China vs. USA – Pressure cooker

The tech war heats up.

• The White House has ratcheted up the pressure on China with the issuance of two executive orders that in Tencent’s case makes far more noise than the effect it will have.
• The White House issued two orders one related to TikTok and the other related to WeChat (not Tencent itself) that bans “ any transaction that is related to WeChat by any person, or with respect to any property, subject to the jurisdiction of the United States, with Tencent Holdings Ltd”
• The TikTok executive order is worded in a very similar manner.
• The practical upshot of these orders is that these entities have 45 days to stop being Chinese owned or they will be blocked.
• In many ways, the executive order against Tencent makes the most sense from a national security perspective but it also will have very little, if any, affect on its parent company.
• The WeChat and its equivalent in China (Weixin) are Instant Messaging chat apps that are unencrypted.
• This means that Tencent and the Chinese Government can read the chat transcript of any user on the system wherever he is.
• The fact that they are unencrypted is probably the single biggest reason why they have been allowed to flourish in China.
• Outside China, the situation is quite the opposite where users demand encryption which WhatsApp and the others now provide.
• However, hardly anyone outside of China uses WeChat and by far its largest use outside of China is the Chinese diaspora communicating with friends and family back home.
• However, this order will also prevent any business in the USA from accepting WeChat Pay which without the pandemic would have made some waves.
• A number of businesses which are in frequently visited locations have started accepting WeChat Pay and AliPay in order to facilitate payment for Chinese tourists and to encourage them to spend more.
• However, at the moment, there are no tourists of any nationality and so these businesses, unfortunately, have bigger problems than losing the ability to accept WeChat Pay.
• I would not be surprised to see a similar order be made against AliPay in the coming days although it is much harder to make the national security argument than it is for WeChat or TikTok.
• However, in terms of revenue, this order is immaterial for WeChat were almost all of its core business is Chinese content and services for Chinese users in China.
• Hence, Tencent’s outlook remains unchanged but the shares just become 5% cheaper.
• At a 2020 PER of 50.0x, I have no desire to participate.
• For TikTok, this is a much more serious problem as it has over 100m active users in the USA and another 100m in other countries outside of China.
• This was on track to generate significant revenues and become a big business in its own right and ByteDance has invested significantly in creating this business.
• TikTok is already blocked in India and to avoid the same happening elsewhere, TikTok needs to be split off from its Chinese parent which is what the deal with Microsoft is all about (see here).
• I think that there is plenty of scope for ByteDance to continue to have an economic interest in TikTok, but it is clear that access to the data and a say in the running of the company is off the table.
• RFM and Alavan Independent (see here and here) have previously forecast a long, drawn-out struggle between the US and China for technology supremacy, but the situation is changing far more quickly than we had anticipated.
• The digital divide between China and the West is coming down and countries caught in the middle (Africa and parts of Asia) will have to decide on which side they wish to remain.