SinoTech

Chinese Tech Companies Deepen Roots in Russia in Spite of U.S. Sanctions

By Raquel Leslie, Brian Liu
Friday, March 18, 2022, 10:44 AM

Many Chinese technology companies have decided to stay put in Russia, despite a growing exodus of Western firms and an ongoing meltdown in China’s tech stock market. On March 15, the Hang Seng Tech Index—one of the leading indicators for technology stocks in Asia—dropped 12 percent amid fears that Chinese firms would be shut out from Western markets for remaining in Russia. Despite financial pressure from U.S. sanctions and Russia’s relatively minor market value for Chinese firms, Chinese netizens have vociferously called on firms to stay in solidarity with Russia, putting firms in a tough dilemma. 

In a joint statement on Feb. 4, Chinese President Xi Jinping and Russian President Vladimir Putin announced that the Russia-China partnership had “no limits.” Chinese netizens have seemingly taken that to heart, voicing their support for Russia’s war on platforms such as Tencent, Sina Weibo and Douyin, where public sentiment is largely pro-Russia, pro-war and pro-Putin. Netizens, deeming him “Putin the Great,” have also turned out in support of Russian businesses by buying out Russian-made goods on Russian e-commerce stores. 

In the face of wide public support for Russia’s war, Chinese tech firms have faced intense domestic backlash for attempting to join Western companies in pulling out of Russia. In late February, three days prior to Russia’s invasion of Ukraine, ride-hailing giant Didi Chuxing announced that it would close down its 1.5-year-old service in Russia. In response to the announcement, nationalist influencers mobilized against DiDi, accusing it of colluding with Western sanctions. Shortly after, Didi reversed course, publishing a statement on Weibo promising that it would continue serving Russian consumers. While evidently a product of the fierce public reaction, Didi’s quick about-face may have been motivated in part by a desire to appease regulators conducting an ongoing cybersecurity probe into the company. 

The pullout of Western firms from Russia has left many ordinary Russians cut off from technology that they have come to rely on, opening a space for Chinese consumer technology firms to fill the gap. After the invasion, Visa, Mastercard and American Express barred customers holding Russian-issued credit cards from conducting transactions on foreign websites. In response, Russian banks have started turning to UnionPay, China’s Visa alternative, and China’s top banking regulator stated that it will not participate in U.S. sanctions against Russia. Similarly, while Apple, Dell, HP and Asus have pulled out, Huawei and Lenovo have decided to stay, putting them in a position to capture the residual market share. 

While Chinese consumer firms have largely decided to stay, firms working in critical technology sectors like semiconductors may face greater penalties for remaining in Russia. In an interview published on March 8, Commerce Secretary Gina Raimondo warned Chinese companies against defying U.S. sanctions, threatening to cut them off from American equipment and software they need to make their products. Raimondo targeted her comments specifically at semiconductor companies, stating the U.S. could “essentially shut” down China’s Semiconductor Manufacturing International Corporation and similar companies for violating trade restrictions. While Putin may have hoped that China would throw him a financial lifeline, it is unclear how far Xi is willing to go to maintain his “no limits” partnership in the face of U.S. threats to critical sectors of China’s economy. 

Shenzhen Lockdown Threatens Already Crippled Tech Supply Chains

On March 14, Chinese officials placed the city of Shenzhen, a major technology hub, on lockdown after the city reported an outbreak of 66 coronavirus cases. The lockdown is scheduled to last one week while health authorities administer coronavirus tests to the city’s 17.5 million residents and try to limit the virus’s spread. In Shenzhen, all businesses—apart from those deemed essential or engaged in supplying Hong Kong—have suspended operations or implemented work-from-home policies. Public transportation, including subways and buses, has also been suspended in the city. 

China is grappling with its worst coronavirus outbreak since the onset of the virus in Wuhan in early 2020 as cases surge across the country. On March 13, the National Health Commission reported 2,125 cases across 58 cities. While China’s case numbers may appear miniscule by global standards, the country is still vigorously pursuing a “zero-COVID” strategy that aims at nipping all outbreaks in the bud through testing and lockdowns. Shenzhen is the largest Chinese city to implement a full-scale lockdown since Wuhan and its neighbors did so in early 2020. Since then, major cities have implemented localized lockdowns to contain the virus. Authorities have locked down the northeastern industrial hub of Changchun since March 11, forbidding 9 million residents from leaving their neighborhoods. Shanghai has closed schools and cinemas and restricted travel into the city. 

The Chinese government’s decision to impose the lockdown on Shenzhen will likely send shock waves throughout the economy and disrupt the global supply of high-end software and crucial tech components. Consumers around the world are heavily reliant on the phones, computers, semiconductor chips, tablets, headphones and other electronic devices manufactured in Shenzhen. Many top Chinese companies, including Tencent and Huawei, are headquartered in the city. It is also home to major research and development and manufacturing facilities for companies such as Samsung, Siemens, Western Digital and Taiwan’s Foxconn, one of Apple’s biggest suppliers of iPhones. 

