Beijing’s new tech control strategy

This is an audio transcript of the FT News Briefing podcast episode: ‘Beijing’s new tech control strategy’

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, January 18th, and this is your FT News Briefing.

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On Wall Street, we’ve got a tale of two big investment banks. China’s lifting its crackdown on tech companies, but it won’t be giving up its control. And US shareholders want to know more about companies’ abortion policies. I’m Marc Filippino and here’s the news you need to start your day.

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Two of Wall Street’s most powerful investment banks came out yesterday with fourth-quarter earnings. Goldman Sachs and Morgan Stanley both reported plunging profits. And investors pummelled Goldman shares, but they flocked to those of Morgan Stanley. The FT’s Brooke Masters explains the different responses.

Brooke Masters
Well, basically, investors freaked out about Goldman because there was a sense that Goldman has not succeeded in finding other kinds of revenue sources and is highly dependent still on investment banking. Goldman also has been making clear that its original plan, which was to get very focused on consumer banking, hasn’t been working very well. Meanwhile, Morgan Stanley shares popped because Morgan Stanley could point to its wealth management division. This is helping rich people manage their money, where they have record revenue. And the CEO there, James Gorman, has been trying for years to focus more attention and more resources on stable revenue in things like investment management, asset management, wealth management. And this was actual proof in that in a quarter where investment banking revenue was terrible, wealth management did really well.

Marc Filippino
So Brooke, did Goldman Sachs’ CEO David Solomon come out yesterday and say anything about how the bank might pivot to try and recover from this?

Brooke Masters
He’s no dummy. He’s basically said, look, we’re going to do wealth management and asset management as well. Because in a world where there’s a lot of income inequality, I mean, the top half has a lot of money. Those people need places to put their money. And Goldman wants to get in on that.

Marc Filippino
So, Brooke, you’ve already said this, but I think it’s important to point out that Morgan Stanley and Goldman Sachs are investment banks. But US commercial banks reported quarterly earnings last week, and they did poorly, too. What can you tell us about that?

Brooke Masters
What’s interesting for the commercial banks is they had been in 2022 raking it in on what’s called net interest income, which is the difference between what they pay depositors for putting their money with the bank and the rates they can charge on loans. Because what happens when interest rates rise, banks immediately start charging more for loans, but they don’t instantly have to start paying money, more money to depositors. And so it’s been a great year for net interest income. But JPMorgan is warning, and I think everyone else agrees, that that gap is gonna have to, is gonna start closing. So there’ll be less money to be made because depositors have other places to put their money. They can go back to buying bonds. You know, they can go to the smaller banks that are paying better rates on CDs and things like that. So I think for all of the banks, the bright, one of the bright spots, which was net interest income is it’s going, it’s not bad, but it’s just not gonna be as good as it was.

Marc Filippino
Brooke Masters is the FT’s US financial editor.

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China’s tech stocks have staged a big rally. Hong Kong’s Hang Seng tech index, which is stacked with Chinese companies, has soared almost 60 per cent since its lows last October. This comes as the country reopens and as Beijing lifts its crackdown on technology companies. This week, China’s big ride-hailing app Didi said it was going to be allowed to sign up new users for the first time in a year and a half.

Ryan McMorrow
Didi is kind of the poster child for the tech crackdown, so that’s definitely a signal that this tech crackdown that has been going on for the past two years is coming to an end.

Marc Filippino
That’s our China technology correspondent Ryan McMorrow. As he reports, Beijing isn’t giving up control over its new technology companies. It’s got a different strategy. It’s purchasing golden shares or what’s known in China as special management shares.

Ryan McMorrow
So starting in around 2015, the Chinese government came up with this proposal to buy these stakes. It’s usually a 1 per cent stake and a board seat and some influence over the content that these private news companies or content companies are putting out. And in 2016, 2017, Chinese state groups started taking small stakes in, at that point it was mostly start-ups. And then it’s just kind of grown in size from there. And then most recently, we now have an expanding all the way to China’s largest tech companies like Alibaba and Tencent and ByteDance.

