The U.S. Department of Commerce recently issued a 162.24% anti-dumping tariff on aluminum foil imports from China. The announcement is unsurprising given President Trump’s rallying cry for tariffs against Chinese imports since the campaign trail. However, the outcome is significant because it marks the Trump administration’s decision to continue treating China as a non-market economy (NME). In response, China has cited the new tariffs as an impetus to request for additional consultations with the U.S. as part of its ongoing fight at the World Trade Organization (WTO) over its NME status.

Beijing argues that, under WTO guidelines, a new member is supposed to be certified as a “market economy” 15 years after ascension. Prior to certification, a member is considered an NME. These economies are often subjected to more stringent anti-dumping duties than other countries. The assumption is that prices are often distorted, state-controlled, and not a reliable benchmark.  As such, trading partners are given more flexibility in determining whether an NME is dumping and in calculating a corresponding tariff. For example, the U.S. generally applies an average duty of 162% against Chinese goods, compared with a 33% rate for goods from “market economies.” Following certification, a higher burden of proof is expected in order for a member country to accuse and retaliate against a country that is certified as a “market economy.” It is thus understandable that China is doing everything it can to acquire the “market economy” certification.

On the other hand, the U.S. and the E.U. argue that achieving “market economy” status was contingent upon China taking up liberalization practices. For example, the continual dominance of state-owned enterprises (SOEs) in China remains a key concern for both the U.S. and E.U. The WTO, however, has yet to take a stance on China’s SOEs. Meanwhile, China has filed a complaint in the WTO against both the U.S. and E.U. for continuing to deny China “market economy” status.

Despite the lack of status, China is now a frequent participant of the WTO dispute settlement system. Some have argued that China’s increased involvement in the WTO can be seen as a failure by the existing international economic order to control the rise of China. However, an alternative view is that China’s involvement in the WTO is evidence of successful efforts to integrate China and align its modus operandi with international norms. There are instances where Beijing has sought to diverge from existing international institutions. For example, China’s establishment of the Asian Infrastructure Investment Bank could be seen as a direct challenge to the current order led by the World Bank and a failure of the existing order to properly integrate emerging economies such as China. Therefore, China’s acceptance and active participation in the WTO should be celebrated and welcomed.

Foiled by Foil China’s Hopes for Market Economy Status (PDF)

Huahua Media, a Chinese film conglomerate, recently scrapped its $1 billion deal with Paramount Pictures. In January, Paramount announced the infusion of cash from the Chinese company to finance 25% of its film slate from 2017-2019. It was a much-needed boost after Paramount’s recent lackluster performance at the box office.

In August, signs of the deal falling through surfaced as Paramount reported a missed payment from Huahua Media. In November, it was officially canceled. The deal’s failure has been one of the more high-profile manifestations of Bejing’s crackdown on “irrational” foreign investment.

In August of 2017, China laid down official rules for overseas investment. The State Council, China’s cabinet, commented the goal is to curb the “various risks and challenges in overseas investments.” Massive capital outflow has the potential to weaken China’s currency and create more debt. The country also has an eye towards reducing leverage in financial markets and mitigating systemic risks during an especially politically sensitive year, before the Communist Party transitions. In April, President Xi Jinping convened a gathering to discuss “safeguarding national financial-market security.”

The People’s Bank of China began imposing restrictions after last year’s record outflow of $816 billion from the country. Foreign investment in the gambling and sex industries has been outright banned. Investments in foreign real estate, film, and sports has been “restricted.” China’s outbound investment has fallen 44.3% during the first seven months since the new restrictions started being enforced. Some of its most aggressive deal makers have been impacted.

The size of the Huahua-Paramount deal likely led to increased scrutiny from Bejing. It far surpassed any previous China-Hollywood deal. Huahua had previously financed Paramount productions such as Star Trek Beyond and Mission: Impossible – Rogue Nation. Paramount plans to fill the gap left by Huahua’s withdrawal with Skydance Media, Hasbro, and SEGA. The practical effect of Bejing’s foreign investment scrutiny is a serious blow to Paramount’s efforts to turn its film business around after releasing several flops. Moving forward, Hollywood executives will presumably exercise more caution in cutting deals with Chinese companies.

China’s Restrictions on Foreign Investment Hit Hollywood Hard (PDF)

The Global Financial Crisis (GFC) forced the central banks in major economies across the world to resort to unconventional monetary policies. One of the unconventional policy measures was to prescribe policy interest rates near zero or even below zero, as seen in some European economies.

By prescribing near zero policy rates in the beginning of the crisis, and even negative rates at subsequent stages, the central bankers communicated that commercial banks are supposed to use available resources to lend, and not earn small returns by depositing that money with the central bank.

The signs of economic recovery and increasing domestic demand have prompted the central bankers to take stock of the situation. Though the U.S. Federal Reserve has signaled that it is beginning to withdraw its stimulus program of allowing the government bonds to mature in October 2017 without any replacement, the other major central banks are not likely to follow suit any time soon.

In the wake of the GFC, the U.S. has seen huge volumes of liquidity being pumped into the economy with near zero policy rates, but unlike Europe and Japan, it did not breach the zero barrier. This difference can be attributed to two factors: first, the U.S. has faster recovery than Europe and Japan; second, the saturation of interest rate reduction policy where any further reduction in rates is not likely to improve the domestic demand.

