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Angela Huyue Zhang is an expert in Chinese law at the University of Hong Kong. Zhang attended Peking University and earned three law degrees from the University of Chicago Law School, where she studied with former Judge Richard A. Posner. Before joining the University of Hong Kong, she taught at King’s College London and practiced law in the United States, Europe, and Asia. She once served as a bankruptcy lawyer at Debevoise & Plimpton in New York and as an antitrust attorney at Cleary Gottlieb Steen & Hamilton in Brussels. In her recently published book, Chinese Antitrust Exceptionalism: How the Rise of China Challenges Global Regulation, Zhang looks at the way in which China regulates antitrust issues is reshaping global business practices. 

Q: Some of your earliest research was about growing opposition to Chinese investment in the U.S. and Europe. How did this become the basis of so much of your work?

A: Yes, some of it goes back to the time when CNOOC faced a lot of political opposition in the U.S. when it attempted to buy Unocal assets. After that, around 2012, I was working as a lawyer and a lot of my Chinese clients preferred going to Europe for acquisitions. At that time there were concerns in Europe about Chinese investment, because there was so much written in the media about the risks to national security. But if you look at the CNOOC case, Unocal’s assets were mostly located in Asia. And the vast majority of energy experts said this did not pose any national security threat. But the opposition was fueled by interest groups and politicians, as well as the media. There was this very well-organized interest group that was opposing Chinese investment in the United States. This dynamic has persisted to this day, whether we’re talking about Huawei, WeChat or TikTok. You can clearly identify interest groups lobbying against Chinese investment.

What is behind this opposition? 

This is a highly dynamic process. At the beginning, Europeans were still receptive to Huawei. This was a time when the UK was still using Huawei’s equipment and network. The situation deteriorated quickly after Trump became president. There was so much pressure on politicians to act against Huawei. Western governments are worried that Chinese national intelligence agencies can pressure companies to turn the data over to the government. And in the U.S., you have the U.S. CLOUD Act [2018, The Clarifying Lawful Overseas Use of Data Act], which means the U.S. government can do the same thing. It’s the same, whether you’re talking about a Chinese or a U.S. company. No company can credibly commit themselves to saying: “We will never turn over our data to our government.” At the end of the day, this is a matter of trust. But now, because the relationship has deteriorated, attitudes have shifted so quickly against Chinese companies. The resentment and hostility towards Chinese companies have taken place largely in tandem with the deterioration in relations between China and the west.

Some of the tension seems to be fueled by trade disputes, cyber attacks and perhaps also concerns in the U.S. about China’s economic rise and its challenge to American companies. How do you see it?

There is an element of insecurity from the U.S. about China’s rise, and what it will mean for the U.S. and other western democratic countries because China’s ideological stance is so different. Clearly, there are legitimate concerns about a national security threat but this is not unique to China or Chinese companies. China has the same concerns about U.S. companies. 

[N]o company can credibly commit themselves to saying: “We will never turn over our data to our government.” It’s the same, whether you’re talking about a Chinese or a U.S. company. 

But I want to make one point: hacking and cybersecurity attacks are a form of spying. If we look at the history of spying, it is not necessarily all bad. When you know your opponent’s strengths and weaknesses, and your opponent knows yours, you help each other reach a better resolution. Bloomberg just reported that the U.S. is increasingly worried that it has become more difficult for its intelligence services to reach top level sources in China. When you have information asymmetry, you don’t know how to act, and you don’t know how your opponent will react. This can make conflicts more likely. That’s why in the old days, countries would exchange spies to gain trust and facilitate cooperation. And one of the purposes of an embassy was to create a legal venue to gather intelligence on the host country. You want to know if a country has nuclear weapons, which could be used to deter and influence opposing countries. We all live in countries with lots of spying but this can actually help avoid conflicts. 

You’re putting a rather generous spin on spying. I’m sure there’s a lot of spying going back and forth but are cyber attacks really just spying?