Foxconn announced on March 14 that it has suspended operations in Shenzhen due to the lockdown. In a statement provided to CNN Business, the company said that it has “adjusted” its production lines to other sites to “minimize the potential impact” from the disruption, and that the “date of factory resumption is to be advised by the local government.” Its two Shenzhen plants are major production hubs for Apple’s iPhones, and workers there had been busy assembling the latest iPhone 13 before the lockdown. Chinese electric vehicle and battery cell maker BYD is also reportedly experiencing production issues at its Shenzhen factory as a result of the lockdown. Trucks holding manufactured goods or components are unable to enter the city this week, which could cause further delays.

Shenzhen is also home to one of the world’s largest ports and a key export hub for Chinese manufactured goods. Last summer, the Yantian port was forced to shut down for nearly a week after an outbreak among dock workers, causing a massive backlog of goods that took months to clear and triggering a spike in global freight rates. Officials stated on March 14 that the port is continuing to operate normally. 

The news of the Shenzhen shutdown came the same day the Washington Post reported that the Russian government is asking China for help in circumventing strict U.S.-led sanctions, including on advanced tech components. The war in Ukraine has already forced rail and air transport on the Asia-Europe route to shift to ocean freight, which is seeing congestion and insufficient capacity. Any effort by Beijing to assist Moscow will likely be met with U.S. sanctions against China—and coupled with the threat of rolling pandemic-related shutdowns, supply-chain disruptions can be expected to persist for the foreseeable future. 

Other News

Biden’s Executive Order Spurs Development of a “Digital Dollar” 

On March 9, President Biden issued an executive order to ensure the responsible development of digital assets, to include cryptocurrencies. The order outlined the U.S. government’s first-ever “whole-of-government” approach to assessing the risks and benefits of digital assets, from promoting U.S. leadership in the global financial system to mitigating the risk of illicit finance. In addition to serving as a general policy statement, the order also tasks various federal agencies to accelerate their research and create action plans on the benefits and risks of digital assets. 

Most notably, the order encourages the Federal Reserve to explore the viability of a central bank digital currency (CBDC), or a “digital dollar.” In contrast to cryptocurrencies like Bitcoin and Ethereum, which are inherently decentralized and peer-to-peer, CBDCs are issued by a central bank and can be intermediated by banks and other private entities. Proponents of CBDCs argue that a digital dollar could minimize payment fees, augment settlement expediency and help expand bank access to the underbanked. 

Another motivation for the creation of a digital dollar may be to promote U.S. technological competitiveness with China. Nine countries so far have launched their own CBDCs, including China’s “digital yuan,” which China showcased to foreign visitors at the Beijing Winter Olympics in February. In January 2022, the Federal Reserve published an assessment on the pros and cons of CBDCs, noting that introducing a digital dollar would help “preserve the dominant international role of the U.S. dollar” especially as other countries develop their own. Separately, on Feb. 3 the Boston Federal Reserve and the Massachusetts Institute of Technology published an example white paper describing a theoretical transaction processor for CBDCs. 

Some commentators have warned that China’s digital yuan may gradually supplant the dollar as the dominant currency in international trade settlements, as the United States lags years behind in developing its own CBDC. In the short term, however, China has found it difficult to convince domestic consumers to adopt the digital yuan. Nearly 1 billion Chinese citizens are already using private digital payments apps such as Alipay and WeChat Pay, and Chinese central bankers have struggled to convince consumers to switch over to the digital yuan. 

Chinese Tech Stocks Slide as Ukraine Crisis, Regulatory Concerns Deepen 

On March 14, Chinese stocks listed in Hong Kong experienced their worst day since the global financial crisis of 2007-2008, as concerns over Beijing’s close relationship with Russia and renewed regulatory risks triggered relentless panic selling. Bloomberg reports that the Hang Seng China Enterprises Index closed down 7.2 percent on March 14, the biggest drop since November 2008. The Hang Sang Tech Index tumbled 11 percent in its worst decline since the gauge was launched in July 2020, wiping out $2.1 trillion in value since a year-earlier peak. The sell-off in Chinese stocks has been so intense that the largest China tech exchange-traded fund in the U.S., KraneShares CSI China Internet Fund (KWEB), has wiped all the gains since its debut in 2013. 

The broad rout comes in the wake of a March 13 report citing claims by U.S. officials that Russia has asked China for military assistance for its war in Ukraine. Though China has denied the claims, traders fear that Beijing’s potential overture toward Putin could spark a global backlash against Chinese firms in the form of sanctions. The coronavirus-induced lockdown in Shenzhen, a key tech hub, has only compounded investor concerns. 

