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CEO Daily: Saturday June 10, 2017

June 10, 2017, 5:03 PM UTC

New York Times columnist Tom Friedman has emerged from a recent foray to China newly astonished by the breakneck pace of innovation here. In his latest column Friedman marvels that the Middle Kingdom has become a cashless society in which “everyone pays for everything with a mobile phone” and even beggars use QR codes.

Just so. And yet the arc of China’s rise — particularly in areas like e-commerce, mobile payment, Big Data and the Internet of Things — is troubling in two ways. The first Friedman acknowledges: as China’s economy has grown, its leaders have continued to protect local companies from global competition, restricting foreign firms’ access to Chinese customers, and forcing them to surrender intellectual property as the price of wider market access. The second reason for concern Friedman leaves unsaid: China’s rulers hope to use the trove of data its tech firms are collecting to tighten the grip of an already authoritarian state.

On Thursday, Alibaba offered further evidence of China’s growing tech prowess by forecasting its annual sales will surge to more than $34 billion in the 2018 fiscal year, a 45% gain over last year and far higher than analysts’ estimates. The announcement inspired rapture on Wall Street. In the first minutes of trading, investors bid BABA’s stock price up 12% to $140.84, an all-time high. The stock is up nearly 50% so far this year, confounding naysayers. Alibaba’s annual sales still trail Amazon’s $136 billion, but they are growing twice as fast.

The pace of innovation in China’s tech sector is so frantic because its largest players — the big three Internet companies, Alibaba, Tencent and Baidu, but increasingly manufacturers like Huawei, Xiaomi and ZTE too — are locked in battle, and pumping billions into new growth opportunities at home and abroad. Alibaba last week reportedly paid $81 million for an 18% stake in Lianhua, one of China’s largest grocery chains. This week, Alibaba Pictures bought a majority stake in Indian ticketing startup TicketNew. The assumption is that bigger is better because Chinese consumers will gravitate to a one-stop-shopping model where a single platform connects them to all the goods and services they seek.

The race to build such platforms has spawned innovations that give Western competitors pause. The Financial Times reports this week that Chinese tech giants are barreling forward in the use of face recognition technologies. Alibaba’s mobile payments affiliate, Ant Financial, allows its 450 million users to log into their online wallets by taking a selfie. Baidu, China Construction Bank, and ride-hailing service Didi Chuxing use the technologies in identify employees as well as customers. A Beijing-based company called Face++ has raised $100 million in its third round of financing, according to the FT, and has licensed its software to Ant and Didi.

U.S. companies like Google, Nest and Facebook have been squeamish about pushing face recognition technologies, fearing backlash from customers concerned about privacy. But China’s citizens, who are obliged to slide ID cards into chip readers to set up mobile phone accounts, make travel reservations and book hotels, seem less fussed about surrendering personal data.

Meanwhile, Caixin, a Chinese business magazine, reports Ant is steadily expanding use of its “Sesame Credit” system, which assigns customers a “financial reliability” score according to criteria such as their online spending records, how regularly they pay their utility bills or credit cards, and other factors such as what city they live in, whether they own a house or car. Caixin says the ranking even factors in the scores of acquaintances.

Ant recently introduced a new service to expedite visa applications to Japan and Luxembourg for customers with high Sesame Credit scores. Caixin notes that Ant has offered “no clear indication of what exactly constitutes Sesame’s definition of an ‘extremely creditworthy person'” or whether the algorithms underlying the rankings are themselves reliable.

Should Chinese customers worry about those algorithms? After all, they make life more convenient, and Western financial institutions use credit rating systems too. Critics say gains in Big Data and artificial intelligence are more insidious in China than the West because China’s political system offers far fewer protections for individual rights. Some fear that in China, “Fourth Industrial Revolution” technologies are setting the stage for an Orwellian distopia.

On June 1, China implemented a sweeping new cybersecurity law the government says was designed to protect the personal information of private users. The first business to run afoul of those new rules? Apple, the American company that defined its brand with iconic ads rebelling against “Big Brother.”

