of Calgary, wrote a report in 2013 about China’s SOEs stating that the Chinese government had engineered their phenomenal growth by granting them cheap or free inputs (capital, real estate, etc.), “in order to create globally dominant corporate powers.”

“Placing a lower priority on human rights, the environment, social justice, and corporate rectitude give China and its SOEs an edge that have helped them in their goal of leapfrogging competing world economic powers, including Canada,” Chen wrote.

We have to make sure there are clear benefits to the Canadian economy if we enter into an agreement.

— Jack Mintz, The School of Public Policy, University of Calgary

“Without these explicit and implicit subsidies, China’s SOEs have actually proven to be far less economically competitive than their private-sector rivals,” Chen added.

“I don’t have a problem with private companies coming into Canada and buying assets,” Mintz said, but noted that with SOEs, Canada is not getting the benefits of foreign investment and actually gets negative benefits.

Bumps in the Road

According to a new report by research firm Rhodium Group and global law firm White & Case, China became the second-largest source of foreign investment in 2016, with US$140 billion or 14 percent of the global total.

The report makes the case that Chinese capital is still vastly under-deployed globally. But deploying the capital is starting to meet with resistance.

Outbound deals from China have been slowing so far in 2017. As of March 20, just US$25 billion in deals, which is 70 percent less than the same period in 2016, have been announced, according to a CNBC report citing Dealogic data.

Tighter capital controls in China to stem the decline in the yuan appear to be making Beijing more selective with its outbound foreign investment.

China is also facing increased scrutiny of its investments abroad, although Canada is making strides in the opposite direction. Certain sectors are believed to be more strategic for Chinese capital deployment, such as natural resources and technology—two areas that point Canada’s way.

A Nexen oil sands facility near Fort McMurray, Canada, is seen in this aerial photograph on July 10, 2012. Nexen was sold to China's CNOOC Ltd. in December 2012. (The Canadian Press/Jeff McIntosh)

A Nexen oilsands facility near Fort McMurray, Canada, is seen in this aerial photograph on July 10, 2012. Nexen was sold to China’s CNOOC Ltd. in December 2012. (The Canadian Press/Jeff McIntosh)

A complaint commonly levelled against China is a lack of reciprocity. “China has only made limited progress in further levelling the playing field for foreign companies in China, which still face numerous formal investment restrictions as well as alleged informal discrimination,” according to the Rhodium Group and White & Case report.

“This lack of reciprocal openness is fuelling particular frustration in advanced economies, which follow principles of openness and non-discrimination for Chinese and other foreign investors.”

Particularly with sectors of the Chinese economy dominated by SOEs, Chen stated, “And unlike Canada, China jealously guards the sectors in which its SOEs exert absolute or strong control, disallowing any private-sector competitors—domestic or foreign—free entry.”

In attracting foreign investment, Mintz advises Canada to put strong limits on SOEs. “It’s a matter of principle,” he said. “SOEs are compromised by the politics they have to work with. And that includes mixed enterprises,” Mintz said.

Mixed enterprises are partially state-owned. The Rhodium Group, which tracks Chinese investment in the United States, breaks down the ownership of the investment into government-owned versus at least 80 percent privately owned. But U.S. and Canadian intelligence agencies have warned in the past that even non-state-owned firms act in the interests of the Chinese government.

“We have to make sure there are clear benefits to the Canadian economy if we enter into an agreement,” Mintz said.

Canada is an exporting nation and China is the world’s second-largest economy. It seems inevitable that more Chinese capital will find a home in Canada.

“We want all of this to be fair and China is not always fair,” said Paul Frazer, president of PD Frazer Associates, a Washington-based government affairs consultant, in a phone interview.

The Harper government had taken a harder stance on China’s foreign acquisitions, but the Liberals appear to be reversing that stance with an eye on completing a free-trade agreement with China.

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Cargo trucks drive through a container pool at a seaport in Qingdao in eastern China's Shandong province in this file photo. Canada aims to do more business with China amid a rising wave of protectionism. (Chinatopix via AP) Cargo trucks drive through a container pool at a seaport in Qingdao in eastern China's Shandong province in this file photo. Canada aims to do more business with China amid a rising wave of protectionism. (Chinatopix via AP) 

While protectionist sentiment is on the rise, Canadian businesses are being encouraged to do more with China, which appears to be in stark contrast to the message U.S. businesses are getting from the incoming Trump administration.

The experience of U.S. businesses in China is worsening. The Canadian government and businesses have to be clear on their objectives in dealing with China in order to succeed, as well as be wary and able to recognize when Chinese actions are not necessarily of long-term Canadian benefit, according to Paul Frazer, president of PD Frazer Associates and a Washington-based government affairs consultant on Canada-U.S. relations.

Prime Minister Justin Trudeau’s cabinet shuffle aims at strengthening Canada’s business relationship with China. Meanwhile, president-elect Donald Trump’s tough talk on China has ranged from losses of American jobs to currency manipulation. He has appointed hardline trade representatives to continue to be tough on China.

“I don’t think that what Mr. Trump does with China will necessarily spill over negatively to what Canada would like to do with China,” Frazer said in a telephone interview. Frazer has previously served as minister of public affairs at the Canadian Embassy in Washington, as the consulate general in New York, and in Prague as ambassador to the Czech Republic and Slovakia.

Working with China is a much heavier lift.

— Paul Frazer, President, PD Frazer Associates

But Frazer seems to hold some skepticism about what Canada is trying to accomplish with China. “I’m not sure we have a clear picture of what Canada wants to do with China yet either, or how it’s going to go about trying to achieve specific objectives.”

Frazer has advocated for the Canadian government to blaze its own trail and not simply ride the coattails of the United States in international relations.

Canadian businesses realize that its biggest growth opportunities lie in China; however, the biggest challenge has been the ease with which it can do business in the United States, said Frazer. The United States has the infrastructure, rule of law, and transparency that China doesn’t.

“Working with China is a much heavier lift, as you can imagine,” Frazer said.

‘Buy America’

The rise of the protectionist spectre is not new and “Buy America” isn’t something that has just emerged recently, Frazer said. “It goes back many years and every time it’s proved to be harmful.”

With supply chains deeply integrated across Canada, the United States, Mexico, and globally, the worry is the knee-jerk reaction to stronger calls to embed “Buy America” wherever it can be done. How that could trigger responses of a similar nature in other parts of the world, which can signal a downward spiral of increased protectionism, is something nobody wants to see, said Frazer. This would seriously threaten jobs in both Canada and the United States.