I just wanted to point out one potential benefit of this kind of involuntary information exchange. Obviously, there are many nuances, and we have to do a case-by-case analysis. It’s an incredibly difficult problem. It’s the same with FDI [Foreign Direct Investment]. People worry about Chinese companies like Huawei, Tencent and ByteDance. At the same time, U.S. companies such as Tesla and Apple continue to invest in China because China is such an important market. Then it would make sense for the U.S. to hold onto some of the Chinese companies on its soil because you can imagine that if one day these American companies are held hostage by the Chinese government, the U.S. government can retaliate and hold some Chinese companies hostage as well. If we have more FDI between the countries, this is another way to ease their conflict. So hostage exchange is one way to think about FDI.

What worries me is all this talk of decoupling leading to the U.S. or China turning more inward. As long as U.S. companies such as Apple and Tesla continue to expand their operations in China, China will be gaining more leverage against the United States. Meanwhile, the U.S. is losing its leverage against China because it doesn’t allow many Chinese companies to invest there. Strategically, this is not a good thing for Western societies.

So the U.S.’s efforts to block Chinese companies from the U.S. market could backfire, and leave Washington with little leverage over Chinese business interests invested in the U.S., whereas Beijing might have huge leverage over American companies operating in China. Is that right?

The U.S. still has a lot of cards on the table. The U.S. dollar is very strong. But the U.S. has been squandering its advantage by imposing aggressive sanctions on Chinese companies. And now China is trying to limit that kind of American influence by gradually doing what it can to avoid using the dollar. The same is true with Russia. So as the U.S. starts to use this power more, that will push China at more and more of a distance from the U.S. and the U.S. will have less and less influence over Chinese businesses. If things go in this direction, with China becoming more independent, U.S. companies operating in China will look more vulnerable. 

The U.S. and Europe should continue to welcome Chinese investment as a hopeful sign that China is willing to exchange hostages with them. That’s exactly what the Huawei boss Ren Zhengfei was saying that its company could sell its 5G technology to western investors. That was an opportunity for the U.S. to get ahold of some of China’s critical assets. But no one in the U.S. was interested. There was a different dynamic with TikTok. When the firm was looking to sell some of their assets; China stepped in and said no. In any case, this hostage scenario is another way of looking at how to reduce tensions in this really complicated relationship.

Would you hold the same position with regard to whether the U.S. blocks or restricts Chinese companies from listing on U.S. stock exchanges?

Well, first of all, there have been long-standing concerns about Chinese accounting problems; that is, the pervasive fraud problem. U.S. regulators do have a legitimate interest to protect investors. They understandably need better information about Chinese companies.

However, once you start making restrictions on Chinese companies listed in the U.S., capital will flow elsewhere. A lot of Chinese companies will choose to get listed in Hong Kong, which has indeed become a very attractive alternative. This doesn’t do any good for the U.S. stock exchanges. At the same time, you don’t want a race to the bottom, where exchanges don’t care about accounting standards, so it’s a very delicate balance. I can also understand it from China’s perspective. They don’t want their companies to be at the whim of a U.S. president declaring that their telecom companies are too closely related to the military and then delist them from the New York Stock Exchange. It just doesn’t make China look good.

It seems Beijing is moving even faster, as we see that just this past week Didi announced that it will delist from the United States. What is Beijing’s approach to U.S. listings now?

Before its listing, Didi was advised by the cyber regulator to postpone its IPO to conduct a thorough cybersecurity check. But the firm didn’t listen and pressed ahead with its filing at a lightening speed. There is an old Chinese saying that “it is better to let the doer undo what he has done,” which probably explains the delisting decision. The regulator obviously has taught the firm a very hard lesson. From now on, all Chinese tech firms will take cybersecurity issues seriously.

Also, from a strategic standpoint, China wants to develop its own stock exchanges to reduce reliance on the U.S. capital market. So this naturally leads to further financial decoupling between China and the United States. The two sides should sit down because the crux of the matter is whether Chinese companies can disclose their working papers to the U.S. securities regulator. That comes down to a data sovereignty issue. The Chinese are not willing to share the working papers as some of them can contain sensitive information. You might recall that around 2013, the SEC [Securities & Exchange Commission] and the CSRC [China Securities and Regulatory Commission] did have some communication and they came to an agreement where China would release data on some companies. Then they reached a stalemate and now the two sides don’t seem to talk much anymore.

