China Telecom’s conflict with American regulators illustrates the need for tougher laws against companies linked to China’s military and intelligence industries.
China Telecom has provided telecommunications services in the United States for the past 20 years, according to Reuters. Globally, it had over 335 million subscribers in 2019. By Chinese law, all of these customers’ privacy, including the privacy of China Telecom’s American customers, is at risk.
China Telecom is extremely close to Beijing, as it provides services to facilities of the regime in the United States.
The October order, from the Federal Communications Commission (FCC), requires China Telecom’s U.S. subsidiary to discontinue services by early next month.
According to China Telecom, the FCC order is hitting its operations hard. To comply, China Telecom will need to notify customers by Dec. 4, the company claims. It said that compliance would also require that China Telecom “end its entire resold mobile resale service in the U.S.”
Unless a U.S. court temporarily halts the FCC order, the company “will be forced to cease significant operations, irreparably harming its business, reputation, and relationships,” the company said.
China Telecom is negotiating with another company to transfer its existing customers, which could lessen the blow.
Given that the company is state-owned, it is unclear what sort of control the company’s ADRs, which were sold on NYSE and held by American investors in lieu of real shares, would have provided to “shareholders.” And if Chinese companies are delisted, they might just disappear to American authorities, leaving American shareholders with their worthless ADRs.
According to The Economist, “Some companies may simply ‘go dark’, meaning they stop reporting to American regulators and are delisted with no buyout at all.” Chinese companies have used that tactic before.
“In the aftermath of the accounting scandals of a decade ago, more than 100 Chinese companies vanished from New York’s exchanges, destroying some $40bn in market value,” according to The Economist. “Many did not compensate investors.”
In those cases, shareholders find it difficult to recoup losses given that most Chinese companies have few holdings in the United States. Getting redress in a Chinese court is also difficult, as the courts almost always rule according to CCP directives as opposed to the rule of law.
When NYSE delisted China Telecom, it also delisted China Mobile and China Unicom. NYSE Regulation made the decision because the listings were “no longer suitable” in light of Trump’s Executive Order, which prohibited “any transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of any Communist Chinese military company, by any United States person.”
Increasing U.S. regulatory pressure on Chinese companies is a reasonable reaction to as much as $600 billion worth of intellectual property theft by China annually, and Beijing’s threats of war and increasing belligerence against the United States and its allies.
As U.S. voters realize the increasing danger of Beijing’s belligerence, industrial and other forms of espionage by Chinese telecom companies, and how the resulting billions feed into Beijing’s war machine aimed at U.S. forces in Asia, expect tougher U.S. government action against Beijing and Chinese companies globally.
Since March, the FCC has been working to revoke authorization for several Chinese telecom companies in the United States, including China Unicom Americas, Pacific Networks, and ComNet. The FCC officially designated several Chinese companies as threats to national security, including ZTE, Huawei, Hytera, Hangzhou Hikvision, and Zhejiang Dahua. The U.S. agency denied China Mobile access to the United States in May 2019.
China Telecom is already listed in Hong Kong.
The case of China Telecom illustrates that American investors should see the writing on the wall and more carefully consider the increased political and regulatory risks of investing in Chinese securities. The Biden administration and Congress should strengthen laws against China’s military and intelligence-linked companies, especially those that fail to fully disclose their financial reports to the Securities and Exchange Commission, as required of other public companies.
A tougher approach to China’s companies is important. But financial regulators should realize that whatever requirements they impose due to China’s economic and political scandals, Chinese companies will still find American investors willing to put their money toward an economy and military that is in direct and increasing military and ideological conflict with American values like democracy and human rights.
Eventually, we will need legislation that more fully decouples American, European, and allied investors, importers, and exporters from China, so that their trade can flow more productively through investments that not only make money in the short term, but enhance the national security of the world’s democratic and allied economies in the long run.