Canadian businesses have been saying that regulations and trade barriers are already hurting export growth, according to the Bank of Canada’s Business Outlook Survey released Jan. 9. “The perception of rising protectionism leads a number of businesses to maintain or build a foreign presence,” the BoC stated.

China won’t be accustomed to dealing with the likes of Trump and this could make it more eager to do business with Canada, albeit on a much smaller scale.

“Where the Canadians will have to be careful is to recognize where they may be taken advantage of, where they’re more a pawn in a bigger game,” said Frazer.

At next week’s World Economic Forum meeting in Davos, Switzerland, China will be front and centre with a “larger-than-ever” delegation headed by president Xi Jinping, “underscoring China’s determination to assume a global leadership role as other major powers are hobbled by domestic infighting,” according to a Bloomberg report. The U.S. presence will be minimal by historical standards.

Canada is in a vulnerable position due to its dependence on exports. The economy has been in the doldrums since late 2014 due to weak commodity prices and flagging export growth.

With the rising cost of production in China, investors may start looking elsewhere the longer it takes to establish greater transparency in regulations and the rule of law.

Some German and U.S. companies believe protectionist sentiment is rising in China. The German automakers have to use local partners to manufacture cars in China.

The most recent American Chamber of Commerce survey, conducted earlier this year, showed that regulatory obstacles are forcing a small portion of U.S. companies to move activities away from China. Eighty-three percent of tech, industrial, and natural resource sector companies are the most downbeat on Beijing’s attitude toward foreign companies. U.S. businesses in China were less profitable in China in 2015 as compared to 2014.

U.S. Politics

A good deal of uncertainty faces Canadian businesses, which are in a wait-and-see mode, according to a Bloomberg interview with John Manley, president and CEO of the Business Council of Canada.

As Trump’s inauguration approaches, the focus is turning to how the administration will function.

Getting things done is not a slam dunk and the Republican Party is not really united, said Frazer. “It’s papered over at the moment because they have a president who brought them to the dance very successfully,” Frazer said.

He also said that due to the natural tension between the White House and Congress, there could be a rocky patch after Jan. 20 as a number of issues are broached—including health-care reform.

“It’s not a parliamentary system,” Frazer said. “It’s not a prime minister with a majority.

“It’s a president who has to rely on the cooperation, collaboration, and the ability to persuade the folks in Congress to do what he would like to see done.

“And they will push back.”

With additional reporting from Fan Yu

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The AMC Empire 25 in  New York, on Aug. 23, 2016. (Samira Bouaou/Epoch Times)The AMC Empire 25 in  New York, on Aug. 23, 2016. (Samira Bouaou/Epoch Times)

Chinese investments in the United States reached a new record of over $45 billion in 2016—three times the previous year’s total.

Planned M&A (mergers and acquisitions) activity and the U.S. economic outlook suggest that 2017 may be another boom year. But with the changing political climate, Chinese investment may not be all that welcome anymore.

“Chinese investors are receiving an outsized amount of scrutiny from government regulators. … There are numerous lawmakers in Congress who are pushing for greater scrutiny of Chinese deals, in particular,” said Daniel Rosenthal, associate managing director at the consultancy Kroll. Rosenthal previously worked for the Obama administration, advising the president and national security advisers. 

Rising Chinese investment in the United States over the last five years has increased the number of reviews by the Committee on Foreign Investment in the United States (CFIUS), a federal interagency body that reviews investments for their effects on national security.

Chinese Investments at All-Time High

The capital flow from China to the rest of the world soared in 2016 because of economic problems at home and a devaluation of the Chinese currency. The United States has become the largest beneficiary of Chinese capital flight, according to a report by the research firm Rhodium Group.

“Cumulative Chinese direct investment in the U.S. economy since 2000 now exceeds $100 billion,” states the report.

The number of industries targeted by Chinese investors also increased in 2016. The real estate and hospitality industries accounted for 37 percent of total investment.

Chinese companies were responsible for most of the investment through mergers and acquisitions. Chinese companies also expanded through greenfield projects, where companies build their foreign operations from scratch. But the scale of such projects remained small compared to buying out already established companies.

Investments by Chinese state-owned companies accounted for 21 percent of the transactions, and strategic investments exceeded those with purely financial objectives. 

If the economic circumstances don’t change, Chinese investment in U.S. assets will continue to grow this year.

“The U.S. growth outlook is brighter than in Europe and other advanced economies; and anticipation of further dollar appreciation against the Chinese yuan … increases the rationale for adding U.S. assets,” the Rhodium report states.

In addition, there are $21 billion worth of M&A deals pending involving Chinese companies, and greenfield projects worth a combined $7 billion have been announced, according to the report.

However, political uncertainties in China and the United States may throttle the M&A boom. Beijing recently made it more difficult to get approval for overseas investments, presumably to curb capital outflows.

And in the United States, political and regulatory scrutiny expanded because Chinese investments may present a threat to national security. 

CFIUS Under the Trump Administration

President-elect Donald Trump is widely expected to take a harder position on U.S. national security matters than the Obama administration.

However, openness to foreign direct investment has been a key policy for the U.S. government for at least half a century.

“Every president since Carter has issued a formal statement confirming the United States’ openness to foreign direct investment [FDI]. There are reasons to believe that the incoming administration will continue this policy,” the law firm Covington & Burling LLP stated in a post on its blog.

And it is too early to speculate whether a Trump administration will change the review process or expand the mandates of CFIUS, according to the law firm. CFIUS, chaired by the treasury secretary, is an inter-agency committee that reviews foreign acquisitions for national security threats.

However, there are a few areas that may require some immediate changes.

For example, the Trump administration can expand the breadth of the transactions that CFIUS can review, said Rosenthal.

“CFIUS currently does not have an authority to review greenfield investments. … A company can start up a new business within the United States, and they could hire people from other companies, offer competitive compensation, and slowly build a U.S. company that does things that are sensitive to the U.S. government,” he said.

In addition, CFIUS does not have jurisdiction over foreign investments in foreign companies that sell goods and services to the United States or own American subsidiaries. Under the CFIUS statute, only the president has the authority to block such transactions.

