(Bloomberg) – The political push to cut investment in Chinese companies intensified this week, in the latest sign that tensions between the world’s two largest economies have rebounded.
While the impulses for closer scrutiny of financial ties between the US and China have long languished in Washington, the Senate quickly, and bipartisanly, moved on Wednesday to advance legislation that could result in the exclusion of some securities from US exchanges.
The greater urgency is due in part to growing calls by lawmakers and President Donald Trump to punish China for its alleged failure to reveal early information about the COVID-19 spread. The pandemic has cost more than 90,000 American lives and has resulted in the loss of tens of millions of jobs.
The economic coup has slowed Trump’s ability to pressure China through tariffs, which can increase costs for American businesses and consumers. That has drawn attention to other discussion points, such as investment transparency. Earlier this month, the Trump Administration and lawmakers barred the Federal Retirement Savings Investment Board, which oversees a retirement savings plan for government workers, from moving to a benchmark index for its international fund that includes Chinese stocks.
US stocks fell for the second day in a row as US relations and China, which had improved with an initial trade deal earlier this year, appeared to be deteriorating with news of the legislation and tensions re-emerging in Hong Kong. The Dow Jones Industrial Average Index has little change from the level it reached in late April.
Proponents of stricter rules on Chinese stocks argue that it is in the interests of national security and investors.
“The level of fraud, the lack of transparency, the failure to protect investors, that has to change,” White House economic adviser Larry Kudlow said Thursday during an event organized by the Washington Post.
Senate legislation would require companies like Alibaba Group Holding Ltd. and Baidu Inc. to certify that they are not controlled by a foreign government.
The bill says that if the U.S. Public Business Accounting Oversight Board You cannot review company audits for three consecutive years, your securities would be prohibited from trading on the New York Stock Exchange, Nasdaq, or anywhere else in the United States.
A complementary bill has been tabled in the House, and its Speaker, Nancy Pelosi, said Thursday that appropriate committees will review it, but did not promise to vote.
Wall Street immediately noted the increased attention of Congress. Analysts at Goldman Sachs Group Inc. sent a report to their clients on Thursday suggesting that a forced elimination of the bags could lead to abrupt price movements. Chinese companies listed in the United States have a market capitalization of more than $ 1 trillion, and about $ 8 billion of those shares change hands every day on average, according to the analysis.
His research examined the proposal by Congress and its potential impact, saying that the focus of US regulators and lawmakers on this issue has recently been elevated, following some recent cases of alleged accounting irregularities.
For some, the need for action was exemplified by China-based Luckin Coffee Inc., a coffee chain involved in an accounting scandal. The company recently announced the intention of the Nasdaq stock exchange to take it out in a statement.
“If this legislation had already been enacted, American investors in Luckin Coffee would likely have avoided billions of dollars in losses,” Democratic Rep. Brad Sherman of California, who introduced the House bill, said in a statement. .
Still, the reality is that nothing will change overnight, or probably any time soon.
Even if the Senate bill were to become law, any possible withdrawal of Chinese companies from the exchanges would be years away, potentially long after Trump and many current lawmakers have already left office.
Roger Robinson, president and CEO of RWR Advisory, a research and risk management consultancy, said the bill is a “notable bipartisan repudiation of the preferential treatment accorded to Chinese companies in our capital markets.”
“However, three years is too long before decisive action is taken against noncompliant companies,” said Robinson, who has long lobbied for stricter enforcement of US auditing standards.
The bill would also require the SEC to draft regulation, invoking the agency’s long process of rulemaking. Completion of an SEC rule requires at least two rounds of votes by a bipartisan commission, as well as a series of procedural steps such as public notice and comment. Trump’s influence on the process is also limited due to the SEC’s status as an independent agency.
So far, SEC President Jay Clayton has issued a series of public statements warning American investors about accounting problems related to Chinese companies, whose auditors are refusing to open their books. The agency also announced a roundtable on July 9 that will include comments from investors, the industry and regulators on the risks associated with investing in China and other emerging markets.
Derek Scissors, a China scholar at the conservative American Enterprise Institute, says he doesn’t think any Chinese companies are properly disclosing or being excluded from the exchanges as a result of the bill.
“We will begin another round of negotiations in 2021, regardless of who the president is, and we will announce another agreement in which they promise to falsely disclose and agree to keep them on the exchanges,” he says.
Stock markets, such as the New York Stock Exchange and Nasdaq, have previously rejected the idea of foreclosure. However, they have come under increasing pressure from the government amid growing fervor for action against Chinese companies. Spokesmen for NYSE and Nasdaq declined to comment.
“We have some very specific problems with the way disclosures are provided for certain emerging markets, including China,” Nasdaq Inc. chief executive Adena Friedman said this month in a Bloomberg Television interview.
While the issue has recently become a political focus for China’s detractors in the White House, for regulators it dates back almost two decades. Inspections conducted by the little-known PCAOB, which Congress established in 2002 in response to the Enron Corp. massive accounting scandal, are aimed at avoiding fraud and misdeeds that could ruin shareholders.
Original Note: Stock Delisting Offers U.S. a Tempting Target in China Tensions
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