On Sept. 24, China announced a blanket prohibition on all cryptocurrency transactions and mining. Citing concern for national security and “safety of people’s assets,” 10 government agencies announced the crackdown in an effort to clamp down on illicit activities and financial speculation. The action prohibits all crypto-related transactions and services provided by off-shore crypto exchanges but does not prohibit the possession of cryptocurrencies. It follows narrower bans issued in May of this year, as well as in 2013 and 2017. While some commentators are skeptical that this latest effort will succeed given past failures, this latest ban is the first-ever blanket ban on all cryptocurrency transactions, and it involves the largest number of regulatory agencies to date.
The ban comes as the People’s Bank of China (PBOC), China’s central bank, is piloting its own digital currency, the eCNY or “digital yuan.” Unlike private cryptocurrencies, the eCNY is issued directly by the central government and is being designed to provide the PBOC with near-real-time financial data on user transactions. Some observers fear that the eCNY will be used as a tool to strengthen the Chinese Communist Party’s domestic surveillance. Others worry that the eCNY will be used to retaliate against international companies that speak out on human rights issues. Fan Yifei, a deputy governor of the PBOC, announced last week that the eCNY has entered a “sprint stage” ahead of the February 2022 Winter Olympics in Beijing.
The crypto ban may also be intended to deter capital flight. Despite past crypto crackdowns and strict capital controls, wealthy Chinese have used cryptocurrencies to funnel more than $50 billion overseas in 2020. As China is in the middle of an economic slowdown that has been exacerbated by other regulatory crackdowns on the tech and education sectors, China may be redoubling its efforts to ward off skittish entrepreneurs from exporting their money overseas.
The regulatory move also has an environmental dimension. According to one estimate, China’s cryptocurrency mining was on track to generate more than 130 million metric tons of carbon emissions by 2024, equivalent to the entire carbon output of Venezuela. Under President Xi Jinping, China has committed to ambitious climate goals, aiming to reach peak carbon dioxide emissions before 2030, and to achieve carbon neutrality before 2060. The ban on crypto mining follows Xi’s Sept. 21 speech at the U.N. General Assembly, where he announced that China will no longer fund coal-fired power plants abroad.
China’s regulatory actions mirror similar moves being contemplated in the United States. Congress and regulators are considering new regulations and taxes on the crypto industry. The Federal Reserve is also mulling whether to launch its own digital currency, observing with interest China’s rollout of the eCNY. Republican lawmakers, including Sen. Pat Toomey, have pointed to China’s crypto crackdown as an opportunity for the United States to press its advantage in innovation.
Evergrande Crisis Unfolds Amid Ongoing Regulatory Squeeze on Tech and Other Sectors
Global financial markets have been in turmoil over the past week as the world waits to see whether China Evergrande, one of the country’s largest and most heavily indebted property developers, will be bailed out by the Chinese government or left to fail.
Founded in 1996, Evergrande profited from the property boom that urbanized large swathes of China and spurred the country’s rapid economic growth. But as property prices now dramatically outpace median household incomes and demand for new apartments falls, China’s property market—and the country’s overall economic growth—is slowing. Beijing has begun to institute new restrictions on home sales in an effort to address heightened concerns about a possible property bubble. At the same time, the government is attempting to rein in China’s unsustainable debt problem by sending a message to developers who borrowed recklessly in recent years that no company is too big to fail. In a meeting held in August 2021, Chinese government authorities told Evergrande to bring its debt under control and instructed banks to scale back their lending to the developer. Evergrande announced on Sept. 14 that it had hired restructuring experts to help “explore all feasible solutions” for its future.
Despite these efforts, Evergrande was saddled with more than $300 billion in debt as of last week, along with nearly 800 unfinished projects across China and as many as 1.6 million people still waiting to move into their new homes. On Sept. 22, Evergrande calmed default fears by agreeing to make a $36 million, yuan-backed interest payment to domestic lenders. However, Sept. 23 passed with no sign that Evergrande had made good on a $83.5 million, dollar-backed interest payment due that day. Shares of China Evergrande Group plummeted nearly 12 percent on Sept. 24 in reaction. A $47.5 million payment is due on Sept. 29. Both bonds will default if Evergrande cannot settle the interest payments within 30 days.
Economists have downplayed concerns that the scale of Evergrande’s issues could trigger a global contagion akin to the collapse of Lehman Brothers in 2008. The Chinese central bank has also embarked on a campaign to curb rampant borrowing and reduce the banking sector’s exposure to troubled developers like Evergrande. Nevertheless, observers fear that the collapse of a company of Evergrande’s size could have ripple effects in China and beyond, causing panic from investors and home buyers to spill over into the property market, shaking foreign investors’ confidence in financing Chinese corporations, and setting off a cycle of defaults among banks and other companies.
Two of the starkest options now facing Beijing each carry significant drawbacks. On the one hand, regulators could step in and force state-run banks to bail out Evergrande, though this would likely encourage other developers to rack up even more debt and further fuel the property bubble. On the other hand, the government could allow Evergrande to fail completely and risk a collapse in the real estate market. Many observers now predict that Beijing will not intervene until multiple major developers begin to fail and pose a systematic risk to the broader economy. There are, however, various other tools at Beijing’s disposal to dampen the impact of Evergrande’s debt crisis, such as unwinding debts gradually and limiting financial disruptions through its control of the banking system. The central bank announced last week that it had temporarily injected $18.6 billion in credit markets to maintain liquidity support and soothe market worries.