In December last year, President Barack Obama blocked a deal that involved a Chinese company buying Germany’s Aixtron, a leading supplier of semiconductor equipment. Aixtron has a U.S. subsidiary and the merger of these two companies would be a risk to national security, according to CFIUS.

However, it is highly unlikely that the new administration will reopen prior CFIUS reviews unless there is a material misrepresentation, according to Rosenthal.

CFIUS includes representatives from 16 U.S. departments and agencies, including the departments of Justice, Commerce, Defense, Energy, and Homeland Security. And there is a balance of power between economic and security agencies within the committee.

However, the new president’s appointments in these agencies may give more voice to the national security arguments and dampen the voices of economic investment and open FDI, Rosenthal said.

“If Trump appoints assistant secretaries at the various agencies who are inherently more skeptical of foreign transactions, then that could shift the balance toward the national security side.” 

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A worker walks past a billboard advertising a new real estate project in Shanghai. China is likely to introduce a property tax on residential housing in the first half of the year as part of its attempts to curb spiralling real estate prices, state media reported on April 26, 2010. (Philippe Lopez/AFP/Getty Images)A worker walks past a billboard advertising a new real estate project in Shanghai. China is likely to introduce a property tax on residential housing in the first half of the year as part of its attempts to curb spiralling real estate prices, state media reported on April 26, 2010. (Philippe Lopez/AFP/Getty Images)

Chinese borrowed almost $100 billion just in August to buy houses. Roughly 70 percent of new loans are mortgages. Prices in Shenzhen and Shanghai are up more than 30 percent over the year, and most analysts are calling for the burst of the second China real estate bubble since 2014.

cnhouseprice

However, between the vertical price increases, the leveraging of the Chinese consumer, the build-up of ghost cities, and Chinese officials scrambling to quench their citizens’ desire for prime real estate, there is a positive takeaway.

“Property is at the intersection of some critical reforms, including liberalizing the capital account, granting more rights to urban migrants and promoting mortgage finance as a new engine of growth. How these complex reforms play out, especially on the demand side of the housing market, will help determine the pace and breadth of China’s economic slowdown,” writes Diana Choyleva, chief economist at Enodo Economics in a recent report.

enodo-mortgage-buys

She says it’s perfectly rational for Chinese to use their $9 trillion in savings to buy houses, even if some of them are empty. Even though Chinese try their best to funnel some of the money out of the country to buy property in London, Sydney, and New York, stringent capital controls still prevent most ordinary citizens from doing so.

As of mid-2015, the stock market is not an alternative for investment any longer, and bank savings have a notoriously low-interest rate, often negative in real terms. Also Chinese just love to buy everything that’s going up, whether it’s stocks or Bitcoin.

So is the Chinese housing market a bubble? In spite of mortgages making up 35 percent of all new loans in the first half of the year, the majority of Chinese house buyers still pay cash for their property, much different from the 100 percent debt financed excesses of the subprime mortgage bubble in the United States. If the buyers decide to borrow, the loan often only makes up 60 percent of the value of the house.

mortgages

The Institute of International Finance

“Household debt remains very low by global standards and stringent down payment requirements … We would have to see a significant fall in prices before homeowners found themselves underwater,” research firm Capital Economics writes in a note to clients.

Of course, it would not be China if there weren’t some people who are borrowing money from friends or underground banks to finance their down-payment to get a loan from the bank or find other ways to get around the down payment. Al Jazeera showed in a recent documentary that a developer offered to overvalue the house to get a higher loan, so the would-be buyers don’t have to pay much of a down payment.

“If an apartment is worth $300,000, and I value it at $400,000, then with a 70 percent loan, you can get $280,000 from the bank,” he says in a video recorded with a hidden camera. Because of the illegality of these practices—different from U.S. subprime—hard data on these shady loans is hard to come by. According to an earlier report by the Wall Street Journal, shady lenders funded $143 million in down-payments in January, a trivial sum compared to the billions in loans taken out. 

mortgages

Different Boom

This property boom, however, is different from the previous Chinese real-estate bubble that burst in 2014, where it was developers and local government-backed companies investing in real estate and taking on massive amounts of debt. As a result, one of the biggest developers Evergrande Real Estate Group had to be bailed out by top Chinese banks in 2015. Chinese households were largely unaffected. Instead, they lost a lot of money margin trading on the Chinese stock market in 2015—a real consumer bubble.

Choyleva argues that the regime’s directive to let migrant workers from the countryside settle in cities is part of the relaxation of the rigid household registration system called “hukou.”

cnhousingsc

“In the past, migrants have not been keen to settle down because they were barred from many of the benefits of urban life, including welfare schemes and access to schools. But as the restrictions of the hukou household registration system are relaxed, attitudes are changing, and pent-up demand for affordable housing is being released.”

With price-to-income ratios for average units in places like Shenzhen approaching 70 according to research by Longview Economics (it’s 16 in London), affordable housing is key to work off the excess inventory. This is why the State Council supported the construction of 7.72 million affordable apartments in urban areas and lending to affordable projects made up 30 percent of total property lending in the second quarter of 2016, according to research by the Institute of International Finance (IIF).

However, there is still a huge mismatch between supply and demand, with around 29 percent of urban dwellings empty compared to just 13 percent in the United States, according to an estimate by RBC Capital Markets. There is also a mismatch in supply and demand at different locations, leading to record price-income ratios in Shenzhen, Shanghai, and Beijing.

chinapricetoincome

“Prices are rising in the big cities where there is much less oversupply, if any, in some of the big ones. The majority of the oversupply is in the 2 and 3-tier cities and migrants, and rural residents are encouraged to move there to buy owner-occupied housing. The investment demand is in the big cities,” Diana Choyleva writes in an email.

As to how to solve these imbalances, despite her less pessimistic view on the housing bubble, Choyleva says a solution will be similar to rebalancing the whole Chinese economy. “There is no easy way; there is no way it’s going to be without pain.”

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Baidu's booth is seen at the International Technology Fair in Shanghai on April 21.
(STR/AFP/Getty Images)Baidu's booth is seen at the International Technology Fair in Shanghai on April 21.
(STR/AFP/Getty Images)

 

Baidu Inc.’s standing amongst China’s elite internet triumvirate is on shaky ground as the company battles slowing sales growth, regulatory uncertainty, and an ongoing cash burn from diversification.

