Since India spearheaded a wide-scope ban of Chinese apps over the summer, a couple of democracies have followed suit to safeguard national security, amid the covert invasion of their digital borders by the Chinese Communist Party (CCP). Such efforts reached a new milestone last month when the White House proposed restricting WeChat and TikTok in the US.
Despite the two apps receiving a temporary reprieve thanks to the independent US judicial system, the march must carry on because the ban carries more implications than just a tech war or an election gimmick.
Yes, the process thus far has been confusing, and the credibility of the US national security apparatus has been undermined given all the commercial angles the administration of US President Donald Trump has been tinkering with, but there are many important reasons for the ban to proceed. It is not the time to retreat.
Psychological warfare is the most obvious reason — something Taiwan has persistently had to deal with given the spread of disinformation by CCP-linked media to destabilize its democracy.
Banning WeChat and other Chinese apps can help shore up defenses against Chinese propaganda going into the US presidential election next month. It prevents the data of citizens of democratic nations from feeding into the CCP’s artificial intelligence algorithms — a practice many publicly listed Chinese software companies have touted as their core business strategy.
It would be a fair act of reciprocity, given that competing technologies have been banned in China for years — only those who bend to the CCP’s demands are allowed in to satisfy their thirst for profits.
However, one of the crucial but least-covered implications is the potential effect on the currency war angle within the grander US-China struggle. Among all the battlegrounds fought between the US and China, the currency war could be the most critical to the outcome of the next global order.
At the center of the conflict is the US dollar. As the world’s reserve currency, the greenback is a source of economic power that allows the US to enjoy “exorbitant privileges,” a term coined by former French president Valery Giscard d’Estaing while he was French minister of finance in the 1960s.
The insatiable need for China’s highly leveraged economy to tap external funding leaves the CCP vulnerable to a weaponized US dollar if the US chooses to turn off the tap.
China has a severe US dollar shortage that might cause a detrimental devaluation of its own currency. The CCP knows that its financial chokepoint is controlled by Washington and has strategically been building momentum in alternative systems for years, such as yuan-based oil contracts (to replace the US dollar-based pricing mechanism) and its Digital Currency Electronic Payment, the world’s first sovereign digital currency established by a major country.
The rapid stockpiling of gold from 2014 to last year is another clear sign that the “Middle Kingdom” has been gearing up for a currency war. The US is starting to take steps to restrict flows of the US dollar to the CCP. In the midst of the COVID-19 pandemic, the US Federal Reserve earlier this year provided US dollar swap lines to multiple central banks to ease funding squeeze on local economies, but not to the People’s Bank of China.
Recent examples have included measures to discourage investment by US pension funds in CCP entities, many of which help build Chinese aircraft carriers, and discussion to delist Chinese stocks traded on US exchanges that do not comply with accounting rules.
Chinese stocks listed abroad have always been enticing to Wall Street. The CCP therefore has cleverly used stock markets as a way to suck up much-needed US dollars.
It is important to understand that all Chinese companies are an extension of the CCP, a relationship further strengthened under Chinese President Xi Jingping (習近平). Money given to Chinese companies is money given to the CCP.
At one time during the TikTok negotiations, it was floated that the company might list on a US stock market as a solution — that would have been playing right into CCP’s hands by providing the authoritarian regime with more US dollars.
Antonio Coppola, a researcher at Harvard University, concluded that US had an astonishing exposure of US$695 billion to Chinese companies in 2017 — an amount that has most certainly grown since. This year alone, Chinese companies took in almost US$7 billion of proceeds from January to Sept. 9 via initial public offerings (IPO) and secondary offerings in the US, Rifinitiv data showed.
In Hong Kong, where the currency is pegged to the US dollar, more than US$10 billion have been raised in the first six months this year, according to a Citibank report. This is a lot of money given to a geopolitical and ideological foe of the liberal order.
The typical pitch by investment bankers who broker deals to funnel US dollars to the CCP usually highlights China’s unprecedented economic growth, the monopolistic nature of its national champions that are expanding globally and cheaper valuations versus other stocks in the world — all of which can translate into handsome investment profits, despite these favorable investment conditions being created by unfair and often immoral practices of the CCP.
Profit is the primary incentive of capital allocators in the free world. It is helpful to have administrative guidelines and moral callings on the investment industry to discourage giving money to Chinese companies, but given the complexity of the financial world, it is an imperative to go to the root of the profit incentive.
The fundamental “pitch” for Chinese companies needs to be challenged so that their stocks become less appealing to the typical investor: This is where the app ban comes in.
Technology shares, which are the primary components of Chinese companies listed abroad, enjoy high valuations due to the perceived high growth trajectory. The higher the growth, the higher the valuation premium and the more US dollars can be raised from the stock market.
The CCP has sanctioned large companies to form monopolies in China without foreign competition, and that is why they can spend unfair amounts of profit to acquire growth abroad.
However, with every country that joins India in the app ban, the destruction to such a valuation premium racks up exponentially because soon there might be no more room to grow. These companies might go from growth stocks to no-growth value stocks that are worth much less in the stock market, and this in turn limits the CCP’s access to US dollars in capital markets.
The story does not stop here: There is no such thing as value stocks in technology.
When a tech company stops growing, it can easily slide into reverse gear and shrink into non-existence — who still remembers BlackBerry? When cheap capital is no longer available, a hyper-growth firm can quickly run into financial troubles — WeWork’s failed IPO that turned into a debt crisis is a perfect example.
The valuation of WeWork, an office-sharing company, shrunk from US$47 billion to a low of US$2.9 billion within one year — this is the magnitude of financial destruction that can be brought upon the CCP if the app ban is carried out more broadly among democracies.
The CCP’s economic machine could crumble given enough US dollars are drained from its system, and one additional US dollar funding channel closed is one step closer to that eventuality.
The app ban is more than what it appears to be: It is a crucial tactical maneuver in the currency war with the CCP.
All democratic countries must join and push forward the ban. Taiwan last month took a good first step by banning Chinese over-the-top service providers, but the measures are far from enough. We have long been at the front of an app invasion by the CCP, hence our defenses need to exceed those of other democracies.
James Lee is a former hedge fund chief investment officer.
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