Winston Ma on China, the U.S. and the Coming Digital War

The emerging digital and technological conflict between the U.S. and China is set to reshape the global economy and create deep and lasting geopolitical divisions – and yet we don’t hear all that much about it.

In one of our favourite conversations of the year, the CLC interviewed Winston Ma, Co-founder and Managing Partner with CloudTree Ventures, to get his unique perspective on technological innovation, geopolitics, and the future of capital markets as the world’s two biggest economies drift ever further apart.

We’re thrilled to have Winston as a keynote speaker at our upcoming International Best Practices Forum being held in Vancouver from October 12-14, 2022.

About Winston:

Winston Ma | Co-Founder & Managing Partner CloudTree Ventures

Winston Ma, CFA & Esq., is an investor, attorney, author, and adjunct professor in the global digital economy. He is a Co-Founder and Managing Partner of CloudTree Ventures, a seed to early growth stage venture capital firm empowering interactive entertainment companies. He is currently the board Chairman of Nasdaq-listed MCAA, a European tech SPAC. Most recently for 10 years, he was Managing Director and Head of North America Office for China Investment Corporation (CIC), China’s sovereign wealth fund. Prior to that, Mr. Ma served as the deputy head of equity capital markets at Barclays Capital, a vice president at J.P. Morgan investment banking, and a corporate lawyer at Davis Polk & Wardwell LLP. 
He is one of a small number of native Chinese who have worked as investment professionals and practicing capital markets attorneys in both the United States and China.

A nationally certified Software Programmer as early as 1994, Mr. Ma is the book author of several books, including The Digital War: How China’s Tech Power Shapes the Future of AI, Blockchain and Cyberspace (2021) and The Hunt for Unicorns: How Sovereign Funds are Reshaping Investment in the Digital Economy (2020).

His 2022 new book is Blockchain and Web3: Building the Cryptocurrency, Privacy, and Security Foundations of the Metaverse. He was selected a 2013 Young Global Leader at the World Economic Forum (WEF), and in 2014 he received the NYU Distinguished Alumni Award.

Complete Transcript:

Caroline: Winston, thanks for joining us today. I am so looking forward to your talk in Vancouver at the International Best Practices Forum. What I’d like to do today is ask you a few questions related to some of the things you’re going to speak to us about at the event. Starting with, how do you see technology shaping the future of public markets? Is it all about disintermediation, for example?

Winston: Sure. No, I think the impact is profound. Typically, it starts with efficiency and processing. But, more and more, people realize it’s a new digital channel as we talk about disintermediation. What’s interesting is, when you look at the examples I put in my recent books on China’s mobile Internet economy, the disintermediation not only reduces costs, generates new consumer user traffic, but also creates new business models. I could give you an example. In China, for the last people, they never had a credit card. A lot of people don’t have PC computers, and many of them do not even have proper banking cards. How do you get to them if you’re an asset management company?

Now, interestingly, as large Internet giants become the newest asset managers in China—because they have the super apps, which connect hundreds of millions of users. And, like in the case of WeChat, it’s got one billion users; it becomes a new digital channel to get to the people, but it doesn’t stop there; it creates new products. For example, there’s one product called Leftover Treasures. Literally, that’s the Chinese name.

This idea is that people have money left over in their accounts with the super apps, whether it’s Alibaba or Tencent, because these super apps have, let’s say, 100 or even more different apps—let’s say, ride hailing, e-commerce, entertainment, content consumption, you name it.

These accounts are really linked to users and mobile wallets, and there’s always something left over in the mobile wallets. Now, what’s really interesting is, the Internet giants find a way to collect these numbers or this leftover money. In the case of Alibaba, in a shorter period of time, it gathered more than $200 billion for overnight money management. That’s the largest money-market fund in the world within a few months. If you think about it, it’s even a better product than the money-market fund in your bank, because the users didn’t have to fill in paperwork. They can have daily liquidity. They can move money in and out very quickly.

When the money pools together, actually, they can negotiate a much better rate with a bank. When you look beyond the disintermediation, actually, technologies are creating higher yield and better products for asset management users.

Caroline: That’s amazing. You’ve also written about China’s digital war. What does that look like, and how might it shape the global economy moving forward?

Winston: I use the title The Digital War, obviously, to make the book more sensational. We’re not literally in a war yet, but the competition of advanced technologies is real between China and the U.S. For that, there are a lot of implications for global investors that are looking into Chinese tech sectors, which have generated many unicorns or super unicorns in the last decade, such as Alibaba, Tencent, Xiaomi, or the more recent ones, the electric car companies and AI companies, et cetera. Several very important implications very quickly. Number one, because of the tension between the U.S. and China, the rationale innovation in China has changed, and that means, for global investors, they will see new, different unicorns that are different from last decade. Last decade, Alibaba, Tencent, those companies were mostly e-commerce players, mobile Internet, but now, because of the tech competition, China’s government puts more focus on “harder technology,” real tech innovation, and advanced manufacturing.

