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Who Lost America?

If you read only one China-related story this week, I’d recommend this thoughtful essay by veteran Wall Street Journal editor Bob Davis reflecting on Bill Clinton’s decision to push for China’s admission to the World Trade Organization. It opens by recalling Clinton’s heady optimism that accepting China into the WTO would lock it onto a development path that would take it from isolated Communist backwater to modern, market-oriented democracy. Bob quotes from a landmark 2000 speech in which Clinton proclaimed to an audience at Johns Hopkins University: “By joining the WTO, China is not simply agreeing to import more of our products, it is agreeing to import one of democracy’s most cherished values, economic freedom. When individuals have the power not just to dream, but to realize their dreams, they will demand a greater say.”

From the vantage of 2018, that statement may seem naive. But to Clinton and members of his economic team, it seemed self-evident. China was, as Clinton put it to Chinese president Jiang Zemin in a 1997 press conference in Beijing, “on the wrong side of history“—and in those days, when China’s economy was much smaller, the conventional wisdom in Washington was that the sooner we allowed China to trade with us, the sooner China’s leaders would scramble to remake China’s economy in America’s image.

I remember those sentiments well because, for Clinton’s first term and most of his second, I was a Washington-based economic writer for the Washington Post. Then in 1999, the Post dispatched me to Hong Kong to write about economics in Asia. It was a head-spinning experience. It became immediately evident to me that the lofty free-market rhetoric preached in Washington had nothing to do with the state-controlled reality I was discovering on China’s mainland.

What strikes me about Bob’s essay is that it hints at how, over the years, many of the most prominent American advocates of admitting China to the WTO have come to feel bamboozled and betrayed. My sense is that a similar phenomena holds true for journalists. Without naming names and at the risk of gross generalization, what I’ve observed in my years following China is that correspondents with the best Mandarin skills and greatest facility for understanding Chinese society have tended to emerge as the most disillusioned and sharpest China critics.

Robert Atkinson, president of a group called the Information and Technology Innovation Foundation, also ponders the evolution of the U.S.-China economic relationship in an essay published this week in the conservative National Review. The piece is something of a polemic, but it’s still worth reading. It’s entitled, “Who Lost China?” evoking the question raised after World War II as the U.S. foreign policy establishment sought scapegoats for China’s drift into Communism under Mao. Atkinson suggests U.S. elites have lost China a second time. He faults presidents from Nixon through Obama for failing to recognize that China’s leaders never had the slightest desire to remold their system into a market-oriented democracy. Rather, he argues, party planners stuck doggedly to their goal: a mercantilist, authoritarian system bent on party control and global technological supremacy.

Atkinson decries “the stifling groupthink of the Washington trade and economics establishment, which, almost without exception, refused even to consider the possibility that Chinese economic and trade policies might pose a threat to the United States. The Washington elite-consensus view was and is that trade is always good (even one-sided free trade in which the other side is mercantilist); that while trade might hurt individual workers, it can’t hurt the overall economy; and that there is no difference between challenging foreign mercantilism and naked protectionism.”

And yet it’s not clear to me that, within the “Washington trade and economic establishment,” such “groupthink” still prevails. Atkinson, for example, cites a recent Foreign Affairs article co-authored by former Clinton security advisor Kurt M. Campbell called “The China Reckoning”—which seems to acknowledge that the Clinton policy of engagement with China was a flop. Is it possible that the US media, in its fascination with Donald Trump’s “populist” political agenda, has failed to draw attention to the fact that America’s elites, too—in business, foreign affairs, academia and media—have fundamentally changed their minds about China?