What is in the working papers that makes them so sensitive? What are the key things that China doesn’t want released?

To give you an example, in the Didi case, China was worried that Didi’s working papers could reveal the major suppliers of its software and network infrastructure. If they exposed these details to the U.S. government, that could make it easier for the [U.S.] intelligence services to conduct a cyber attack on Didi’s networks. This is a theoretical possibility, however, I don’t think they turned over that data, so it’s all fine now.

Do they turn this type of thing over in the U.S.?

On occasion. Say there is a big merger that triggers an antitrust review process in a foreign country. The foreign government could request a lot of information from U.S. firms, including supplier information so that they can better understand the competition dynamics upstream. And you can imagine this is a bigger problem now that the global economy is highly integrated, and firms are increasingly subject to foreign regulation when they conduct business overseas. With mergers and IPOs comes potential requests for sensitive data. 

Today, global companies merge all the time and cross-border information flow is going to occur, and be shared with governments. How can you have cross border deals and listings, etc. and not share some of this data? Doesn’t this require a much greater flow of information?

This problem with information flow does not just happen between China and the U.S. but also between the U.S. and the EU. The EU court has decided that the U.S. privacy protections are not adequate for European data. They don’t trust that European citizens’ data will be afforded much protection in the United States. So that is going to make transatlantic data flow more difficult. This regulatory issue is going to be a big stumbling block for large multinational companies in the years to come. Now, back to the IPO question. At one point, China proposed a joint oversight framework but the U.S. side declined. So it’s not like the two sides were not talking, it’s just that they were not able to reach a compromise. But I’d hope to see some agreement. I’m pro integration, as you can tell. I don’t like conflicts. This is not good for either side. I don’t want China to become more inward-looking and isolationist. Also, this is certainly not helping investors.

Many analysts believe that the hostilities are only getting worse and we’re not likely to see the type of integration that was under way in the early to mid 2000s. What do you think?

It will probably never go back to what it was but it doesn’t have to end in an ugly divorce. There are so many problems between the U.S. and China. And hearing a voice from the other side is a first step because if they’re not listening, they are not being heard. To start, I hope they [Beijing] will let the foreign journalists go back to China. I also hope the U.S. can soften its rhetoric on China. President Xi has been calling for national rejuvenation and China obviously has become a very proud nation. Chinese people want to have dignity and self-confidence on the world stage. They felt hurt during the Trump era because there was so much hostile rhetoric against China. But there’s still an opportunity to talk to one another because each side has so much leverage over the other.

Your book, “Chinese Antitrust Exceptionalism,” highlights some of the conflicts that have arisen over how to regulate global companies that cross borders and deal with very different regulatory regimes. What’s the core issue you were trying to grapple with? 

My book focuses on antitrust, but it’s really about globalization: how China regulates and why its regulatory approach made some foreign businesses unhappy. I understand where those complaints against China were coming from, and also how China became a target for all this regulatory scrutiny in the West. There’s a lot of misperceptions about Chinese investment as well. In the book, I call China exceptional. We need to understand why it is exceptional. Now with regard to antitrust issues, what you observe is a different dynamic in China. In the U.S., there are companies that challenge the government in court, right? But in China, companies tend to be more obedient and quickly adapt to the agency’s demands. It goes back to a fundamental point about power imbalance between businesses and the government in China. The government clearly has the upper hand. The government has so many tools to discipline a firm, whether we’re talking about legal instruments, like law, or extra-legal instruments like the media. That’s why all businesses in China, whether foreign or Chinese, want to maintain a good relationship with the Chinese government. 

What does that mean in terms of regulatory outcomes? Do you get different results in China versus, say, Europe?