Clay Chandler

Technology and innovation

Apple beware. Chinese smartphone makers like Huawei Technologies, Xiaomi and ZTE Corp. are challenging Apple's dominance, especially in emerging markets like India and Africa. Wall Street Journal

Apple says mobile tipping is an in-app purchase. Chinese consumers love to say thank you by sending small sums of money to others using digital wallets on their mobile phones. But Apple, in a risky move, says it wants 30% of tips sent via the Apple payment system. Quartz

China's tech companies vs the FANGs. Are Chinese companies like Alibaba and Tencent a better investment bet than Facebook, Amazon, Netflix and Google? Wall Street Journal

China cracks down on celebrity blogs. China's censors go after frivolous content. New York Times

Trade and Finance

Muddy Waters sinks shares of Chinese furniture maker. Carson Block's attack on Man Wah Holdings is one of a host of campaigns by short sellers targeting Hong Kong companies this year.  Bloomberg

LeEco cancels bond sale becoming the latest high-flying, highly leveraged Chinese company to stumble in executing its overseas expansion strategy. Financial Times

Are China shares about to be added to the Morgan Stanley Index? Morgan Stanley sees a 50-50 chance that MSCI will add China shares in mid-June. Barron's


In Case You Missed It

Tesla Takes Off in China Fortune

Red Bull owner locks horns over drink's future in China Financial Times

Rémy Cointreau toasts the return of Chinese cognac drinkers Financial Times

China in the world


China is "filling America's shoes" on climate change! So says Time's Justin Worland, who frets that just a week after President Trump pulled the U.S. out of the Paris agreement, China convened a high-level summit bringing together leaders from around the world including California governor Jerry Brown, former U.S. Commerce Secretary Steven Chu. Time

No, China will remain "torn by nonconflicting priorities" when it comes to carbon emissions, declares Wall Street Journal columnist Andrew Browne. Sure, China is burning cleaner coal, China's consumption of the stuff has fallen for the past three years. But coal is still king, China is still the world's biggest polluter and both those things are likely to remain true for years to come. Browne notes that Xi Jinping's grand "One Belt, One Road" initiative will prolong the life of some of the nation's biggest, dirtiest producers of steel, glass, aluminum and cement. Wall Street Journal

Don't expect China to fill the broader global leadership vacuum left by Trump. Since at least the days of Napoleon, the world has been gasping at the scale of China's potential. But the Economist argues China itself remains reluctant to push hard on the outer boundaries of what it might do. Economist

China will soon put fighter-jets on artificial islands in the South China Sea. A Pentagon report warns China will soon complete construction of 24 hangars on manmade outposts on the Fiery Cross, Subi and Mischief Reefs (also known as the Spratlys) enabling it t house up to three regiments of fighter-jets. The Stars and Stripes

Mattis vows the U.S. will remain engaged in the Pacific. The U.S. Defense Secretary, speaking a day after release of the Pentagon's report on Chinese construction of jet hangers  on the Spratlys, assured Asian leaders at the Shangri-la Dialogue, a high-profile annual security forum in Singapore, that the US remains engaged in the Pacific. But he faced "skeptical questions from the floor" of the forum, "where friendly nations openly voiced doubts" about U.S. commitments. Financial Times

Doubts about Trump are driving Southeast Asia into the arms of China, says the FT's Ben Bland. And China is putting the squeeze on countries like Singapore, who has tried to balance its relationship between both superpowers." A resurgent China, emboldened by a U.S. retreat from the world stage under Mr Trump and Beijing's victories in the South China Sea," says Bland, "is no longer willing to accept what it sees as double dealing by the likes of Singapore." Financial Times

Meanwhile, in Australia...

Canberra is awash with Chinese cash. While Americans debate allegations of Russian meddling in U.S. presidential elections, Australians last week were rocked by allegations that their own political leaders have pocketed millions of dollars in donations from Chinese agents. For years rumors have swirled that China's communist rulers were funneling large sums to friendly Australian politicians.  The issue made headlines this week when one of Australia's largest publishing groups and a popular television news program reported that, in 2015, the nation's intelligence chief warned leaders of both the Labor and Liberal parties to stop accepting donations from two prominent businessmen of Chinese descent because they were operatives of the Chinese government. In the U.S., political contributions from foreigners is akin to treason. In Australia foreign gifts are legal. Both parties ignored the warnings, and the businessmen continued to lavish them with cash. Last year one of the donors reneged on a pledge to make a huge contribution the Labor Party stating explicitly that he was withholding the funds because a Labor Party official had suggested that Australia dispatch its navy to challenge China's territorial claims in the South China Sea. New York Times