The company has a near monopoly on China’s internet search business after Google exited in 2010. But the business environment is deteriorating and its efforts to diversify away from search—which generates over 90 percent of Baidu’s revenues—have not yielded returns. While second-quarter sales increased 10 percent, profits dropped 36 percent year over year, the biggest quarterly decline in the company’s 11 year history as a publicly traded entity.

Baidu’s U.S.-listed ADR shares are down around 6 percent year-to-date. Its market capitalization is now dwarfed by other members of the “BAT”—China’s big three internet giants of Baidu, Alibaba Group, and Tencent Holdings.

Baidu_Alibaba

Baidu (BIDU)’s market cap compared to Alibaba Group (BABA) and Tencent Holdings (TCTZF) during the last five years. (YCHARTS)

Regulatory Headwinds

Baidu derives an overwhelming majority of its sales from search advertising, putting the company at the whim and mercy of the Chinese Communist Party, which maintains tight control over the country’s Internet search framework.

Once a darling of the Party, Baidu has found itself increasingly marginalized by its regulatory changes. Beijing recently announced guidance requiring online advertising companies to restrict the number of advertising to less than 30 percent of each page. An additional wrinkle mandates that all online ads also must be clearly designated as such to help consumers differentiate between sponsored and true search results.

Once a darling of the Party, Baidu has found itself increasingly marginalized by its regulatory changes.

Regulatory restrictions were enacted following an investigation of Baidu earlier this year after a college student died from a cancer treatment advertised online that the student found via Baidu’s search engine. Additional limitations were placed over online advertising of healthcare services.

These constraints have put a damper on Baidu’s advertising revenue growth by “reducing the number of online clients” available to the company, CEO Robin Li said last quarter regarding the change while lowering organic growth guidance from 9 percent to 5 percent for 2016.

The unfavorable regulatory environment has dampened some analysts’ expectations of its stock. JP Morgan’s Alex Yao holds an “underweight” rating on Baidu shares—a minority as most analysts polled last week by S&P Market Intelligence had “outperform” ratings—with a lowered price target of $164, or around 8 percent below Sept. 2 close. Nevertheless, several analysts, including those from Oppenheimer and Piper Jaffray, lowered their price targets over the last month, reflecting a downward shift in sentiment.

Advertising Shift

A big part of JP Morgan’s downbeat assessment of Baidu is due to the industry shift of advertising dollars away from search engine into social media channels.

Look no further than Tencent, which is eating Baidu’s lunch in online advertising. Tencent is China’s social media and mobile gaming king, and its surging advertising revenue growth has reflected the paradigm change in online advertising. Second quarter data showed a 60 percent increase in online advertising revenues to a record 6.5 billion yuan (about $1 billion).

Part of that is due to consumers’ shift from computers to mobile, benefiting Tencent’s mobile platform Weixin/WeChat, which counts 800 million users. Tencent has leveraged the platform to distribute mobile games, video content such as Hollywood movies, and NBA basketball games.

The company has historically generated most of its mobile revenues from in-game purchases. But taking a page from Facebook’s recent success, Tencent has worked to monetize its user base by aggressively pushing mobile advertising within its WeChat app, whose functionality includes mobile chat, news, social updates, and mobile wallet.

Diversification

With its bread and butter online advertising facing headwinds, Baidu is actively searching for an alternative future profit center by deploying billions into potential new technologies, with a focus on artificial intelligence (AI).

Last week, Baidu and American computer graphics media company Nvidia Corp. announced they were collaborating on a platform for semi-autonomous cars. Details were vague during the unveil at Baidu World conference on Sept. 1, but Nvidia CEO Jen-Hsun Huang said the partnership will allow “Baidu to get a self-driving taxi fleet on the road, and the same platform is also designed for use in OEM cars, tied into the same network.”

While Nvidia has dabbled in self-driving cars for years, a host of deep-pocketed companies from several sectors are all vying for a breakthrough in this platform. Technology giants such as Alphabet and Apple, car companies such as Tesla and Volvo, and taxi companies such as Uber are all aiming to bring autonomous driving technologies to market.

To help drive artificial intelligence innovation, Baidu open sourced one of its key machine learning platforms called PaddlePaddle by freely offering the software to AI experts.

Following the footsteps of Microsoft and Amazon, Baidu is releasing its toolkit to attract AI talent and in turn help shape the development of a nascent field that could underpin future consumer-based technology.

Baidu hopes its tools will catch on. Xu Wei, head of PaddlePaddle development at Baidu, told technology focused website The Verge that its AI platform needs only a quarter of the code necessary compared to rival platforms for the same machine translation software.

And some of the company’s existing efforts haven’t panned out. An example is recent cancellation of Baidu’s food delivery drone program called Baidu Takeaway, created in 2015 to provide drone-based food deliveries. But Baidu decided that the food-delivery market isn’t scalable enough to profit, given that Baidu doesn’t have manufacturing facilities for drones.

With none of the above technologies ready to bear fruit in the near future, it begs the question—can Baidu’s long view ease short and medium-term pressures on its shares?

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Workers distribute packs at S.F. Express in Shenzhen, China, on Nov. 11, 2013. Private companies in China have stopped to invest in further expansion in 2016. (ChinaFotoPress/ChinaFotoPress via Getty Images)Workers distribute packs at S.F. Express in Shenzhen, China, on Nov. 11, 2013. Private companies in China have stopped to invest in further expansion in 2016. (ChinaFotoPress/ChinaFotoPress via Getty Images)

Previously the engine of relatively efficient growth, it looks like the private sector has given up in China. Investment by private companies went negative in June and decreased another 0.6 percent in July. That’s right, negative growth month over month, something completely unfathomable during the boom years of above 20 percent growth just a few years ago.

“We believe private [investment] slowdown is more structural this time, dragged by weaker investment return and falling business confidence amid limited reforms and deregulation. Strong State Owned Enterprise (SOE) investment is unlikely to fully offset the weakness, instead, it could create more excess capacity and deteriorate capital returns,” the investment bank Morgan Stanley writes in a note.

For the first half of 2016, private investment is only up 2.4 percent over the year. This is worrying because the private sector is responsible for most of China’s real economic development and relatively efficient capital allocation. 

The government will try to coopt the private sector into spending through monetary and fiscal policies.