If you look at the European Commission’s fine on Google, the case was initiated in 2010. And the General Court in Luxembourg just decided last month that they’re going to uphold the Commission’s ruling. Google can still appeal but you see in Europe it takes more than 10 years before you reach a verdict. In China, Alibaba‘s investigation took only four months, and there’s no appeal. And when agencies decide an abuse of dominance case in four months, they can miss a lot of the nuances and details; more time allows for a more thorough analysis. But in terms of a substantive outcome, even if you go through the 10-year process in Europe, it is possible, as in the Google case, that it might still come out the same. So it appears that the Chinese process is more efficient.

In China, Alibaba’s investigation took only four months, and there’s no appeal. And when agencies decide an abuse of dominance case in four months, they can miss a lot of the nuances and details; more time allows for a more thorough analysis. But in terms of a substantive outcome, even if you go through the 10-year process in Europe, it is possible, as in the Google case, that it might still come out the same. So it appears that the Chinese process is more efficient. 

You can argue that this is a very heavy-handed approach to regulation. But if you go back to Chinese legal tradition, there has been much greater emphasis on substantive justice rather than procedural justice. Due process is a western concept that didn’t get transplanted into China until the 1980s. But the drawbacks are clear. When you don’t have a judicial check on agency action, you may worry about agency capture. You may worry about rent seeking and abuse of power. You may worry that the authorities might overreach because businesses don’t have the power to fight back. And you may worry about the lag before the top policymakers realize that agencies have over-enforced. Whereas in a western society where power is more decentralized, businesses can better resist government policies. That explains why things in the U.S. and EU move slowly.

Fundamentally, I think all societies strive for the same goal to tackle social ills. But having a rule of law in place, and having this kind of structural balance and institutional constraint, is one way to resist this kind of policy swing, and prevent agencies from acting too quickly. That’s a good buffer for society. As a legal scholar, I believe in the rule of law; China needs more of that; it’s vital for businesses because it can increase certainty and transparency. There have been many criticisms about Chinese policies being so opaque. Partly this is because policymakers want to keep it that way, so that agencies still have the room to juggle and maneuver during policy swings. 

Can you say something about the situation where so many entrepreneurs seem to be disappearing, some prosecuted and some perhaps under house arrest. It even seems that Jack Ma has disappeared from the scene, though as far as I know he’s not been accused of any wrongdoing. What’s going on? 

Well, this concern about private entrepreneurs disappearing or being arrested is not new, such concerns have been around since long before this recent crackdown on the tech sector. Now, what I observe is that there’s some dark side to the Chinese entrepreneurship as fraud and corruption are rampant in Chinese business circles. There was Anbang Insurance, Tomorrow Group, the P2P business; one after another was a fraud story. Naturally, the Chinese government is worried about financial risks, even for those largest Chinese fintech companies. I see clear, legitimate concern from the Chinese government to regulate Ant Group. The firm acts as an intermediary to connect individuals and small businesses with banks, but it has little skin in the game and this could create a serious moral hazard. So what is surprising to me is not why China shut down Ant’s IPO; it is why the firm got approval to get listed in the first place.

Evergrande is another example right now. There are clear and legitimate reasons for the government to deleverage the property sector. But Evergrande tried to circumvent the government’s regulation on financial loans by resorting to supply chain finance, which accounts for two-thirds of its debts. Now the firm is on the verge of collapse, bringing down a vast network of suppliers, contractors, homebuyers and employees. So there is actually a greater demand for regulation in China due to its weak institutional environment. That’s why there is a saying in China: if you loosen up there will be chaos. The internet sector is another example. During the past 10 years, this sector has grown to be really unruly. It has become highly concentrated and companies such as Alibaba and Tencent created walled gardens within their own ecosystems. You don’t have that in the U.S. or Europe. This state of affairs does justify government intervention. How the government intervenes is another question. Chinese agencies lack capacity. They also lack the expertise. They’re a bit behind Western regulators in terms of how to think about many tough regulatory issues. Also, let’s be fair to them, these regulatory problems are very new, and agencies in the U.S. and Europe are similarly struggling with how to deal with them. 

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