A blow to Beijing or a shot to the foot?
Economy: New anti-Chinese move by the US
The US, the decision to change the rules for the audit of listed companies could lead to a loss of confidence by global investors, Chinese authorities said. Expert Chen Fengying explained why this move affects not only the Asian country, but also the North American one.
The US Senate passed a law that could deprive some Chinese companies of access to the American country's stock exchanges. Under the new law, all companies must demonstrate that they are not controlled by foreign governments and undergo an audit by the Public Company Accounting Oversight Board. Previously, this procedure was mandatory only for US companies, but it is mandatory for all companies, including Chinese ones.
The China Securities Market Regulatory Commission noted in its statement that some provisions of this law are directed against the Asian country and are not based on professional considerations related to securities regulation. Aside from harming the interests of both states, this legislative initiative undermines both investor confidence in the US capital markets and its international status.
Anonymous sources told Reuters that the NASDAQ exchange was planning to introduce the new restrictions for the public sale offer, an operation carried out in the stock market through which a bidder puts up for sale some financial asset. In particular, to list on this exchange companies in some countries, including China, would have to raise $ 25 million through their public sale offer or, alternatively, account for a quarter of their post-listing capitalization. As a consequence, Baidu, the Chinese search engine, began to consider the possibility of withdrawing its shares from this stock market and putting them up for sale in another one that is closer to the Asian country.
Why the Stock Market is So Attractive: The US stock market has always been attractive to Chinese companies because it did not have extremely strict regulation. For this reason, the largest Chinese technology companies such as Alibaba or Baidu chose to launch their public sale offers in New York. Meanwhile, the rules for listing on China's stock exchanges were quite strict; They were challenging even for national champions, and much more so for startups. For example, to launch a public offering in Shanghai, a company must be profitable for at least three years and record more than $ 4.19 million in total profits. For startups this requirement is very high.
Another advantage of listing in the US was that in this way Chinese companies gained access to foreign currency. On the one hand, due to the inclusion of Chinese giants in global supply chains, they needed US dollars to carry out commercial transactions. On the other hand, obtaining US currency within the Asian country is not so easy.
What Washington seeks to achieve with the new law: The new regulation for listing on the US stock markets seeks to create the same conditions for all companies. However, this move is specifically aimed at Chinese companies and fits perfectly into Washington's overall strategy of seeking to curb China's development, said Sputnik Chen Fengying, an expert at the Institute of World Economics at the Chinese Academy of Contemporary International Relations.
According to the political scientist, the United States is now obsessed with the idea of denigrating China. This is especially evident after the spread of the coronavirus pandemic. In addition, the incident involving the Chinese company Luckin Coffee, whose shares were listed in New York, exacerbated the fraud problem related to the public sale offer. The Luckin Coffee case contributed to Washington now believing that the practice of exaggerating financial results is widespread among Chinese companies.
An investigation revealed that Luckin Coffee falsified the sales data for its products, inflating them $ 310 million. As a result, the trading of Luckin Coffee shares on the New York Stock Exchange was temporarily suspended. After resuming its capitalization, it plunged 35 percent, sinking the quotes of other Chinese companies like Alibaba, iQiyi, Baidu and JD.com. Although these companies are unrelated to Luckin Coffee, investors began to suspect that they may be using the same practices.
"I think Chinese companies really need to strengthen self-discipline. However, Washington's new move is associated with populism that has recently spread [in the American country]. Now, the shares of more than a hundred Chinese companies are listed on US stock markets. The United States claims to be acting in its own interest. However, it does not realize that Chinese companies bring with them the capital that is so necessary for the North American country, "he explained.
The Trump Administration has previously banned pension funds from investing in the shares of Chinese companies. And last week the Senate passed the audit law.
Apparently, Washington understood that the tariff pressure exerted on China had not worked and decided to pave the way for another escalation and unleash a financial confrontation with the Asian country. However, as in the case of pension funds, US investors will also be affected if Chinese companies are excluded from the national stock markets, since they occupy an important part in their stock market, Chen Fengying warned.
A Sino-US economy and security commission calculated that a total of 156 Chinese companies with a market capitalization of $ 1.2 trillion are currently present in the US stock markets, estimated at $ 36 trillion. According to the expert, it is not difficult to deduce that its possible withdrawal from these financial markets would lead to a sharp drop in the market capitalization of the US stock markets.
Furthermore, Chen Fengying emphasized that Washington is unlikely to exclude all Chinese companies from its short-term stock markets, but he did not rule out the outcome of this long-term scenario. And it is the epidemic and the global economic recession that allows it.
At the same time, the interviewee stressed that in any case, Chinese companies have alternatives to New York. Thus, in case things get too complicated for them in the North American stock market, they will always be able to transfer their assets to those in London or Hong Kong.