— Viktor Shvets, global strategist, Macquarie Securities

To balance the decline in private investment, the state used SOEs as countercylical fiscal policy instruments. SOE’s share of investment in fixed assets rose 23.5 percent compared to the first half of 2015. Because of inefficient investments from years prior, overcapacity, and mounting defaults, Morgan Stanley thinks this is ill advised. 

 

(Morgan Stanley)

(Morgan Stanley)

Morgan Stanley notes that private companies are avoiding sectors such as mining and steel, which are plagued by overcapacity. But they also cannot invest in the service sector as they please because of high entry barriers and too much regulation.

Private investment outside of manufacturing—read services—declined 1.1 percent in the first half of 2016 over the year, compared to 15 percent growth in 2015. SOEs, on the other hand, boosted investment in services 39.6 percent.

So much for a successful rebalancing to services, which has been considered a linchpin of the effort to reform the Chinese economy. It’s happening, but at the behest of the state.

 

 

(Morgan Stanley)

(Morgan Stanley)

Overall, there just aren’t enough good investment opportunities around and the borrowing costs for private firms are as high as 15 percent, much higher than the return on assets. Unlike their state-owned counterparts, private companies actually try to be profitable—and they don’t see profits in China’s slowing economy.

In addition, the lack of progress in the much-touted reform agenda hurts business confidence and financial visibility. Zhang Qiurong, who owns a specialty paper business told the Wall Street Journal: “The economic outlook is really grim. You have to survive, that comes first.”

Mr. Zhang’s feelings are reflected in the China Economic Policy Uncertainty Index, which has been increasing steadily in 2016, almost reaching the record levels of uncertainty seen during the last handover of Communist Party leadership in 2012.

The economic outlook is really grim. You have to survive, that comes first.

— Zhang Qiurong

The result of the uncertainty? Companies are stashing money at the bank and just won’t spend and invest it. 

“Despite loads of liquidity pumped into the market, enterprises would rather bank the money in current accounts in the absence of good investment options, which is in line with record low private investment data,” Sheng Songcheng, head of statistics and analysis at the People’s Bank of China said earlier this year. Cash and short-term deposits at banks grew 25.4 percent in July.

To counter concerns of crashing private investment in China, the regime promptly announced private-public partnership (PPP) investment programs worth $1.6 trillion and spanning 9,285 projects, first reported by Xinhua on Aug. 15.

“The government will try to coopt the private sector into spending through monetary and fiscal policies,” says Viktor Shvets, global strategist at Macquarie securities.

The problem is that this strategy is unlikely to work. 

“The impact of PPP on China’s investment growth is likely to be limited, considering the small share of PPP projects in execution (less than 0.5% of total [investment]), the still low participation ratio by private investors … International experience shows that private financing of public investment entails large fiscal risks in the absence of a good legal and institutional setup,” writes Morgan Stanley. And a good legal and institutional set-up is not what China is known for.

If the PPP and short-term monetary and fiscal stimulus won’t work, China actually has to deliver on reforms to get the private sector to spend again. 

 

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Smartphones show the ride-hailing apps Uber Technology Ltd., left, and Didi Chuxing at a residential compound in Beijing, on  Aug. 1, 2016. (AP Photo/Andy Wong)Smartphones show the ride-hailing apps Uber Technology Ltd., left, and Didi Chuxing at a residential compound in Beijing, on  Aug. 1, 2016. (AP Photo/Andy Wong)

San Francisco-based ride-hailing giant Uber Technologies Inc. gave up on competing in China after suffering heavy losses to acquire market share in the country.

The company announced on Aug. 1 it is selling its Chinese arm to the biggest local rival Didi Chuxing (“Beep Beep Travel” in English) in a deal that would value the combined company at $35 billion.

Most of the people we asked for advice thought we were naive, crazy—or both.

— Travis Kalanick, CEO, Uber

“Three years ago I traveled to China with a small group of people to see if we might be able to launch Uber there,” stated Travis Kalanick, Uber’s CEO and co-founder in an open letter posted on company’s website.

“Most of the people we asked for advice thought we were naive, crazy—or both,” he said.

Fast forward to today and Uber China—in just two years—exceeded Kalanick’s wildest dreams. 

In exchange for the Uber’s China assets, Uber will receive 5.89 percent of the combined company with preferred equity interest, which is equal to a 17.7 percent share in Didi, according to a press release by Didi. In addition, Chinese search engine company Baidu and other Chinese shareholders in Uber China will receive a 2.3 percent share in Didi.

(Source: CB Insights)

Ride-hailing firms in China have grown very fast but suffered heavy losses due to fierce competition. According to media reports, Uber lost roughly $2 billion in China in two years. And now it is effectively selling its China business in exchange for a $7 billion share in Didi, which is not a bad deal for Uber shareholders.

In its latest round of fund-raising, Uber Technologies Inc. reached a valuation of $62.5 billion, which made the company most valuable startup in the world. And Uber China raised financing in January valuing the China business at $7 billion.

As part of the deal, Didi Chuxing will also invest $1 billion in Uber’s global company.

In comparison Didi Chuxing raised funds from investors including Apple, Alibaba, and SoftBank in June and reached a valuation of $28 billion. So with the acquisition of Uber China for $7 billion, Didi’s valuation rose to $35 billion.  

As part of the deal, Didi Chuxing will also invest $1 billion in Uber’s global company. Cheng Wei, founder and chairman of Didi, will join the board of Uber. Travis Kalanick, will join the board of Didi, according to the agreement. And Uber China will remain as an independent brand and business operation.

Travis Kalanick, CEO of the global ridesharing service Uber in Beijing on Jan. 11, 2016.   (WANG ZHAO/AFP/Getty Images)

Travis Kalanick, CEO of the global ridesharing service Uber in Beijing on Jan. 11, 2016. Uber announced it will sell its Chinese business to the local rival Didi Chuxing on Aug. 1. (WANG ZHAO/AFP/Getty Images)

Why Do US Tech Firms Leave China?

The announcement marked the latest surrender by an American technology company in the face of intense competition in the world’s biggest market. In the last few decades, American technology giants allured by China’s massive population have been trying to gain a foothold in the country.

They invest in China with big hopes and risk billions of dollars like Kalanick. “If you have the opportunity to build both Amazon and Alibaba at the same time, you’d be crazy not to try,” he explained in the letter.

American technology giants allured by China’s massive population have been trying to gain a foothold in the country.

However, giant tech firms face tough times once they enter China. Some experience strict government licensing and censorship like Google Inc., for example.

