July 11, 2022 | A reader of The Institutional Risk Analyst shared this great tweet from @MacroAlf about the duration of reserve currencies over the centuries. As we noted in our 2010 book, "Inflated: How Money & Debt Built the American Dream," the British Empire tossed the ball to the US after WWI.
Notice that even in the Middle Ages, when China was a great empire, it’s currency was not exported abroad nor was it expansionist. China in the 1400s was largely self-sufficient and had no need of predatory trade tactics as today. Sometime in the mid-1400s, the Hongxi emperor ended symbolic trade with the west in order to save money and focus on internal threats. Immanuel Hsu wrote in his classic "Rise of Modern China":
"The Chinese attitude towards foreign trade was an outgrowth of their tributary mentality. It postulated that a bountiful Middle Kingdom had no need for things foreign, but that the benevolent emperor allowed trade as a mark of favor to foreigners and as a means of retaining their gratitude."
Six centuries later, little has changed in terms of Beijing's attitude to foreigners and domestic security. The country remains hobbled by an authoritarian government whose chief aim is continuance, making it economically vulnerable and socially unstable. As the Chinese Communist Party employs ever more harsh methods to retain power, the day of reckoning inevitably approaches. As in the 1400s, the chief concern of the occupants of Beijing is security from rising domestic social unrest.
Most recently, the shift away from an outward-focused economic orientation in China came about because Xi Jinping, who has systematically eliminated political rivals, turned his attention to power centers in the business community. Along with a more general purge of “corrupt” cadres in corporate suites under the party’s “United Front” effort, Xi’s nation prison now features smart phone apps that can instantly downgrade a Chinese citizen's status or even cut off access to money, travel and health services.
Party control over private business is increasing in China. Xi has sought to “integrate the Party’s leadership into all aspects of corporate governance” and “clarify” its legal status within the corporate governance of private companies. The aggressive reassertion of communist control over private enterprises in China is a problem for many western companies and for many reasons. The decision by the European Union to name China as a strategic threat is only the latest in a series of actions to highlight the predatory nature of the Chinese state.
Many foreign companies have been forced to leave Vladimir Putin’s nation prison since the start of the Russian war with Ukraine. But there are a large number of foreign companies that are being quietly pressured by the US and other nations to relocate significant productive assets outside of Beijing’s sphere of control, this on the assumption that relations with China could deteriorate in a similar fashion to the break with Moscow. Major Taiwan semiconductor makers, for example, are building new production facilities in Japan, Europe and the US.
One of the most visible foreign companies operating in China is Tesla Motors (TSLA), creation of global business mogul Elon Musk. Like domestic Chinese business leaders, Musk has been forced to praise Beijing in his public comments, imitating the groveling seen by Alibaba (BABA) founder Jack Ma and other Chinese business leaders in response to Xi Jinping’s crackdown. As the mirage of globalization slowly fades and relations between the US and Beijing inevitably deteriorate, Musk will eventually be forced to make a decision about continuing to do business in China.
If readers of The Institutional Risk Analyst take a moment to examine TSLA’s filings with the SEC, Musk is entirely silent about the risk of being forced to leave the Chinese market. While the latest TSLA 10-K details scores of loans provided by state-controlled Chinese lenders and tax breaks granted from the Chinese government, there is no hint in TSLA’s public disclosure that Musk may eventually be forced to abandon the China because of a political break between Beijing and Washington.
Thus we come to Musk’s abortive takeover attempt for Twitter (TWTR), a half-hearted effort that was never really possible financially or politically. The fact that Musk spent his credibility pretending to have an interest in acquiring TWTR illustrates how little he understands the precarious position he occupies between China and the US. Why do we say this? Because the US government would never actually allow Musk to control TWTR or any other US media company.
“By dominating the supply of multiple components critical to the fortunes of Tesla, the Chinese government holds so much leverage over chief executive Elon Musk’s wealth that his planned acquisition of Twitter should concern national security leaders,” a dozen current and former officials involved in reviewing foreign investments told The Washington Post in June.
As we noted last year (“Update: New Residential Investment, Fortress & Softbank”), if the US Committee for Foreign Investment in the US (CFIUS) would not allow SoftBank Group (SFTBY) to take full control over Fortress Investment Group, there is no way that Washington would allow the foreign-born Elon Musk to take operational control over TWTR or any US media property that has access to consumer data. Remember, in the world of global trade and investment, it’s all about the data.
China’s financial participation in TSLA is so extensive that Musk arguably should register as an agent of the Chinese government. But the irony is that despite the sway that the Chinese Communist Party has over TSLA, the firm is still seen as an outsider in the Chinese market and a possible security threat because of fears of spying for the US!
"There's a very strong incentive for us to be very confidential with any information," Musk told an influential Chinese business forum in 2021. "If Tesla used cars to spy in China or anywhere, we will get shut down." His comments came in response to reports that China's military had banned TSLA cars from its facilities.
Naturally, once the Chinese have stolen as much technology and know-how as possible from TSLA, the firm will be marginalized in favor of state-supported competitors in the world of electric vehicles. And as the pretense of globalization fades and the level of confrontation between China and the US grows, Elon musk will be forced to make a choice.
Questions: When will Elon Musk inform his TSLA investors about the real and growing risk of being forced to exit China? Why did Elon Musk ever pretend that he was able to acquire TWTR, a transaction the US government would never allow?
Today, Republican candidates are falling all over themselves to ingratiate themselves with Musk, but a military conflict with China over Taiwan will change that narrative very quickly. Will Musk's close ties to China's communist government eventually threaten his control over TSLA as well as SpaceX? Stay tuned.
Comments