In more recent years, we saw the emergence of Chinese electric car manufacturers [that] got listed in the U.S. The top three are XPeng, Nio, Li Xiang, Li Auto that compete with Tesla.

We’re seeing different unicorns that come to invest. That’s one.

Secondly, we will see the limitations on data flow between the countries, especially in the AI, artificial intelligence area, because it is a data-intensive sector. Because both U.S. and China are putting a lot more restrictions on the data flow across the border, we will see fewer exchanges of data flow, unfortunately, which will slow down the AI research. In extreme cases, as we have seen, in the case of SenseTime, a Chinese AI facial recognition company, it was put on the blacklist by the U.S. Defense Department. As a result, its IPO cannot have U.S. investors’ money. It had its IPO last year at the Hong Kong Stock Exchange without U.S. investors’ participation.

The data regulations from most countries do have impact on the growth of these new-economy companies. Finally, I think the end result of the digital war simply is that we will see fewer truly global companies. Quick question: How many companies globally do you think are there to have more than 100 million Internet users in both China and the U.S.? I want our audience to think for a second how many. And where are they?

Of course, I will give you the answer very quickly. Globally, there are only two, and interestingly, one from China, one from the U.S. From the U.S., it’s Apple. From China, it’s TikTok, which is a parent to Binance. These are the only two companies that have more than 100 million users in both countries.

Even only two. We see Apple has to really deal with China’s data regulation very carefully, and for TikTok in the U.S., it is under analyst investigation for its management of U.S. users’ data. Going forward, it will be just very difficult to see new truly global companies emerge because of the digital war.

Caroline: That’s a very powerful statement. I guess it’s part of that. The U.S. has delisted Chinese firms most recently. How big a blow is that to China, and how do you see the situation evolving?

Winston: It’s a very big topic. A few companies have already been delisted, such as China Telecom, for example. Earlier this year, it was put on the blacklist by the Defense Department. It can no longer be traded in the U.S., and it is removed from some of the major stock indexes by the asset management product providers. The bigger picture is, about roughly 200 Chinese ADR companies that are listed in the U.S., including Alibaba and also the new electrical manufacturers like Xiaopeng, et cetera.

For these companies, they are subject to the delisting risk, because of a series of U.S. legislation and the rulemaking. It started with the Congress; it passed the law two years ago called Hold Foreign Companies Accountable Act. Essentially, foreign companies must comply with U.S. listing rules to be listed.

Now the background here is that among all the countries in the world, only two companies from two places can be exempted from the U.S. auditing requirement—they’re China and Hong Kong—and this exemption was made possible through a memorandum between U.S. and China governments more than a decade ago. The Congress law essentially said, forget about the exemption; all companies must comply with U.S. auditing requirements.

Based on that, a year ago, the U.S. SEC has developed detailed enforcement rules so that if a company from China fails to comply with the auditing requirement from the U.S. for three years, then it will be forced to do this. The enforcement agency for this one, so the third level is PCAOB, the accounting board, which does the accounting of the numbers for foreign companies to list in the U.S.

Long story short, this enforcement is happening, number one. And, number two, it looks fairly clear that the U.S. side doesn’t want to change too much, so it has become mostly a compliance question from the China side. Now, the trickiest thing here is, the Chinese companies are caught in between. The U.S. side demands more disclosure, more transparency, and from the China side—since we are living in the era of a digital war—data becomes very sensitive.

From China’s regulatory perspective, especially through the newly enacted data, security law limits Chinese companies’ disclosure of sensitive data to foreign countries, so it becomes a very difficult compliance issue for the Chinese companies. As thoroughly, we are looking at the SEC; that’s enforcing disclosure in multiple aspects, not only from the auditing perspective but also demanding Chinese companies to provide more disclosure, government influence on them, and cash flows related to the VA structure, which made the listing possible.

When you look at all these, it is a very tough situation for the Chinese companies, because the U.S. side is for real, and the China side also has data security regulation, and the clock’s ticking. We’ll see how the two governments’ conversation will evolve in the coming months to decide the fate of the trillion dollar-ish market capitalization of the Chinese companies listed in the U.S.

Caroline: The clock is ticking. Those are ominous words. Thank you so much, Winston. I wonder where we’ll be in October. I look forward to hearing more in Vancouver when we see you on October 13th. Thank you so much for your comments, and for joining us today.

Winston: Thank you.

To receive more interviews like this, be sure to subscribe to the Canadian Leadership Congress newsletter here!