Google entered China in 2000 but had to shut down its operations due to censorship imposed by Chinese Communist Party and a cyber attack from within the country. Google disclosed in 2010 that Chinese hackers had penetrated the Gmail accounts of Chinese human rights advocates in the United States, Europe, and China and threatened the company. As a result, Google had to withdraw its operations in the country.

China has barred access to Facebook, YouTube, and Twitter since 2008-2009.

In addition, U.S. e-commerce platforms like eBay and Amazon lost the battle in China to local rivals like Alibaba and Tencent. Local firms are backed by strong funding and the government policies that often favor domestic players.

With the hope to become a dominant marketplace in China, eBay, for example, entered the market in 2002. However, after investing $250 million, it had to withdraw in 2006 because it couldn’t compete with Alibaba. 

Screen Shot 2016-08-01 at 9.58.59 PM

(Source: CB Insights)

The Right Time to Exit?

“We’ve grown super fast and are now doing more than 150 million trips a month. This is no small feat given that most U.S technology companies struggle to crack the code there,” Kalanick stated.

Uber and Didi Chuxing are investing billions of dollars in China and both companies have yet to turn a profit there.

— Travis Kalanick, CEO, Uber

Exiting China seems like the best strategic decision for Uber, according to Kalanick given the challenges and a huge cash burn.

“Uber and Didi Chuxing are investing billions of dollars in China and both companies have yet to turn a profit there. Getting to profitability is the only way to build a sustainable business that can best serve Chinese riders, drivers and cities over the long term,” he stated.

The decision to sell Uber China came after China’s ministry of transportation issued preliminary rules to legalize ridesharing on July 28. The rules were more advantageous to the state than to the businesses in the car-hailing industry.

In one fell swoop, the Chinese Communist Party both legitimized the industry and brought it under its tight control.

For example, article 5 of the new rules requires the ridesharing companies to establish physical servers in China and store user information and car related data within those servers for two years. While the ministry of transport did not name any specific company, this stipulation seemed to be aimed directly at Uber China.

In one fell swoop, the Chinese Communist Party both legitimized the industry and brought it under its tight control.

Without providing specifics, Beijing also announced that pricing would be scrutinized. This was interpreted as a threat to Uber China’s strategy to attract new customers using aggressive and “below-cost” pricing.

“This agreement with Uber will set the mobile transportation industry on a healthier, more sustainable path of growth at a higher level. Didi Chuxing commits all our energy to work with regulators, users, and partners to meet the transportation, environmental and employment challenges of our cities,” Didi stated in the press release.

Didi Chuxing was formed in February 2015 by two competing ride-hailing services launched by the Internet giants Tencent Holdings and Alibaba Group.

Didi currently serves 300 million users across over 400 Chinese cities, according to the press release. Research firm Analysys estimated Didi had 42.1 million active users in May while UberChina had 10.1 million.

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Hulk of Brazil controls the ball during the 2014 FIFA World Cup Brazil Group A match between Cameroon and Brazil at Estadio Nacional on June 23, 2014 in Brasilia, Brazil. (Photo by Stu Forster/Getty Images)Hulk of Brazil controls the ball during the 2014 FIFA World Cup Brazil Group A match between Cameroon and Brazil at Estadio Nacional on June 23, 2014 in Brasilia, Brazil. (Photo by Stu Forster/Getty Images)

Yes, China has the official goal of becoming a leading power in world soccer by 2050 according to a policy document issued in March 2015. 

As it is the case with any kind of policy directives in China, this leads to overpricing and malinvestment. Or why else would Shanghai SIPG pay $61.4 million for the less-than-average Brazilian player Hulk? Remember his non-performance at the world cup in Brazil 2014?

To get an idea of how large a price Shanghai SPG paid, consider the cost of the most expensive Chinese national. Linpeng Zhang, who plays for Guangzhou Evergrande Taobao, is only worth $1.3 million, according to Transfermarkt.com.

And why else would Chinese appliance and car manufacturers buy whole European soccer clubs? It may not be just the policy directive. This may be a win-win in terms of both politics and economics for the Chinese. 

The most valuable Chinese Super League 11, all prices in euros. (Transfermarkt.com)

The most valuable Chinese Super League 11, all prices in euros. (Transfermarkt.com)

First, it’s an easy way for these companies to funnel money out of the country. Chinese companies are buying up everything that is not bolted down, bidding for $119 billion worth of foreign companies in the first five months of 2016 alone.

Second, it is true that president Xi Jinping is personally pushing the initiative. So everyone who is tagging along wins some browny points and gets to increase their foreign asset holdings at a time when the Chinese economy is slowing and the currency may devalue at any moment.

The numbers are small in comparison, but nonetheless remarkable. Since 2014, Chinese firms in real estate, retail, manufacturing, as well as energy have invested $1 billion in 10 European soccer clubs like Manchester City and Internationale Milano.

Other deals, like GSR Capital’s proposed $825 million deal to take over AC Milan and Fosun International’s $59 million confirmed take-over for England’s Wolverhapton Wanderers would almost double that figure.

Players

As for players, the Chinese Super League spent $145 million on players this year and a whopping $443  million during last year’s transfer windows according to data supplied by Transfermarkt.com.

Hulk is the most valuable player and other notable transfers include Colombian forward Jackson Martinez ($46 million) from Atletico Madrid and  Chelsea’s Ramirez ($31 million).  

Despite the $600 million spent, however, Transfermarkt.com only values all of the Chinese Super League’s players at $360 million and the league pulls in a mere $200 million in TV revenues for five years. So the Chinese companies and super-rich behind the clubs have to fill in the gap in revenues (wages cost money too), which they gladly do.

Chinese companies and investors have a reputation for overpaying for anything from Vancouver real estate to Australian wineries, but why?

If the assessment of hedge fund managers like Kyle Bass is true, holding Chinese bank deposits may result in higher losses than overpaying for a European soccer club or a Brazilian player.  

He thinks China will face a banking crisis and a devaluation of the currency: “It’s going to cost them 30 percent of GDP. Loss given defaults will be more than 80 percent, they are going to lose $3 trillion in bank capital, they only have $2 trillion in there,” he said in an interview with RealVisionTV.

If his scenario holds true, a diversified portfolio of gold, bitcoin, Vancouver real estate, and some soccer players should weather the storm. 

