The U.S. government considers China a ‘strategic competitor’. The State Department says the Communist Party of China is committing genocide of Muslim minorities in Xinjiang. American corporations and Wall Street aren’t too worried about it.
It’s not only large Wall Street investment firms that are funding China’s new computer hardware companies, its latest gene therapy R&D, or artificial intelligence developers. Small, retail investors are doing it now, too.
During a Senate Finance Committee hearing about China last week, Ron Wyden (D-OR) said, “I’m particularly attracted to this idea of cutting off access to capital. That is a no-brainer. We’ve got to do that.”
Wyden was responding to one of the witnesses of the day: Aynne Kokas, a Senior Faculty Fellow at Miller Center for Public Affairs at the University of Virginia. “U.S. exchanges fund China companies. Look at companies in China that have raised money through our capital markets, like Baidu, which has built a Netflix competitor from that capital from U.S. investors.”
This may sound benign. Americans have funded European telecoms and tech companies for years. But we don’t view Europeans as having cheated their way to the top. Now something as innocent as Baidu’s Netflix knock-off IQiyi does an IPO in 2018 and is raising money that we think will help it replace Netflix in Asia. With IQiyi, Netflix has peaked.
You can’t blame the Chinese Communist Party strategy to list here. They know where the money is. Chairman Xi is adept at using our open markets to his advantage.
But here’s the thing: China doesn’t really need to list in the U.S. anymore. Wall Street is coming to them. Their two-year-old STAR Market is the latest example of how Americans are funding the rise of China’s stars.
What is the STAR Market?
The industry leaders working on Beijing’s Made in China 2025 plan are part of a new stock index in Shanghai called the Science and Technology Innovation Board, aka the STAR Market. It launched on July 22, 2019. It is comprised of 254 companies, most of them over 10 years old. They are in the industries China deems imperative to its economic growth and its projection of soft power globally: semiconductors, biotech, clean energy and artificial intelligence, primarily. This January started off with 50 of those companies being put into an exchange-traded fund run by KraneShares in New York, making it easier for retail investors to buy stocks of companies not listed in the U.S. This is the layman’s gateway to investing in Made in China 2025. Prior to the KraneShares Star 50 Fund, only qualified institutional investors had access to these companies. Now anyone with $100 can buy in.
All of this would be harder to bemoan if it were reciprocal. Only a handful of institutional investors in China can invest here, per Beijing’s orders. U.S. investors of any size are allowed to give Chinese companies the capital they need to invest. The Chinese aren’t allowed to return the favor.
The STAR Market is to China what the Nasdaq is to the U.S. Foreign investors that like the tech and genomics story will want to be there.
Over $1 trillion has flowed into China’s capital markets, doubling in less than three years. American investors don’t need the NYSE or Nasdaq to buy China, especially the big money investors.
The amount of Chinese domestic stocks and bonds held by overseas entities has topped 1 trillion dollars. pic.twitter.com/OSkwzlylsB
— David Ingles (@DavidInglesTV) April 7, 2021
Looking at the above chart, it is worth noting that China owns around $189 million in U.S. stocks and $1.11 trillion in U.S. Treasury bonds, a lot of that due to corporate trade and Beijing banks buying dollars.
Funding China’s Rising Stars
Most of these companies are over 10 years old. The bulk of their backers are wealthy Chinese individuals or venture capital firms set up by the state to invest in these new technology companies. China Integrated Circuit Industry Investment Fund is one of the more consistent investors in these companies. Others are provincial or municipal level VC funds run by the government.
The vast majority of the companies on the STAR Market have no significant foreign shareholders (more than 0.2%). We found a few of them that do.
Memory interface chips manufacturer, Montage Technologies, which has a branch in Silicon Valley, counts Intel as a 10% shareholder.
Ninebot Limited counts Sequoia Capital as 15.12% shareholder, making them the biggest of all foreign investors in Ninebot. They are teamed with another China VC on Ninebot. Intel owns 2.9%. And a Cayman Islands hedge fund named WestSummit Global Technology Fund has a 5% position as of October 20, 2020.
Remember that thing called the Segway? It’s Ninebot’s now.
EFORT Intelligent Equipment Corp is another STAR Market listing. It basically grew by buying up Italian firms. They bought WFC Group, an Italian automotive equipment and robotic system integrator; Italian robotic painting company CMA; Italian metal processing and surface treatment system integrator EVOLUT; and ROBOX, a manufacturer of robot core components. EFORT now has 19 subsidiaries worldwide and has a painting robot R&D center and an intelligent robot application center in Italy. China is taking over Europe’s robotics industry. Europeans probably helped fund it, as they are as keen to invest in China as we are.
Lastly, Chinese managed hedge funds registered in the Cayman Islands are also busy soliciting U.S. investors to STAR listings.
Some well-known names like solar panel behemoth Trina Solar and vaccine maker CanSino Biologics are also on the STAR board. Trina Solar delisted on the NYSE in 2017 because it went private at a time when trading volume in solar was in decline. They risked being delisted as a result of that low volume. Both of these companies are no stranger to foreign capital. Trina raised millions on the U.S. stock exchange, capital that helped it invest in oversupply of the solar panel industry and crush European and many American competitors.
Other listings are tied to Chinese firms that have been in the crosshairs of the U.S. Treasury or Commerce departments. UCloud, which has data centers in Los Angeles and Washington DC, counts China Mobile’s investment arm, China Mobile Capital Holdings, as an investor.
Executive Order 13959 put “China Mobile Communications” and “China Mobile Communications Group Co Ltd on the Commerce Department’s entity list on December 28, 2020 and “China Mobile Limited” was added to the Communist Chinese Military Companies (CCMC) List on January 8, 2021.
Those companies are not part of the STAR 50 index, which is what the major ETFs are tracking so it is unlikely that any significant American capital is flowing into these firms. Many American hedge funds are also cognizant of the Pentagon’s attention to defense contractors, and so they tend to shy away from these names. It’s not always an easy task as some of these companies are managed in a way that subsidiaries and offshore entities make it hard to know their core businesses. Moreover, Executive Order 13959 by former President Trump prohibits U.S. investors from investing in China military supporting entities anywhere in the world, and that would include the STAR market. Most companies there are not in any obvious way part of the civilian-military fusion strategy of Beijing.
China launched four ETFs for the STAR 50 index on November 16, 2020 for the local market. The four funds were created by China Asset Management, E Fund Management, Huatai-PineBridge Fund Management, and ICBC Credit Suisse Asset Management. Initial fundraising of the ETFs started in September and they received nearly 100 billion yuan (or around $15.2 billion) in investment capital.
The U.S. is funding China’s rise and in increasing numbers. It’s a free market, and capital is the freest of all and will seek out where it is easiest to make returns. Wall Street sees China as the place to be — thanks to its stated investment goals in the economic sectors of the future, and its massive pricing power due to economies of scale and state subsidies.
China’s share of total foreign holdings of U.S. securities stood at 8% in 2019, the most recent data, down from its all-time high of 15% in 2009. China doesn’t want to fund our rise. Why are we increasingly funding theirs?