The Evergrande debt crisis can also be viewed through the lens of the Chinese government’s recent crackdowns on the private sector, such as those targeting technology companies like Tencent and Alibaba. President Xi may face incentives to treat Evergrande as a sacrifice to serve his broader policy goals. Evergrande’s troubles have coincided with Xi’s application of regulatory pressure across various industries in the name of “common prosperity,” such as by limiting minors’ online gaming. The detention on Sept. 24 of the top two leaders of HNA Group, another debt-laden giant in China’s transportation and logistics industry, took place against this broader backdrop of pressure on corporate practices that the Chinese Community Party increasingly regards as a threat to the economy and, by extension, its grip on power.
Huawei CFO Released From House Arrest in Canada Ahead of U.S.-EU Tech Meeting
Huawei executive Meng Wanzhou returned to China on Sept. 25, after spending nearly three years under house arrest in Canada. Meng, wanted by the U.S. for fraud charges related to violations of U.S. sanctions on Iran, was at the center of a diplomatic dispute between Canada, the U.S. and China. Concurrent with the announcement, China released two Canadians who are widely believed to have been held in retaliation as political hostages. In a deal with Justice Department officials, Meng acknowledged helping Huawei conceal direct dealings with Iran in violation of U.S. sanctions. In return, she received a deferred prosecution agreement, under which she would not be required to formally admit guilt. If she complies with the terms of her court agreement until December 2022, the U.S. will drop its case against her.
The saga unfolded against the backdrop of a Trump-era campaign against Chinese tech companies over national security concerns. President Biden has largely continued Trump’s tough line on China’s technology sector. In June, for example, Biden expanded Trump’s blacklist of Chinese firms off-limits to U.S. investors from 31 to 59 companies. In March, the Federal Communications Commission identified Huawei as one of five Chinese companies that pose a heightened threat to U.S. national security and communications networks.
Meng’s release comes as the U.S. and the EU plan to meet to discuss how to address competition with China. American and European negotiators are set to hold the inaugural meeting of the U.S.-EU Trade and Technology Council (TTC) in Pittsburgh on Sept. 29. Interpreted by some analysts as an effort to develop a common approach to countering China in semiconductors, artificial intelligence and other key technology sectors, the trans-Atlantic initiative will include working groups focused on data governance, green technology, supply chain security, export controls, investment screening and more. The TTC will also consider competition policy amid a push for antitrust action against Silicon Valley tech giants.
Xi Jinping Calls for Greater International Tech Cooperation
President Xi called for greater global cooperation in science and technology in a video speech to the Zhongguancun Forum in Beijing on Sept. 24. At the event, which Beijing has used to promote technology exchanges, Xi stated that China would adopt a “more open attitude” and take part in “global innovation networks.”
Xi’s remarks come at a time of heightened tensions between China and the United States in the technology sector. Amid the still-simmering trade tensions between the two nations, many Chinese tech companies, including telecommunications giant Huawei, have been sanctioned by the United States over national security concerns and allegations of intellectual property theft from U.S. institutions and businesses. At the same time, China has been pursuing a domestic strategy of “indigenous innovation” to reduce its reliance on imported technologies.
Some progress to stabilize the bilateral relationship has been made over the past month, with Presidents Biden and Xi holding a phone call on Sept. 9—only their second since Biden took office—to discuss ways to prevent existing tensions from devolving into conflict. Both leaders delivered addresses at the annual meeting of the U.N. General Assembly on Sept. 21. In his remarks, Biden called for a new era of global unity against common threats but also reinforced his view that the world faces a choice between democratic freedoms and authoritarian influence from countries like China and Russia. Biden was careful to vow not to pursue a new “Cold War” era of sustained conflict with such nations, asserting that the United States would “compete vigorously and lead with our values and our strength to stand up for our allies and our friends.”
Supreme People’s Court Clarifies Protections for Gig Workers
The executive vice president of China’s Supreme People’s Court, He Rong, announced during a press conference on Sept. 23 that the court has clarified labor rules governing the country’s gig economy in an effort to ensure that the government is “regulating platforms into healthy growth” while also “protecting workers’ legitimate rights.”
The court’s approach in striking this balance arrives in the wake of new guidelines on protections for gig workers that were jointly published by several central ministries in July. The guidelines instructed tech platforms to boost pay and benefits as well as adjust the algorithms used for managing workers to ease workloads and lessen punishment for late arrivals or deliveries.
In early September, China’s human resource ministry called 10 of the country’s largest digital platform companies—including Alibaba, Tencent and Didi—into a meeting to implore them to improve conditions for contract workers in line with these instructions. Such moves represent just one element of Xi’s broader campaign to shrink China’s growing wealth gap in the name of “common prosperity”—and tighten his grip on the country’s tech sector.
On Lawfare’s Cyberlaw Podcast, Jordan Schneider discusses the downsides of empowering China’s regulators to crack down on technology giants.
Minxin Pei cautions that China’s crackdown on private entrepreneurs may undermine China’s goal of common prosperity.
The Center for Strategic and International Studies dissects Chinese smartphone giant Xiaomi’s first-ever transparency report, revealing how Xiaomi responds to government requests for information around the world.
Kevin Rudd interprets Xi Jinping’s recent regulatory crackdowns through the lens of Xi’s “new development concept” and his bid for a record third term in office.
Sapnbi G K and Mihir Mahajan, writing in The Diplomat, explain how China’s draft algorithm regulations expand China’s state control over internet services.
The Economist explores how WeChat and other Chinese-language media are amplifying the Communist Party’s voice overseas.
Kara Swisher compares American and Chinese tech regulatory crackdowns for the New York Times.
Evelyn Farkas argues that to counter China, the U.S. and the EU need to resolve their disagreement over the EU’s proposed Digital Markets Act, which would impose new competition rules on large American tech companies.
Justin Sherman, writing for the Council on Foreign Relations’s Net Politics blog, says the U.S. should get serious about Chinese and Russian threats to submarine internet cable security.