China vs. USA: Xiaomi – Stumbling block.

Xiaomi blacklist stretches logic.

• Xiaomi’s blacklisting looks more like an outgoing administration leaving stumbling blocks for the next inhabitant rather than a rational move to contain the rise of China.
• The US government has added Xiaomi and eight other companies to a blacklist which forbids US citizens and corporations from investing in the shares of companies on the blacklist.
• This not the entity list and there are currently no restrictions in terms of the supply of components or software but access to US capital has been completely cut off.
• Those that already hold the shares have until November to divest their holdings.
• Not surprisingly, shares in Xiaomi dived in trading but ended significantly off their lows with an overall decline of 10.3%.
• The US Government has decided that Xiaomi falls into the category of “Communist Chinese Military Companies” as it is “engaged in providing commercial services, manufacturing, producing, or exporting” to the People’s Liberation Army (PLA).
• To the letter of US law, this statement is almost certain to be 100% accurate as Xiaomi sells millions of smartphones and other smart home devices within its hardware ecosystem in the Chinese market.
• Hence, given that the PLA has somewhere between 2m and 3m personnel, it is almost certain that a good number of these people own a Xiaomi device of some description.
• Under this definition, one would expect that every consumer electronics, internet and service company would quickly follow Xiaomi onto this list.
• It is important to note that Xiaomi is no SMIC which has also been added to this list (see here) but where there is a very clear and demonstrable link between SMIC and the PLA.
• Looking through Xiaomi’s shareholder register (Bloomberg) reveals that the biggest two shareholders are Lin Bin (co-founder) and Smart Mobile Holdings Ltd which is one of Jun Lei’s (co-founder) companies.
• What follows is a series of well-known international asset managers and pension funds until one arrives at China Asset Management Company Ltd which is a subsidiary of a China mainland company that could conceivably be linked to the CCP and the PLA.
• However, this company owns 0.1% of Xiaomi and as a result, it will have no influence at all over how the company is run or how its products are designed and sold.
• Every Chinese company is also subject to a 2017 law that compels “any organisation and citizen” to “support and cooperate in national intelligence work”.
• Furthermore, the CCP has emphasised through a series of policy announcements that the private sector has a role in “United Front Work” which means that non-CCP organisations must support CCP policy objectives and support its role in government.
• This really means that any company headquartered in China could be viewed as being state-controlled or influenced giving the US government the ability to blacklist anyone that it sees wants.
• Xiaomi is also no Huawei and is not seen as a Chinese national champion and putting pressure on it is unlikely to deliver the same negotiating pressure as Huawei has done (see here).
• Hence, this looks like the last move to increase pressure on China and raise awareness of this issue before a new administration takes over.
• The new administration can reverse this (and most of the other) trade actions taken against China very quickly but given that there is general agreement in the USA with regard to the threat that China represents, I can see the new administration sitting on this for a while.
• Consequently, I don’t expect this to be reversed in the immediate term meaning that there could be pressure on Xiaomi’s valuation given the limited access to capital it now has.
• It still has a long way to fall before this could be called a bargain, but it is now one to pay a little closer attention to.