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Pigeons are seen in front the Nasdaq MarketSite in New York's Times Square in New York City on June 16, 2015. (KENA BETANCUR/AFP/Getty Images)Pigeons are seen in front the Nasdaq MarketSite in New York's Times Square in New York City on June 16, 2015. (KENA BETANCUR/AFP/Getty Images)

The global IPO market has slowed down in the first half of 2016 because of increasing financial market volatility. Many companies who want to raise capital had to postpone or cancel their plans to go public.

“Although many IPO candidates are on the lookout for profitable investment opportunities, they remain cautious and are holding back for the time being,” stated consulting firm, Ernst & Young, in a report.

The number of IPOs fell by 38 percent compared to the first half of 2015 and the amount raised was down by 61 percent, the weakest since 2009.

China’s economic slowdown, low oil prices, and the Brexit spiked volatility in global financial markets and decreased the appetite for new issues. 

The gloomy global economic outlook has also made IPO candidates more hesitant.

— Alessandro Miolo, Ernst & Young

There were only 437 IPOs worldwide in the first half of 2016. Activity in the IPO market picked up in the second quarter after a period of stagnation in the first quarter. However, “the first half of the year overall remained significantly less than last year,” said Ernst & Young. 

“The gloomy global economic outlook has also made IPO candidates more hesitant. The summer months have been rather quiet so far with regard to IPOs. Uncertainty has increased with Brexit,” stated Alessandro Miolo, a partner at Ernst & Young.

The Chinese IPO market declined the most at 58 percent, due to the country’s economic crisis. The money raised in the Chinese IPO market fell by 84 percent from $30 billion to $4.8 billion in the first half of 2016.

The money raised in the Chinese IPO market fell by 84 percent.

—  Ernst & Young

Interestingly, energy sector IPOs worldwide set a new record in 2016. There were 7 offerings that raised over $1 billion. The largest IPO was the listing of the Danish wind farm operator Dong Energy, which raised $2.6 billion.

Europe, too, suffered declines, but it was the most active region in the world, with 65 IPOs raising $12.9 billion. Six of the ten largest IPOs worldwide took place in Europe.

The U.S. IPO activity (Factset)

The U.S. IPO activity (Factset)

US Lags

IPOs in the United States also declined sharply. The number of companies going public fell 50 percent this year. The total money raised from IPOs fell more than 60 percent, according to Renaissance Capital, an IPO advisory firm. Both the number of IPOs and the amount of money raised marked the lowest since 2009.

The IPO activity in the U.S. tech sector dried up with only three initial public offerings in the first half of the year.

—  Factset

There could be some uptick in future activity though: “The spate of recent IPOs and initial filing signal that the IPO window is beginning to re-open,” stated Renaissance Capital in its 2016 IPO outlook report. 

The IPO activity in the U.S. tech sector dried up with only three initial public offerings in the first half of the year. The recent public offering of Twilio, a cloud communications company, cheered investors as the shares of the start-up soared 92 percent on the first day of trading.

However, the $150 million raised was well below last year’s average of $341 million in the tech services sector, according to Factset, a market research firm.

The U.S. biotechnology industry has been the primary driver of the growth in IPO volume over the past few years.

“From 2013 to 2015, no other industry has come close to matching the Biotech industry IPO volume,” states Factset. 

And the S&P 500 Biotechnology industry has gained 106 percent since 2013, outperforming the S&P index. More recently, however, these firms have struggled, falling nearly 20 percent in the last 12 months.

“It will be interesting to see if this dip in performance leads to fewer Biotechnology firms entering the public market in the future,” said Factset.

Ongoing vitality in the M&A market is also slowing down IPO activities. A well-organized sale is much easier to control than an IPO, which is dependent on numerous external factors, according to Ernst & Young.

“Private equity businesses and firms wishing to dispose of subdivisions tend to prefer a sale over an IPO, particularly since strategic investors are very keen to buy. Prices can be pushed right up,” Miolo said.

Screen Shot 2016-07-21 at 11.23.14 AM

Withdrawn or postponed IPOs in the United States, second quarter of 2016 (Factset)

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A woman uses her iPhone at an Apple store in Shanghai on Sept. 25, 2015. (Johannes Eisele/AFP/Getty Images)A woman uses her iPhone at an Apple store in Shanghai on Sept. 25, 2015. (Johannes Eisele/AFP/Getty Images)

BEIJING—Apple is being sued by a subsidiary of China’s broadcasting regulator over a propaganda film more than 20 years old, in the latest legal wrangling for the tech giant in China in recent weeks.

A Beijing court says the case has been brought by a production center that alleges that Apple has infringed its exclusive online rights to broadcast a film that depicts Chinese fighting against Japanese soldiers in northern China in the early 1930s.

The plaintiff is also suing the developer and operator of the Youku HD app available on Apple’s App Store that it says enabled users to watch the film and caused it “huge economic losses,” according to the Beijing Haidian District People’s Court.

The court says it has accepted the case brought by Movie Satellite Channel Program Production Center that comes under the State Administration of Press, Publication, Radio, Film and Television.

The plaintiff alleges that Apple has infringed its exclusive online rights to broadcast “Xuebo dixiao,” which loosely translates as “Bloody Fight with the Fierce Enemy” and was first shown in 1994.

The production center is also suing Heyi Information and Technology (Beijing) Company Ltd., which developed and operated the Youku HD app, the court said in an online statement Thursday.

The app is sold by Youku.com, according to information on Apple’s iTunes site. The Youku site is one of China’s best known movie and TV program streaming sites and is owned by Youku Tudou Inc., which is listed on the New York Stock Exchange.

The plaintiff wants the two companies to immediately stop broadcasting the film and is seeking compensation of 50,000 yuan ($7,500) plus its “reasonable expenditure” of 20,158 yuan ($3,000) in attempting to stop the infringement of its rights, the court said.

Emailed requests for comment to Apple spokespeople were not answered Saturday, and a spokesman for Youku Tudou was not able to immediately comment.

Apple Inc. has recently faced legal setbacks and other obstacles in China, its second-biggest global market.

In April, it suspended its iBooks and iTunes Movies services, reportedly due to an order by Chinese regulators.

In May, a Beijing intellectual property tribunal in Beijing ordered Apple to stop selling its iPhone 6 and iPhone 6 Plus in the city after finding they look too much like a model made by a small Chinese brand. Sales of the phones are continuing while Apple appeals.

