China Tech Set for Growing Global Isolation in 2020
Following a two-week hiatus for the holidays, I’m resuming my first column of the new year with a look at the China tech trends likely to dominate headlines in 2020. Two of the year’s big ones are focused on stock markets, involving global shifts in where and when Chinese companies make offshore IPOs. The third is one that began in 2019 and is almost certain to accelerate this year, namely U.S. President Donald Trump’s war against the rise of China tech.
The big theme in all three trends is the growing Western wariness of China’s high-tech rise, which is leading to a backlash in both financial markets and trade policy. An interesting story this week in our content partner The Australian Financial Review noted a similar phenomenon occurred back in the 1980s, though the object of frictions back then was Japan, which had just undergone a similar rise.
Recent historians will know the anti-Japan backlash ultimately petered out when Japan’s economy hit the skids and the country’s overseas buying spree slowed significantly. China’s economy seems to be following a similar track, with growth now at its lowest level in decades.
But the differences end there. The anti-Japan sentiment was driven largely by its aggressive overseas M&A, much of it for real estate. By comparison, the anti-China sentiment is driven more by backlash against its aggressive acquisition of foreign technology and use of foreign capital markets to fund the growth of its tech companies. That kind of activity is unlikely to be slowed considerably even if China’s economy hits the skids.
All that said, let’s jump in with trend No. 1 of the year, which will see China’s aggressive use of U.S. stock markets to raise cash peter out following a strong two-year run. I’ve written about this trend before, so will simply put a link to my previous column rather than restate the key points here.
Since writing that column, one of my contacts who closely follows such listings shared a list he has compiled for new IPO applications since September, which further underscores that this slowdown is indeed occurring. That list contained roughly 20 Chinese companies, mostly tech, that filed to make U.S. listings in the last four months of the year but have yet to complete their IPOs.
One or two of these are familiar, such as Ucommune, which bills itself as the WeWork of China and filed for a $100 million listing in December. But most of those are much smaller names that most people have never heard of, such as internet health platform Zhongchao Inc. or AnPac Bio-Medical, which were both aiming to raise more modest sums in the $20 million neighborhood.
A quick check of these offerings shows that all three are still alive and have made updated filings with the U.S. securities regulator in the last couple of weeks. Whether or not they and the others actually make it to market is another matter, especially considering the tepid demand for this kind of small China tech stock on Wall Street lately.
Coming home to roost
As they get a chilly reception on Wall Street, many Chinese companies looking to make offshore IPOs may start to consider moving closer to home by listing in Hong Kong. That could include new listings, but is also likely to net some of China’s biggest internet names that are already listed in other offshore markets, most notably the U.S.
E-commerce juggernaut Alibaba brought that trend into focus last November when it raised $11 billion in a Hong Kong listing to supplement its existing New York listing. Since then, media have reported that New York-listed gaming giant NetEase and online travel agent Trip.com, formerly known as Ctrip, are both looking into making similar second Hong Kong listings. And just this week other media reports said search giant Baidu is also exploring such a move.
It does seem that Alibaba has indeed opened the floodgates for this kind of a Hong Kong migration, which is being driven by a number of factors. Chief among those are a recent change to Hong Kong stock exchange rules that now allows the dual-class share structure most of these companies have. A listing in Hong Kong will also make these companies’ shares ultimately available to Chinese mainland-based investors through Hong Kong’s stock connect program with bourses in Shanghai and Shenzhen.
Last but certainly not least are increasingly aggressive moves by Trump aimed at keeping Chinese technology out of the U.S. and the West in general, and also at keeping China from getting its hands on cutting-edge Western products. That theme is showing up quite regularly these days in global headlines, including one this week from Reuters reporting that the U.S. pressured the Netherlands to block ASML, a leading manufacturer of equipment used to make microchips, from selling its products to China.
Of course the poster child for Trump’s increasingly antagonistic stance is Huawei. The embattled Chinese telecom giant has been a global headline fixture since May 2019, as the U.S. has banned both its networking equipment and presses its allies to do the same, and also tries to slow the company by restricting its access to U.S. technology.
This particular tug-of-war seems destined to only intensify in the year ahead. A number of U.S. allies are trying to take a middle-of-the-road approach, saying they will only use Huawei equipment in noncore networks. Few have said they won’t sell technology to Huawei or other Chinese manufacturers like surveillance-equipment maker Hikvision, which has also been blacklisted by the U.S.
At the end of the day, 2020 looks set to be a year of changing tides when it comes to China tech. Those tides will increasingly flow back to China, with local tech firms looking to their home market both to raise capital and also develop and procure the technology they need to survive and thrive.
Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com
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