The frenzied sell-off also came as the U.S. Securities and Exchange Commission identified five Chinese firms worth $1.1 trillion last week that could be subject to delisting in early 2024 if they fail to comply with certain auditing requirements. Beijing has carried out its own crackdown on offshore-listed tech companies it views as potential threats to national security. On March 11, Bloomberg reported that Chinese ride-sharing group Didi Global was forced to suspend preparations to list in Hong Kong by the Cyberspace Administration of China (CAC) because its proposals to prevent security and data leaks did not meet CAC requirements. The company’s shares plunged 44 percent in response. Shares of Chinese tech giants also sank after the CAC released new draft regulations to protect minors online on March 14. Adding fuel to the fire, Tencent Holdings Ltd. is reportedly facing a record fine for violations of anti-money laundering rules by its WeChat Pay mobile network. 

The CAC, a Chinese Communist Party regulatory entity, rose to fame over the past two years as an instrumental actor in China’s ongoing tech crackdown. Its core functions have since expanded from content control to data security and privacy, and it now regulates the entire digital economy. It recently pledged to strengthen its efforts to monitor, review and clean up online content across China’s internet in 2022 following an aggressive campaign in 2021. 

Stocks across Hong Kong and China have started to rally after China’s state council vowed on March 16 to keep its stock market stable.

White House Officials Disagree on Restrictions for Outbound Investments in Sensitive Chinese Companies

Key White House national security and economic officials remain split on new rules for the screening and potential restriction of outbound investments in sensitive Chinese companies. National Security Adviser Jake Sullivan has been advocating for months for President Biden to issue an executive order that would prohibit many American investments in Chinese companies in order to prevent the transfer of key technologies that might later fall into the hands of the People’s Liberation Army. 

The U.S. government currently has tools to screen inbound investments of concern and restrict licenses for the export of sensitive technologies, but no means to control the flow of outbound private equity and other direct investment in companies involved in the modernization of China’s military or digital authoritarianism efforts. Any eventual executive action will likely cover American banks; mutual funds; and other financial institutions investing in Chinese semiconductors, artificial intelligence, and facial recognition and other surveillance areas. It would likely derive its authority from the International Emergency Economic Powers Act, which gives the president broad authority to limit trade in economic emergencies and could also include export controls to limit the shipment of the technologies themselves.

But interagency divisions continue to prevent a clear policy approach from the Biden administration. The Treasury and Commerce departments are reportedly pushing back against an executive order, arguing that new rules would dramatically reduce new U.S. business in China and put American firms at a competitive disadvantage to European and Asian banks that will continue to access China’s economy. The Biden administration has considered investment controls on China since at least last summer, when Sullivan indicated that officials were discussing ways to crack down on companies that “circumvent” export rules or help fund China’s “technological capacity.” 

In the meantime, Congress has taken the lead by looking to pass legislation to create a new screening mechanism for investments. Sens. Bob Casey and John Cornyn introduced legislation in 2021 that would set up a federal commission to review supply chains that run through China. It is now under consideration as part of Congress’s broader China economic competitiveness bill, slated to be finalized this spring. Even if Casey and Cornyn’s bill is approved, however, trade experts note that executive action from Biden may still be necessary to monitor financial flows from American banks into Chinese tech firms. 

Commentary 

Victoria Coleman and Janet Napolitano propose the creation of an independent federal agency for digital human rights to build domestic safeguards against digital authoritarianism. 

Yangyang Cheng argues that the United States’ fixation on Chinese scientific espionage hurts scientific progress and unfairly treats innovation as a zero-sum game. 

Masha Borak examines how China’s gig workers are using mass social media groups and unofficial unions to fight for better labor conditions. 

Hirsh Chitkara explores how Russia’s war in Ukraine has accelerated U.S. sanctions against Chinese tech companies for cooperating with Russia. 

Zhang Jun argues that U.S. “containment” policies aimed at stemming China’s economic and technological rise won’t have a lasting effect on the Chinese economy. 

Peter St. Onge and Jeremy Dalrymple criticize Biden’s executive order on digital assets, arguing that government-backed digital currencies pose significant privacy concerns.

AJ Caughey and Shen Lu provide a backgrounder on how the Cyberspace Administration of China rose to become China’s internet “super regulator.” 

Gen. Paul Nakasone testified to Congress that China’s progression toward semiconductor “chip independence” poses a threat to national security. 

Rear Adm. Mark Montgomery and Annie Fixler argue that reconciling the House of Representatives’ America Competes Act with the Senate’s United States Innovation and Competition Act would bolster domestic cyber talent and American international competitiveness.

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