Also that month, Apple suffered another setback when a court ruled that a Chinese company is allowed to use the iPhone trademark on bags, wallets and other leather goods.

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A woman walks out from a Sam's Club in Shenzhen, in southern China's Guangdong province, on Nov. 15, 2015. (AP Photo/Ng Han Guan)A woman walks out from a Sam's Club in Shenzhen, in southern China's Guangdong province, on Nov. 15, 2015. (AP Photo/Ng Han Guan)

Walmart said it would sell its Chinese online e-commerce business to JD.com, as part of a strategic alliance between both companies. In return, Wal-Mart Stores Inc. (NYSE:WMT) will own 5 percent of JD.com Inc. (Nasdaq:JD), China’s largest e-commerce company by revenue.

JD.com will acquire Walmart’s Yihaodian marketplace platform, including the brand, website, and app. Based on JD.com’s recent share price, the stock deal is valued at roughly $1.5 billion.

JD.com has a very complementary business and is an ideal partner that will help us offer compelling new experiences that can reach significantly more customers.

— Doug McMillon, president and CEO, Walmart

Yihaodian, launched by two Chinese entrepreneurs in July 2008, is an e-commerce platform selling grocery products. Walmart first invested in Yihaodian in 2011 and took full control of the company in 2015.

“JD.com has a very complementary business and is an ideal partner that will help us offer compelling new experiences that can reach significantly more customers,” said Doug McMillon, president and CEO of Walmart in a press release. 

JD.com’s shares jumped nearly 5 percent to $21.06 on the Nasdaq Stock Market on Monday afternoon. The e-commerce company headquartered in Beijing is a major competitor of Alibaba’s Tmall. It sells electronics, mobile phones, and computers online and is trying to expand its offerings to compete with Alibaba’s Taobao and Tmall.

Walmart and JD.com agreed to team-up in several strategic areas in China including both online and offline retail.

As part of the deal, Walmart will continue to operate the Yihaodian direct sales business and will be a seller on the Yihaodian marketplace. Both companies will work together on growing the Yihaodian brand and business under its current name and market position.

Sam’s Club China will open a flagship store on JD.com, expanding the availability of Sam’s Club’s high-quality imported products across China. It will offer products through JD.com’s nationwide warehousing and delivery network.

Walmart and JD.com will use both supply chains to create synergies, including broadening the range of imported products.

Experts believe, forming an alliance with JD.com could give Walmart a better chance to remain competitive in the Chinese market and boost its retail sales.

—  

Walmart’s China stores will be listed as a preferred retailer on JD.com’s O2O JV Dada, China’s largest crowd-sourced delivery platform. This partnership will drive online traffic to Walmart stores and allow customers to order fresh food and other items. Walmart will continue to operate its own physical stores.

China offers enormous opportunities for both online and offline retailers. However, it also has significant challenges due to recent economic slowdown and fierce competition. Experts believe, forming an alliance with JD.com could give Walmart a better chance to remain competitive in the Chinese market and boost its retail sales. 

“We’re excited about teaming up with such a strong leader in JD.com,” said McMillon. “We also look forward to offering customers a tremendous number of quality imported products not previously widely available in China through Walmart and Sam’s Club.” 

“We look forward to further developing Yihaodian, which has tremendous strength in important regions of eastern and southern China. … We are also delighted to welcome the Sam’s Club flagship store onto the JD.com platform. Sam’s Club’s unique, high-end product selection meets the demand from China’s increasing affluent consumers for high-quality, imported products and has already proven popular in the Chinese cities where it has stores,” said Richard Liu, CEO of JD.com.

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Chinese traders love speculating in anything that’s not bolted down. So they effectively took over the virtual currency Bitcoin, representing 90 percent of global trading volumes. And if trading the volatile Bitcoin cryptocurrency wasn’t enough, BitMEX offers them the opportunity to use leverage as well.
“Our goal is to let anyone bet on anything at any time,” BitMEX founder Arthur Hayes told Bloomberg. The 30-year old ex-Citigroup trader founded BitMEX in Hong Kong two years ago, modeling it after the Chicago Mercantile Exchange (CME). The CME allows traders to buy or sell vast quantities of commodities or financial instruments putting little money down.
This process is called speculating on margin, a process BitMEX has taken to the cryptocurrency world. Traders have to deposit Bitcoin (or other cryptocurrencies) instead of dollars or euros or yuan to fund their accounts.
They can then use one Bitcoin to buy a contract worth 100 Bitcoin—100 times is the exchange’s maximum leverage—and BitMEX charges a fee of 0.005 percent for each transaction.
Similar to the real futures exchange in Chicago and elsewhere, all the traders are doing is entering a legal contract, which is settled in cash (or cryptocash in this case) after it expires or the trader is stopped out. Real bitcoins, altcoins, ether, or daos—all cryptocurrencies—don’t change hand.
In the example above, a trader could buy a contract worth 100 bitcoin for only one bitcoin. If the price goes up 5 percent the trader makes 5 bitcoin or a 500 percent return on his original 1 bitcoin investment. However, if the price falls 1 percent, he loses 100 percent or all of his initial investment. There is no chance to buy and hold, or wait until the price recovers.
This is similar to regular spread-betting exchanges like Alpari or the bucket shops of the roaring 20s. 
A preview of the BitMEX trading dashboard (BitMEX)
The exchange’s algorithms and computer programs make sure winners and losers always net out to zero, again similar to the real futures exchange. However, unlike the role-model, winners may be asked to subsidize losers at times. 
“BitMEX contracts have high leverage. In very rare cases, profits may be reduced during certain time periods if there is not enough money on the exchange to cover user profits,” it states on the company’s website.
The company wants to expand its offering beyond cryptocurrencies so Chinese speculators can bet on Western financial indices and stocks and Westerners interested in Chinese stocks can bet on mainland financial markets.
While China has regulated inbound and outbound money transfers and investments, bitcoin can flow freely, making it possible for mainlanders and Westerners to found their account and start betting.
Because they aren’t really buying or selling anything and merely entering into contracts, BitMEX doesn’t need to worry about moving around the underlying financial products.
So far, the company is far away from its goal to have “anyone bet on anything,” however. Chinese can only bet on U.S. dollar interest rates (one contract) and Westerners can only bet on the FTSE China A50 share index (one contract.)

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