Is this the end
for Chinese Companies on the US stock market?
The US and China head towards decoupling
Welcome to China Uncensored. I’m Chris Chappell.
This episode is sponsored by
MOVA globes. Two countries on this globe seem to be moving further apart. Can you guess which ones?
For years, China has been taking advantage of the US economically. And it’s gotten so
bad that some people are saying, hey if the relationship isn’t working out,
maybe the US and Chinese economies should get divorced. Let’s call it Conscious Decoupling.
A few weeks ago we did an episode on why
the Chinese Communist Party is terrified of decoupling.
Meanwhile, President Trump doesn’t seem too worried.
Here he is at a White House press conference in September.
So when you mention the word decouple, it's an interesting word. So we lose billions of dollars,
and if we didn't do business with them, we wouldn't lose billions of dollars.
It's called decoupling, soon you'll start thinking about it.
Well, I certainly am thinking about it now.
And the Trump Administration has now taken a big step towards decoupling.
The US Securities and Exchange Commission is pushing ahead with
a plan that threatens to kick Chinese companies off of US stock exchanges.
The SEC is the US federal agency that regulates the stock market.
And, by the end of this year, the SEC is planning to “propose a regulation
that would lead to the delisting of companies for not complying with U.S. auditing rules.”
Basically, this Christmas, they’re giving Xi Jinping a stocking stuffed with coal.
So what does it mean when the SEC talks about Chinese companies
not complying with US auditing rules?
Well, major Chinese companies like Alibaba and Baidu trade on the US stock exchanges. However,
China refuses “to let inspectors from the Public Company Accounting
Oversight Board review audits [of them].”
Why? Well, this article from 2015 called “The SEC Caves on China”
explains. It says that “China-based auditors have refused to comply with SEC subpoenas for their
clients’ paperwork, citing Chinese laws that treat such corporate information as state secrets.”
Huh, that’s weird. Why would documents from totally private
Chinese companies be considered state secrets?
But instead of pushing back, the SEC “quietly carved out a China-size exception:
When Chinese companies list on U.S. markets, basic auditing rules won’t apply.”
So that means that Chinese companies can come to the US,
get listed on Wall Street, and rake in lots of money from American investors.
And the US government can’t review the audits of those Chinese companies.
Allowing Chinese companies onto US stock markets without
standard regulatory oversight is a problem. And it has already come back to bite US investors.
I’ll tell you how after the break.
Welcome back. Chinese companies can be listed on US stock exchanges,
even though they refuse to be audited. And this has caused major problems.
Even as of that article from 2015, “Tens of billions of dollars in U.S. market value
have disappeared in recent years as more than 170 U.S.-listed Chinese companies
have faced scrutiny for embezzlement, theft, misrepresentation and other alleged abuses.”
And it hasn’t gotten better in the last five years.
Just this past summer, the Chinese company Luckin Coffee
was caught in a 300 million dollar revenue fraud after an SEC investigation.
Yeah, Luckin Coffee inflated its revenue by 300 million dollars.
Then its stock price collapsed and it got delisted from NASDAQ.
Which can only mean one thing. It’s a great investment opportunity!
What could go wrong?
There are more than 200 Chinese companies listed on US stock exchanges,
with a combined market cap of $2.2 trillion.
This year alone, Chinese companies have raised $12 billion dollars in initial public offerings,
all while essentially ignoring US law.
And it’s not just Luckin Coffee type fraud that puts US investors at risk.
The political machinations of the Chinese Communist Party are also a threat to US investors.
Like how Alibaba founder Jack Ma criticized Chinese regulators,
and then China put the brakes on the $310 million dollar IPO of a company tied to Ma.
Which caused Alibaba’s stock on the New York Stock Exchange to fall 8%. Which means US
investors in Alibaba lost a huge amount of money based on the whims of the Chinese Communist Party.
So the SEC is trying to delist Chinese companies that don’t follow the rules
that all other companies in the US do. But it’s not just because of Trump.
This is becoming a bipartisan issue. Back in May, the Senate overwhelmingly
approved a bill that could bar Chinese companies from US stock exchanges.
A big issue is *where* these Chinese companies are getting their American investment money.
Much of it is “from pension funds and college endowments in search of fat investment returns.”
Which is insane! It means the value of Americans’ pension funds
can be affected by the decisions of a hostile foreign government.
This delisting of certain Chinese companies is just the latest in a post election sweep by the
Trump Administration to crack down hard on the Chinese Communist Party. A couple weeks ago,
Trump issued an executive order banning investment in Chinese firms with military ties.
Which makes you wonder: How long had that been going on?!
But despite what you might think,
the Chinese Communist Party doesn’t sound too bothered by the Trump administration’s
harsh actions. Because they’re betting they can get Joe Biden to put a stop to it.
Fang Xinghai, who’s the Vice Chairman of the China Securities Regulatory Commision, said,
“I think during the Biden administration we should be able to resolve that problem because it’s not
an intractable problem. All it takes is good will on both sides and a willingness on both sides.”
And considering Biden’s record with China while he was Vice President,
there could be a lot of willingness on both sides.
The new SEC rules will be open for public comment in December. But according to Andrew Bishop global
head of policy research at New York-based Signum Global Advisors, “If the new rules
haven’t been set in stone by the time Trump leaves offices, Biden could water them down.
Even if they are imposed by January 20, Biden could issue new rules to override them.”
And you know what that means! Time to start investing in that new exciting Chinese company,
“Beijing Peaceful Rise Naval Industrial Corporation Inc.”
And this episode has been sponsored by MOVA Globes.
You’ve seen one of these MOVA Globes on my desk before.
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Once again I’m Chris Chappell, thanks for watching China Uncensored.