The mobile video dance app TikTok has dominated financial news lately due to proposed bans on the company by the White House. Currently valued at $230 billion USD, TikTok is one of the most valuable private companies ever. In a move seen as retaliation for a military clash between India and China, TikTok was completely banned by India in June of 2020 along with almost 60 other Chinese apps.TikTok has also been banned in Pakistan, and a number of other countries are considering banning it.
So if India's ban was due to a conflict, then why is the U.S. White House considering its own ban of the app?
Should TikTok be banned in the U.S.?
There are several compelling reasons for the U.S. to ban TikTok. The ban can be interpreted as an extension of the U.S.'s trade war with China into digital platforms. In addition, the U.S. has valid privacy concerns surrounding the app, as social media platforms are notorious for collecting data. TikTok requires access to their users' microphones and cameras, allowing the app to gather extensive, personal data. The privacy issues take an even darker twist when considering the parent company Bytedance is ultimately owned by the Chinese government.
Is the Chinese government stealing your private information through TikTok?
Under Xi Jinping, the Chinese government has taken more of an authority role in the country's private companies. To further drive that point home, in 2007 China implemented a national intelligence law that states in article 7: "Any organization and citizen shall, in accordance with the law, support, provide assistance, and cooperate in national intelligence work". This public stance by the Chinese government combined with China's known approach to censorship poses a national security threat to countries using this app.
Social media's collection of data and creation of echo chambers is not a new phenomenon, yet putting this procedure in the light of China's governmental policies makes for a scarier scenario. Whether the above concerns are the reason the White House is considering a ban, while logical, is certainly conjecture. Yet the impact TikTok's ban will have on China's economy is not conjecture and will be in the United States' national interest.
How does TikTok play a role in the US-China currency war?
A ban on Chinese owned apps like TikTok will reduce China's access to U.S. dollars needed for Chinese economic growth.
China has experienced exponential growth as the global leader in manufacturing and exporting of goods. Their recent foray into technology is further accelerating that growth. China's current nominal GDP stands at $14.14 trillion while the United States nominal GDP stands at $21.44 trillion. China is on a relentless growth trajectory, growing from the 7th largest economy in 1980 to the second largest today. However, the major hangup in China's growth strategy is its highly leveraged economy. China needs external funding to grow and this leaves them beholden to the global reserve currency, the US dollar. Any shortage of U.S. dollars to China can cause a devaluation of their own currency.
China is acutely aware of their dependence on the U.S. dollar and is actively employing many strategies to combat this. China is rapidly in the process of creating their own cryptocurrency, the Digital Currency Electronic Payment (DCEP) with the intention of breaking the US dollar's monetary sovereignty. The idea is to create the first digital, nation-backed currency. Their hope is the advantages of cryptocurrency on a blockchain ledger will attract foreign countries to use their currency over the dollar in international dealings. Their attack on the U.S. dollar doesn't stop there, in 2018 China launched RMB future contracts for crude oil to diminish the global reliance on the petrodollar. The opportunity for global oil to trade in a currency other than U.S. dollars opens the door to removing the dollar as the world reserve currency, possibly replacing it with the RMB or DCEP. Yet, in the meantime, China still needs U.S. dollars to fund economic growth.
The United States is aware of China's need for dollars and with concerns of losing its economic positioning the U.S. is naturally cautious in its dealings with China. However, China has opened its own doors to obtaining unchecked amounts of US dollars via Wall Street.
Wall Street's appetite for Chinese companies is voracious as U.S. investors have roughly $695 billion invested in Chinese companies. Profit is the main goal for capital allocation and the monopolistic nature of these Chinese companies makes their profit margins desirable. 102 Chinese companies have been listed on the New York Stock exchange in the last four years, bringing the total to 220 chinese companies listed in the last 12 years. Additionally, the amount of funds each company raises has been increasing year over year. This increase is attributed to the growth of Asia's private equity firms like Sequoia Capital China, the owner of Bytedance, parent company to TikTok.
China is providing companies with capital before moving to private markets, allowing them to grow to higher multiples before converting said growth to U.S. dollars in an IPO. Sequoia Capital China under the direction of Neil Shen has brought the largest public offerings of Chinese companies to the United States and thus brought the majority of U.S. dollars back to China.
Banning TikTok will help protect the U.S. economy, and your privacy
Reducing Chinese economic growth is a prerogative of the United States and other democratic nations of the world. China's growth machine is relentless, but reducing the amount of U.S. dollars that support it can diminish its capabilities. Hence a good reason for TikTok's ban. Money invested in a "private" Chinese company is money invested in the Chinese government. Chinese subsidiary companies listed on the US stock exchange provide China access to coveted U.S. dollars, while the parent company remains listed on Hong Kong or Shanghai Stock Exchange.
A technology company's value is tied to its user base, and more specifically to its growing user base. Ultra high user growth can lead to shocking valuations like TikTok's current $230 billion valuation. Similarly, reduction of users, including an outright ban, can destroy a tech company's valuation. Closing one additional funding channel to the Chinese government is a step toward reducing China's relentless global domination quest. With TikTok's current valuation, this would be a major blow to China in the ongoing currency war.
