Congress unanimously passes bill to de-list Chinese companies on US exchanges unless they comply with US auditing requirements. China, fearing bipartisan Trump and Biden moves to unite allies, offers South Korea and Japan a trilateral free-trade agreement, erects WTO-illegal tariffs on Australia, and threatens EU and others if they support Australia or the US.
The weekly trade report with L.C.
US actions to restrict Chinese access to the US economy have become a bipartisan activity. The House, where Democrats have a majority, approved without dissent on December 2nd the Holding Foreign Companies Accountable Act. The bill will force Chinese companies listed on US stock exchanges to abide by US audit and transparency standards. Chinese companies must also confirm that they are not state-controlled. A company will have three years to submit to an annual audit by the Public Company Accounting Oversight Board or be removed from US listings.
The bill passed the Senate in May, also unanimously, and awaits a presidential signing.
Beijing expressed anger at the legislation. While there is a three-year phase-in, final approval of the measure is expected to raise US-China tensions yet further. Passage of the legislation by the House led to an immediate drop in the stock prices of Chinese companies.
Biden not likely to reverse
While the Biden administration might not welcome this new irritant to relations, congressional approval was so overwhelming, and justification for the measure so strong, that it is not expected to be reversed. All listed US companies must comply with the same audit requirements. In their absence, US investors are put at risk.
The bill directs the Securities & Exchange Commission to impose the auditing requirement in a way that avoids causing problems for US companies audited in China. The US and China could reach an accommodation before the end of the phase-in period. Increased negotiating leverage for the US could end up being one effect of the bill. According to press reports, US regulators are “working on another proposal that could allow Chinese auditors to comply with the inspection requirement without violating” Chinese laws that limit information-sharing. Chinese companies do get audited but by Chinese firms that don’t provide information to US regulators and that are regarded as having inadequate standards. A negotiated settlement could result.
There has been great bipartisan interest in the issue for years but also a resistance. It is thought that many Chinese companies would simply move to non-US exchanges or go private. De-listing could also have a disruptive impact on the global financial system and potentially force a sharp depreciation of the yuan.
Wall Street could become target of anti-Beijing anger
Financial companies from the US and elsewhere continue to enter China, which has been accelerating the opening of its capital markets. This is an opening the US has pushed for, but it could erupt into a major scandal. A powerful investigative report in the December 3rd Wall Street Journal is headlined “China Has One Powerful Friend Left in the U.S.: Wall Street.” The article reports that Wall Street financial powerhouses including JP Morgan, BlackRock, and Goldman Sachs are tripping over themselves to get whatever financial crumbs are still available in China. There aren’t many left, because the Beijing government deliberately let Chinese firms get the richest pickings before allowing foreign firms in to compete. The fact that Wall Street has now become China’s main advocate in the US could cause problems for the Biden administration, given the extent of support it received from that sector during the election campaign.
Meanwhile, running counter to Wall Street enthusiasm for befriending Beijing:
- A just-released report of the US-China Economic & Security Review Commission warns that China is implementing a “calculated strategy” to attract foreign capital for its debt-strapped economy and that this poses risks to foreign firms.
- The Trump administration has directed the Federal Retirement Thrift Investment Board to halt planned investment in Chinese companies or funds that invest in them, warning that this would put investors at risk while helping China.
- President Trump issued an executive order on November 12th barring Americans from investing in Chinese publicly traded companies that are owned or controlled by the Chinese military.
- Four major Chinese companies were added on December 3rd to the Defense Department’s list of companies owned or controlled by the Chinese military. The four are China National Offshore Oil Corp. (CNOOC), Semiconductor Manufacturing International Corp., China Construction Technology Co., and China International Engineering Consulting Corp. The four will be added to the thirty-one Chinese entities that the US Defense Department has already declared to be controlled by the Chinese military. US investors hold 16.5% of CNOOC shares, so the divestiture requirement will have a major impact. CNOOC claims that its designation as military-controlled is based on “false and inaccurate information.” There is speculation that the company was targeted as PLA-linked because of its involvement in oil drilling in the South China Sea.
- In the six weeks left to it, the Trump administration is reportedly preparing to issue a list of eight-nine Chinese aerospace and high-tech companies that will be prohibited from accessing US technology because of their close ties to the Chinese military.
China’s diplomats deploy in damage-control mode
Japan-South Korea. The South Korean press reports that, in the wake of Chinese Foreign Minister Wang Yi’s recent visit to Tokyo and Seoul, Beijing is boosting a trilateral China-Japan-South Korea free-trade agreement. The plan was reportedly a major focus during Wang’s visit. China claims its proposed deal could have higher standards than the recently concluded RCEP. Political and strategic realities in northeast Asia, however, suggest that cementing such a trilateral deal won’t be easy for China.
Europe. In October, US Secretary of State Mike Pompeo and Borrell launched a “new bilateral dialogue” on China, dealing with issues of human rights, security, and multilateralism. Nevertheless, the trans-Atlantic tariff war continues. Even apart from bilateral tiffs, the EU has internal problems that could interfere with outreach across the Atlantic. These include its continued failure to pass a new budget and conclude an EU-UK post-Brexit deal.
The US press reports that China’s Foreign Minister Wang Yi, hoping to profit from the EU difficulties, recently spoke with EU foreign affairs chief Josep Borrell, warning him against allying with Washington against Beijing. Borrell, however, made clear that the EU is looking for a reset with the US under its incoming president.
Australia. After last week’s report that the Trump administration is considering assembling an alliance of countries that would protect each other if singled out for retribution by China – as Australia has been – Biden’s choice to be his national security adviser, Jake Sullivan, tweeted on December 2nd: “The Australian people have made great sacrifices to protect freedom and democracy around the world…. America will stand shoulder to shoulder with our ally Australia and rally fellow democracies to advance our shared security, prosperity, and values.”
Australia received strong support from other allies including the EU, UK, and New Zealand after an official in China’s Foreign Ministry tweeted a photo-shopped picture purporting to show an Australian soldier threatening an Afghan child with a knife. The picture was a fake, but Beijing refused to apologize for the tweet. This caused further rifts with democratic countries.
Canberra indicates that it will file a WTO complaint over China’s restrictions on its exports. The complaint will probably focus on China’s tariffs imposed against Australian barley.
It is thought that Beijing undertook its campaign to punish Australia as a means of warning other countries not to side with the US against Chinese interests. Beijing is thought to be especially concerned about president-elect Biden’s commitment to coordinate with allies in curbing China. This was a motivation for China’s concluding the RCEP and reviving the idea for a trilateral free-trade agreement with South Korea and Japan. But China’s messaging may backfire. Not only is it likely that other countries will support Canberra’s WTO complaint, but the prospect of losing the China market is reportedly causing companies not only in Australia but other countries as well to begin diversifying their markets so that they won’t be so dependent on exports to China.
L.C. reports on trade matters for business as well as Founders Broadsheet.
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