Marc Filippino
Ryan, is this about controlling content or is it to keep tech companies growing?

Ryan McMorrow
Well, it’s definitely both. Especially now with the economy stuttering, lots of people unemployed and foreign investors running away from China, the tech crackdown really couldn’t continue. So in its place, the government has really, to some degree, has started taking these 1 per cent stakes to get influence over these companies, but not in such a heavy-handed manner as the tech crackdown did. So it gives them a direct say in how these companies are operating. And specifically, it gives them a direct say on content, which has always been what the Chinese government is most focused on because they’re just so worried about messaging and what their population is hearing and they want to be able to control that.

Marc Filippino
Now, I wanted to ask you about one tech company in particular, since you’ve closely followed Beijing’s purchase of a stake in ByteDance, which is the company that owns the social media company TikTok. And as you reported, a government entity bought a 1 per cent stake in the company. And with that, they were able to nominate a director and they tapped the guy who appears to be an extreme nationalist.

Ryan McMorrow
So we did a little bit of research on the Communist Party official that they brought in. His name is Wu Shugang. And actually, about a decade ago, he attracted attention for saying very nationalistic stuff online. He called all liberal Chinese people traitors and told them to go to hell for preaching human rights and freedom. And he now has a say over the top three executives at the platforms. And if the company wants to do any mergers or acquisitions or distribute profits, that all something he’s now involved in as a board member here.

Marc Filippino
That’s the FT’s China technology correspondent, Ryan McMorrow.

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There is a huge wave of shareholders who are demanding that US companies provide details about their abortion policies. This all began after the US Supreme Court last year overturned the federal right to an abortion and left it up to individual states to decide policies. The FT’s governance reporter, Patrick Temple-West, has been reporting on this and joins me now. Hi, Patrick.

Patrick Temple-West
Hello.

Marc Filippino
So what companies are we talking about here and what do shareholders actually want?

Patrick Temple-West
We’re tracking a record number of US companies here: American Express, Eli Lilly. Shareholders are interested to know what risks these companies face as they make adjustments for employees who might need to travel out of state to receive reproductive care and also what sort of risks they face from state laws.

Marc Filippino
So are these demands mostly coming from progressive groups that support abortion rights?

Patrick Temple-West
Yes, mostly from the left. These are organisations that feel strongly about abortion specifically and had filed some shareholder proposals on this in previous years, but only under a handful. Now it’s really a wave. So there are those shareholders who are primarily concerned about reproductive rights from the conservative perspective. They are interested again in what risks companies face when they object to their state’s abortion laws. This is the case with Eli Lilly, based in Indiana. And there, the company is facing a shareholder proposal from a conservative group because the company came out and opposed the state abortion law and said we might have to look at hiring or moving employees elsewhere because this is a workforce risk for us.

Marc Filippino
Now, how are companies responding to these shareholder demands?

Patrick Temple-West
What happens in most circumstances is companies try to block shareholder proposals that they don’t like at the Securities and Exchange Commission. The interesting thing to see is how will the SEC rule on these? Is the agency going to allow these for a vote? Precedent says they will. They’ll just say, OK, this is a significant enough risk that the company needs to put this for a vote for its shareholders, and then would have companies and shareholders do about it. Companies might want to say, OK, you know, we’re just going to proactively disclose more information about this. We really don’t want this to go to a vote because that could backfire on us. Or if it does go to a vote, how are the big shareholders going to rule on these things? Big question is how BlackRock and Vanguard are going to vote on these shareholder proposals. That’s something that we’ll be watching very closely in the weeks and months ahead as these come to a vote.

Marc Filippino
Patrick Temple-West is the FT’s governance reporter. Thanks, Patrick.

Patrick Temple-West
You’re welcome.

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Marc Filippino
You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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