CICC Probed by Regulator, and Huawei Trials New Harmony OS

CICC has been fined for its lax due diligence with IPO candidate S2C. And Huawei beta tests the latest rendition of its Harmony smartphone operating system.

By Doug Young & Rene Vanguestaine

This week’s China Inc starts with CICC, China’s leading investment bank, which has found itself in hot water after being investigated by the securities regulator. The investigation centers around allegations that CICC failed to conduct proper due diligence for a semiconductor company called S2C, which had been seeking to list on Shanghai’s STAR market. S2C’s IPO application was ultimately rejected following an on-site inspection, which raised concerns about potential data falsification. As a result, S2C has been barred from attempting to list again for the next five years.

There are notable comparisons between this case and the recent record fine levied against PwC for its audit work on property giant Evergrande. While an investment bank and an auditor are not the same thing, both cases still reflect a growing effort by China’s securities regulators to clamp down on financial intermediaries who fail to perform their obligations.

In industries like investment banking, it ultimately comes down to people—some do their jobs exceptionally well, while others simply don’t. It’s important for regulators to hold investment banks accountable, but it is noteworthy that little has been said about the auditors in this case. After all, auditors are typically the ones responsible for verifying the company’s financials before bankers even get involved.

CICC was fined 6 million yuan, and regulators confiscated another 2 million yuan from the company’s sponsorship business income. Individual executives were also hit with fines. This seems to be a positive step for China’s capital markets.

It seems that, unlike PwC, CICC may have gotten off somewhat lightly, perhaps partly because nobody was directly hurt by the failed IPO since it never reached the market. In PwC’s case, a lot of investors lost significant amounts of money due to their handling of Evergrande’s financials. It is possible that penalizing CICC was easier because they are a private company rather than a state-owned enterprise.

Huawei’s Struggle for Market Traction

Moving on from finance to tech, we turn our attention to Huawei and its efforts to develop its own operating system, Harmony, as an alternative to Android and Apple’s iOS. This week, Bamboo Works ran an informative expert corner on the topic, and we encourage everyone to check it out for a deep dive. For our purposes, the big news is that the latest version of Harmony OS is getting lukewarm reviews during beta testing with WeChat, China’s leading communications app.

The latest version of Harmony is different from its predecessors in that it now requires app developers to rewrite their apps for the new environment, meaning they can no longer simply adapt their existing Android apps, especially for larger and more complex apps like WeChat. With only 15% market share in China and virtually no presence outside of the country, Huawei might find it hard to convince developers to invest in building Harmony-compatible apps.

Many people find it easier to stick with only one platform, such as Microsoft or Apple, to simplify their digital lives. Huawei seems to be trying to replicate Apple’s model by creating a tightly integrated ecosystem. But getting users and developers to switch over from their entrenched Android and Apple systems is a formidable challenge.

There is also the potential for antitrust issues in the future. If Huawei is successful in building an exclusive ecosystem, it might eventually face regulatory scrutiny, just as Apple and Google have in Western markets. While Harmony is still relatively small, if it becomes successful, regulators will likely start paying more attention to it.

Of course, there’s also the nationalistic factor to consider. Huawei is widely respected within China, and many Chinese consumers are willing to support the company, even if its products aren’t quite on par with their Western counterparts. This sentiment has certainly helped boost sales of Huawei’s smartphones, especially when the company positions its products as strong alternatives to foreign brands. Such consumer support can be a significant advantage, as seen with other products like Xiaomi’s electric vehicles, where national pride has played a substantial role in boosting sales.

Moreover, Beijing has been vocal about reducing China’s reliance on Western technologies, which likely means that Huawei will receive continued support from the government. Unlike fashion or consumer goods, software and technology have deeper implications for national security and data control, making it easier for the government to push for widespread adoption. A strong push from the highest levels will likely aim to make domestically developed operating systems the default solution.

About China Inc

China Inc by Bamboo Works discusses the latest developments on Chinese companies listed in Hong Kong and the United States to drive informed decision-making for investors and others interested in this dynamic group of companies.

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