In recent weeks I’ve noticed a flurry of stories in the Western press suggesting that perhaps Xi Jinping has overplayed his hand in asserting China’s claims to prominence on the global stage and sparring with Trump on trade. The Chinese economy is slowing. In recent days, China’s economic planners have signalled that they are shifting back to an emphasis on growth rather than trying to scale back the nation’s spiraling bad debts. Trump cut a trade deal with the EU, enabling him to focus on tariffs against China. Trump is blunting the impact of China’s retaliatory tariffs by borrowing a page from China’s own playbook and doling out subsidies to U.S. soybean farmers. Meanwhile, some argue that travel restrictions imposed by Xi on the party’s top leaders have limited their ability to have in-depth discussions with U.S. counterparts or understand how leaders in the rest of the world perceive them.

Could it be that, while we in the West agonize over “Who lost China?,” China’s leaders, as they prepare for their party conclave in Beidaihe, are also agonizing over “Who lost America?”

More China news below.

Clay Chandler

Innovation and Tech

Finger lickin’ good. Hillhouse Capital Group, one China’s savviest tech investment funds, is in talks to acquire Yum China, the country’s biggest fast-food operator, according to a report in The Information. Yum China’s shares, which are listed on the New York Stock Exchange, have a market capitalization of nearly $13 billion. The company, which operates more than 8,000 KFC and Pizza Hut restaurants across China’s mainland, was spun off from U.S.-based Yum Brands in 2016 in response to perceptions that China operations, plagued by a series of food scandals and stiff competition from local upstarts, were a drag on Yum’s global stock price. Hillhouse, founded by Zhang Lei in 2005 with financial backing from Yale University, now manages about $35 billion in assets. The fund was an early investor in Tencent and Didi Chuxing. Last year, Hillhouse was part of a consortium that took private Belle International, a Hong Kong-listed shoe retailer, for $6.8 billion. (More about the strategic logic behind that investment in this interview at Fortune Brainstorm Tech International.) Owning Yum both Yum and Belle would put Hillhouse in control of China’s two largest bricks-and-mortar retail franchises. The Information 

Facebook blocked. After years of trying to woo its way into China, Facebook appeared to have been given a break this week. It registered a subsidiary with $30 million capital in Alibaba’s hometown, Hangzhou, and announced its intention to build an “innovation centre” in the province. However, hours later, the company’s listing disappeared from the register and references to it were partially censored online. Facebook’s registration had been quietly revoked. The reversal was reportedly due to a disagreement between the local authorities and the Cyberspace Administration of China, which exerts ultimate control over the arena. New York Times

A.I. shopping. Alibaba has joined a $600 million funding round for Megvii, the A.I. company behind facial recognition system Face++. Megvii provides face scanning systems for companies like Lenovo and Alibaba’s fintech affiliate, Ant Financial, which it also counts as an investor. Megvii will use a large part of the new funding to invest in retail initiatives, such as unmanned stores – a service Alibaba is attempting to perfect. Bloomberg

China’s new e-commerce powerhouse: The $1.6 billion US IPO of Pinduoduo signifies is rapid rise of the Shanghai-based Chinese social e-commerce platform rival to and Alibaba’s Taobao in China’s highly competitive e-commerce market. Like and Taobao, Pinduoduo offers a wide range of products from groceries to home appliances but uses a “team purchase” model that integrates of social components into the traditional online shopping process. By sharing Pinduoduo’s product information on social networks such as WeChat and QQ, users can invite their contacts to form a shopping team to get a lower price for the commodity. TechNode

Pay the piper. Alipay and Tenpay, China’s leading mobile payment providers, were both fined $88,000 by China’s State Administration of Foreign Exchange (SAFE). It is the first time SAFE has publicly named and shamed rule breakers and comes as both Ant Financial and Tencent look to push their services overseas. The authority listed a further 25 companies and individuals that had violated regulations. South China Morning Post

Economy and Trade

Chips down. Qualcomm withdrew its bid to buy Dutch-owned NXP after Chinese regulators failed to approve the $44 billion deal in time for its Thursday deadline, snuffing two years of negotiations. Qualcomm thought it had Beijing’s approval wrapped up in May, but then China and the U.S. waded into a trade war and approval stalled. Since China doesn’t import enough American goods to maintain tit-for-tat measures with the U.S., vetoing or otherwise scuppering global M&A deals for American companies could be an increasingly powerful economic weapon in its arsenal. Financial Times