However, the access to near zero credit has stabilized the banking system and set off a boom in the financial assets market. This boom has been further strengthened by the flight of safety to dollar-denominated assets by financial asset managers and the simultaneous appreciation of the dollar. The recent Federal Open Market Committee statement released on November 1, 2017 gives clear indications of recovery in the economy, highlighting the low unemployment rate and expansion of economic activity at a moderate pace, irrespective of an anticipated temporary increase in inflation due to recent natural calamities.

While the U.S. has set its course on withdrawing its economic stimulus, Europe and Japan are not likely to do so in the near future. One of the factors adding to the uncertainty of withdrawal of stimulus by European Banks and Japan is that head chiefs of four major central banks are nearing end of term and may be replaced soon: namely, Mario Draghi, Chairman of European Central Bank; Janet Yellen, Chair of U.S. Federal Reserve; Haruhiko Kuroda, Governor of Bank of Japan; and Zhou Xioachuan, Governor of People’s Bank of China. However, the fears of this uncertainty are allayed to a certain extent after taking into consideration that their probable successors would continue to tread on expected lines and consider the withdrawal of stimulus as the economies show signs of recovery.

Stimulus The Beginning of an End (PDF)

Commerce Secretary Wilbur Ross says he will likely not maintain his stake in Navigator Holdings, a shipping company that does business with a Russian energy company. Ross has as much as $10 million invested in Navigator Holdings. One of Navigator’s clients includes the Russian energy company SIBUR, which is owned by Putin’s son-in-law along with sanctioned Russian oligarch Gennady Timchenko, who reportedly has ties close to the Kremlin.

The Commerce Secretary is criticizing reports that say he did not disclose his business ties with Navigator Holdings. The ties were first revealed in the Paradise Papers, which were leaked to a German newspaper on November 5, 2017. Ross says he disclosed three times on his form 278 that he had an interest in Navigator Holdings. However, it appears that billionaire banker Ross failed to disclose that Navigator Holdings conducted business with SIBUR.

In an interview with Bloomberg TV, Ross denied that Navigator Holdings had ties to Russians under sanctions; Ross further stated that he was not involved with Navigator’s negotiations with SIBUR, but that there was nothing wrong with having a business relationship with the Russian energy company. SIBUR appears to be Navigator’s second-largest client.

Ross argued that he does not have a duty to disclose Navigator’s relationship with SIBUR because he is not an officer, director, or investor of the Russian energy company. He further stated that a company without sanctions is the same as any other company. However, Timchenko, one of the owners of SIBUR, has been barred from entering the United States by the Treasury Department since 2014.

Senator Richard Blumenthal, D-Conn., who is part of the Senate Commerce Committee, says Ross was misleading by not disclosing Navigator Holdings’ ties to Russia. Senator Blumenthal said that he will call for the Commerce Department to investigate Navigator’s relationship with SIBUR.

The Commerce Secretary says he is planning on selling his stake in Navigator Holdings, but his reasons for selling are not because of the controversy surrounding the company’s ties with SIBUR.

US Commerce Secretary Says He Will Likely Sell Stake in Russian Energy Company with Ties to Putin and the Kremlin

On November 8, 2017, following the victory of a proxy fight against a U.S. investor, Sina issued a new class of shares and gave 55.5% of the company’s voting power to Charles Chao, Sina’s chairman and chief executive, to avoid facing such fights in the future.

Sina, listed on NASDAQ since 2000, is an Internet pioneer and tech giant in China. Its weibo service is one of China’s most popular social networks. The forced shareholder vote was initiated by hedge fund, Aristeia Capital, who nominated two candidates for the company’s board to push for significant changes of Sina. However, on November 3, 2017, Aristeia Capital failed with more than 77% and 56% of the votes against the two nominations.

The contest draws attention because it is the first proxy fight between a New York-listed Chinese company and a U.S. investor. Some even view it a “test case” to show how far the foreign ownership of Chinese companies listed in the U.S. can go. Sina also seems to take it very serious, changing its shareholder structure in just less than four days after the victory. It “believes any future proxy contest could be costly, time consuming, and disruptive.” The investors may hold another opinion though, as the share price of Sina fell about 10% the day after the announcement.

Some U.S. investors have complained about the lack of shareholder rights in U.S.-traded Chinese companies since their boards are not held to the expected US standards. NASDAQ offers foreign private issuers some exemptions, and many Chinese companies like Sina are incorporated in “business-friendly” places, thus not necessarily subject to US laws.

Many foreign investors have been richly rewarded by China’s Internet market. Back in late 1990s, when Chinese Internet start-ups sought capital and few Chinese venture capital firms existed, the companies’ financing largely depended on foreign investors.

This could be a problem because the Chinese government has some restrictions on foreign investment in certain sensitive areas. Except for the investment structure (variable interest entity or V.I.E) invented for this situation, some analysts speculate that one reason for the foreign investors’ success in avoiding certain scrutiny from the authorities is that they have taken a largely passive role in the companies. But the proxy fight may express some dissatisfaction with such passiveness. Will the approach taken by American activists touch the nerves of the Beijing authorities? Will the Chinese government take a more active role in the management of its corporate giants? Do American investors really understand how China’s Internet sector works and will their active participation truly benefit the shareholders? The answers are still pending.

Sina Concentrated Its Control Shortly After Winning the Proxy Fight Against a U.S. Investor (PDF)