Commentary
Over the past two decades or so, Chinese companies didn’t have to worry about being regulated by Wall Street watchdogs. They were exempt from having to follow U.S. accounting standards and benefited from massive inflows of American capital. It was good business for both sides, but especially for China.
As it was, U.S. investment firms were falling all over each other to invest in Chinese companies. Chinese firms could literally just show up on Wall Street and get the VIP treatment. U.S. capital markets would end up funding Chinese companies that would soon be competing, if not destroying, their American competitors, while enriching the ruling members of the Chinese Communist Party (CCP) at the same time.
Free Ride to End for China
But with the CCP’s initial handling of the epidemic, which allowed the virus to infect the world and is destroying the world economy, combined with rising geopolitical tensions between Beijing and Washington, the Trump administration is in no mood to give China a free ride any longer.For instance, according to the U.S.–China Economic Review Commission, as of February 2019, there were 156 Chinese companies with a total valuation of $1.2 trillion listed on U.S. exchanges. But more than 100 of them don’t allow regulatory audits as required by the 2002 Sarbanes-Oxley Act (SOX).
Going forward, they will be required to do so.
The SOX Act was originally put in place to protect investors from the huge corporate fraud perpetrated by Enron, WorldCom, and many others, where stockholders lost most—if not all—of their investments. Over the years, however, the same thing has happened to American investors investing in fraudulent “Chinese Hustle” companies listed on U.S. exchanges. Luckin Coffee is just one recent example. Some observers even contend that a significant majority of Chinese companies listed on American exchanges are fraudulent.
Clearly, Trump’s insistence on asserting the right of U.S. regulators to audit Chinese companies is necessary in order to protect American investors’ capital. Without audits, U.S. regulators will have no idea if Chinese companies, their assets, profits, and management, or even their products, are real.
It’s likely, however, to be a deal-breaker for most U.S.-listed Chinese companies. There’s no comparative regulatory system in China, so there’s no absolute standard for accounting and other oversight mechanisms. But if Chinese firms don’t comply with the new laws, they will be kicked off American exchanges.
In short, for years, Chinese companies have had a free ride and virtually unfettered access to U.S. capital markets and have abused that privilege.
That’s all about to change.
Alibaba to Exit NYSE?
In fact, President Donald Trump recently told Fox News’ Maria Bartiromo that he expected no less of a company than China-based internet retail giant Alibaba (the Chinese internet giant and parent company of the South China Morning Post) to leave Wall Street rather than follow SOX audit rules. Trump anticipates that Alibaba would likely seek to relocate to either London or Hong Kong.It appears that Trump has set the policy tone going forward.
Just the Beginning
The $50 billion Federal Employees pension fund is a prime example. Trump recently convinced the I Fund’s managers at the Thrift Savings Plan to avoid or withdraw funding Chinese companies based on mainland China. That result is that $4 trillion worth of U.S. capital was pulled from Chinese companies in the fund alone.But that’s not the only example of Trump’s crackdown on Chinese companies.
On May 12, the National Legal and Policy Center (NLPC) formally requested that BlackRock, the world’s largest investment advisor, divest from 137 Chinese companies currently listed on U.S. stock exchanges. In their letter addressed to Chairman and CEO Larry Fink, the NLPC pointed out that all of the companies are “under the influence and ultimate control of the Communist Party of China.”
Still, the Trump administration may push things even further. It’s considering giving Americans the right to sue China for damages related to the CCP virus, commonly known as the novel coronavirus. That may include claims against China for loss of life, loss of property and business, and for human suffering. Travel sanctions and bans are on the table as well, as is restricting loans from U.S. lenders to China-based and China-owned businesses.
Following Trump’s lead, the U.S. Senate is also cracking down. On May 20, the Senate passed the Holding Foreign Companies Accountable Act, which is intended to force Chinese companies to comply with all U.S. securities laws. Corporate transparency seems to the guiding principle, which as noted, is simply not a factor in Chinese business organization.
Clearly, the overall intention of these measures is to push China out of American capital markets in order to protect American investors and jobs, and punishing the CCP for its abusive capital and trade policies, as well as for its role in the pandemic, under which the world continues to suffer.
London (Not) Calling
But even London may not be such a great option for Chinese firm, because well before the CCP virus pandemic, tensions were high between London and Beijing over the Hong Kong crisis. Cracks in the London–Shanghai financial relationship have been widening for some time.What’s more, at $2.4 trillion, the London exchange is only a fraction of Wall Street’s more than $30 trillion valuation. Liquidity in London is, therefore, magnitudes lower than what Beijing is used to or requires. Furthermore, interest in Chinese currently remains comparatively low.
Chinese firms will likely find listing opportunities closer to home. Both the Hong Kong and Shanghai exchange investment climates are more attractive to Chinese companies, with greater liquidity and easier listing requirements than the London exchange.
But that option comes with risks as well. The more Beijing tightens the screws against Hong Kong, the less likely Western capital will be willing or available for Chinese firms in Shanghai markets.
Will Trump be successful in kicking China’s assets off Wall Street?
Sen. Marco Rubio (R-Fla.) offers a clue: “If Chinese companies want access to the U.S., they must comply with American laws and regulations for financial transparency and accountability.”
If the current trend is any indication—and the president wins reelection in November—it looks like a real possibility.
James R. Gorrie is the author of “The China Crisis” (Wiley, 2013) and writes on his blog, TheBananaRepublican.com. He is based in Southern California.
Correction: An earlier version of this article misspelled the name of a firm. The correct spelling is BlackRock. The Epoch Times regrets the error.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
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