Autobots retreat. Hasbro, the world’s largest toymaker in market value and the maker of Transformers, Play-Doh, Furby and My Little Pony, will shift the bulk of its China productions elsewhere minimize impact from U.S. tariffs. In a conference call Monday, Hasbro chief executive Brian Goldner says the toymaker, which sources about a third of its products from China, will move to other parts of the world. But Goldner did not identify where the company will move production. New York Post

Still robust. In a report on Friday, the IMF remained positive on the outlook for China’s economy, predicting growth will decline just slightly, from 6.9% in 2017 to 6.7% this year. “China’s near-term outlook remains robust due to strong domestic momentum, recovering global trade, and significant reform progress,” the IMF said. However the consultation for the report was conducted before the U.S. and China descended into a trade war. Caixin Global

Grabbing a share. Blackrock has launched its first Chinese private fund, having successfully registered the entity with Chinese authorities earlier this month. The fund, called China A-Share Private Opportunities Fund 1 , invests exclusively in A-shares and charges less than half the normal fees. Citic was charged just 0.75% in management fees, opposed to the 2% normally charged by Chinese fundsSouth China Morning Post

Towering IPO. State-owned telecoms operator, China Tower, has secured 10 cornerstone investors for its IPO, which could value the company at up to $35 billion. The IPO is potentially the world’s largest listing since Alibaba went public in New York four years ago. However, retail investors in Hong Kong were apparently cautious amid a volatile market, subscribing to only 21% of available shares by the second day. Conversely, shares earmarked for overseas investors have been oversubscribed. South China Morning Post

In Case You Missed It

Smart bots: China’s sex doll makers jump on AI drive Reuters

What bubble? China’s record-breaking venture capitalists charge ahead Reuters

Berlin Poised to Veto Chinese Pursuit of German Engineer Financial Times

After Trade War Failure, China’s VP is now reforming state-owned enterprises South China Morning Post

Meituan Dianping launches autonomous food delivery system TechNode

#MeToo nets China’s social justice ‘frat boys’ Inkstone

U.S. Embassy Street in Beijing Is Rocked by Blast New York Times


Politics and Policy

Healthcare scare. China has been gripped by a scandal involving faulty vaccinations and lax government oversight. At the heart of the issue is Changsheng Biotech, which was belatedly fined $502,000 this month for distributing ineffective DPT vaccines last year. At the same time, it was revealed that the company had forged data on its rabies vaccines too. The public backlash was so great that Premier Li Keqiang and President Xi Jinping both stepped in, calling for a thorough investigation. Attention then turned to Sun Xianze, who was in charge of drug safety regulation while the current scandal grew. Sun was also in charge of food safety in 2008 when thousands of children were hospitalised due to tainted milk formula – an incident still seared on China’s collective psyche. Many are wondering how disgraced officials like Sun have been able to continue in public office. South China Morning Post

China’s new cyber czar. Xi Jinping is putting allies in charge of nation’s main Internet regulator and key propaganda agency. Xu Lin, who worked for Xi in Shanghai, is likely to take over as the head of the State Council Information Office, the party’s external propaganda arm. Xu, 56, who has served as the head of the Cyberspace Administration of China (CAC) since June 2016, will take over for Jiang Jianguo. Xu will be replaced at CAC by Zhuang Rongwen, also a Xi ally. South China Morning Post

Airlines acquiesce. U.S. airlines have complied with Beijing’s demand that Taiwan not be referenced on their websites as a country separate from China. The White House slammed the demand as “Orwellian nonsense” back in May but Delta, United and American Airlines all changed how they list Taiwan head of the July 25 deadline set by Beijing. The Chinese government welcomed the changes as “positive developments”. Reuters


This edition of CEO Daily was edited by Eamon Barrett. Find previous editions here, and sign up for other Fortune newsletters here.