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CEO Daily: Saturday, July 29, 2017

Good morning from Shanghai, where I’m filing this newsletter from the almost painfully glam lobby of the Andaz Hotel. I arrived here a couple of nights ago to speak at a Fortune Global Forum “roadshow” organized by this year’s host city, Guangzhou. I’ve stayed on in Shanghai to rediscover this city, which hosted the first Global Forum in China in 1999.

I use the word “rediscover” advisedly. It’s not that I am returning to Shanghai after a long absence. I lived here in the early 2000s, and have managed to visit pretty regularly in the years since.

But Shanghai changes faster than any place I know. Each time I return, I’m flabbergasted by the pace of development. Pudong’s financial district sprouts new skyscrapers. The Bund sports pricier restaurants. Huaihai Lu, once the Avenue Joffre in the old French Concession, is recolonized by a few more European luxury boutiques. Buildings, city blocks, entire neighborhoods seem to vanish and reemerge as something else. If I am away for more than six months, it feels like coming back to an entirely new metropolis: bigger, richer, sleeker, chic-er.

I have been thinking about the breakneck pace of growth in Shanghai while trying to parse the implications of Chinese president Xi Jinping’s declaration last Thursday that China’s development has reached a “new historical starting point.” Xi’s pronouncement was part of a major policy address he delivered in Beijing to provincial and ministerial officials ahead of this year’s 19th Party Congress. At that gathering, likely to be held in the next few months, Xi is expected to install a new generation of leaders and consolidate his position as the party’s “core” leader. The speech seems to signal Xi’s determination to double down in his second term on the authoritarian policies that have been the hallmark of his first five years in power: a zealous campaign against graft, expanded support for state-owned enterprises, and new measures to strengthen the party’s grip on China’s economy and society.

You can get a flavor of Xi’s remarks from these reports in Bloomberg and the Wall Street Journal. Alas, both those outlets are blocked in China. And so, no matter how stylish and seemingly cosmopolitan the lobby of my hotel, to access the global business press from it, I am obliged to rely on a “virtual private network” or VPN. In recent months, Xi’s push to bolster the party has included a sweeping crackdown on the use of VPNs and tightened party control over nearly all permutations of Internet use. In fact, TechCrunch reports today that Beijing has ordered Apple to purge all major VPN apps from the App Store in China. The move was first noted by ExpressVPN, a provider based outside of China—and, as it happens, the service I’m using to write this. The company says it received a notice from Apple that its app was scrapped because it “includes content that is illegal in China.”

Xi is also putting the squeeze on privately owned Chinese companies the government deems too aggressive in expanding outside China. In recent weeks, China’s state media has been filled with reports deploring the dangers posed by what pundits here are calling “gray rhinos“—large Chinese companies with murky ownership structures, high-debt ratios and extensive holdings overseas. It’s almost as if Beijing’s vaunted “Go Global” investment policy has been rebranded as “Go Home.”

Concerns about the risks over-leveraged firms pose to China’s financial system are well-founded. And yet, of the four gray rhinos China’s bank regulators have singled out for greater regulatory scrutiny in recent weeks, at least one, Dalian Wanda, was an established business with a coherent global strategy.

Shai Oster, a China tech correspondent for The Information, worries in a thoughtful essay published today that all the “euphoria” over the dazzling innovations in China’s tech sector in recent years masks the heavy-handedness with which Xi has dealt with private firms. If Xi himself can order the takedown of China’s most high-profile and politically connected property developer, no one is safe. “Even someone as famous as Alibaba’s founder Jack Ma could face increased political risks in the current climate.” Executives many of foreign firms operating in China say they feel equally vulnerable.

The optimistic view is that the many recent measures to tighten political control in China are temporary and that Xi will loosen up after the Party Congress once he has his ducks in line. It’s a comforting thought. If only there were more evidence to support it.

More China news below.

Clay Chandler
@claychandler
clay.chandler@timeinc.com

Technology and innovation

Paypal and Baidu make a play for mobile payments beyond China. PayPal has joined with Chinese tech giant Baidu to offer mobile payment services to the 20 million middle-class Chinese consumers who use their mobile phones to shop overseas. The partnership will allow Baidu Wallet users to make online purchases outside China by linking Wallet accounts to PayPal. Analysts say the overseas market offers the best opportunity for Baidu in mobile payments because inside China the sector is dominated by Alibaba’s Alipay and Tencent. Quartz

China steps up its quest to become a space science superpower. Over the past several decades, China has built the capacity to place satellites and astronauts in orbit and send spacecraft to the moon. Now China is pressing to establish itself as a leader in global space research. But China has been sidelined from international collaboration by a U.S. law that prohibits NASA from working with China. Scientific American

US skepticism of cryptocurrencies proves boon for China. The US Securities and Exchange Commission’s announcement Tuesday that some initial coin offerings (ICOs) will soon be scrutinized and regulated as securities won cheers from Asia-based cryptocurrency investors. Cryptocurrencies are not regulated by law in China, which saw sixty-five ICOs this year. China’s central bank has developed a national cryptocurrency, and is currently testing its feasibility. Caixin

Politics and policy

Behind Sun Zhengcai’s fall from grace. Was it his failure to eradicate the influence of Bo Xilai? His ties to a mysterious woman named Huang who used his name in a fraud scheme? His wife’s close links to the disgraced former chief of staff of Hu Jintao? The SCMP‘s Wang Xiangwei parses possible explanations for the sudden downfall of the man considered the leading political rival to Xi Jinping. South China Morning Post

In Case You Missed It

Starbucks makes biggest deal ever with $1.3 billion move on Chinese market FORTUNE

Apple supplier Foxconn will build $10 billion plant in Wisconsin FORTUNE

A beautiful essay critiquing the “fake lives” of Beijingers is blocked after lighting up Chinese social media QUARTZ 

Hong Kong oyster sauce company buys London’s “Walkie Talkie” tower FINANCIAL TIMES

Business, commerce, trade and finance

US trade representative lashes out at China’s industrial policies. America’s top trade negotiator Robert Lighthizer said Tuesday that President Trump is determined to challenge China’s use of unfair subsidies and “non-economic” industrial policy to build up export industries that are costing American jobs. Lighthizer, in a rare media interview, said that the Trump administration would work to hold China’s practices to the rules of the World Trade Organization, an organization that he has criticized for being ineffective in enforcing fair trade. Reuters

US corporate acquisitions in China collapse. American corporate acquisitions in China plunged to their lowest level for 14 years in the first half of this year, reflecting growing uncertainty about the US-China relationship. The value of mergers and acquisitions involving American companies in China dropped 32%to $523 million in the six months to June 30, down from $771 million in the same period last year. US acquisitions were down 87% from $4 billion in the first six months of 2015, according to Thomson Reuters data. Reuters

China in the World

China bracing for crisis on border with North Korea. Global military and security experts say that over the past several months, China has taken a series of steps to bolster defenses along its 880 mile border with North Korea including deploying a new border defense brigade, establishing 24-hour video surveillance of the border backed by aerial drones and digging new bunkers to protect against nuclear and chemical blasts.  WSJ

One station, two systems. The Hong Kong government’s plan to lease to the central government a section within its new high-speed railway terminal  has stirred up anger in the territory. The blueprint, announced Wednesday, will allow for mainland laws and workers to be employed within certain areas of the upcoming West Kowloon Station in Hong Kong. Detractors argue the arrangement contravenes Hong Kong’s Basic Law and is an encroachment of the city’s legal autonomy. The Guardian