The US is getting tough on Chinese companies
They could be kicked off US stock exchanges If they don’t open their books to US regulators.
Welcome to China Uncensored. I’m Chris Chappell. We’ve been saying for a while now that the US
needs to decouple from China’s economy if the US wants to remain the world’s superpower.
Well, the US and China might be getting slightly closer to doing just that.
There are currently 261 Chinese stocks listed on US stock exchanges.
Last month, the US and China reached a deal that would allow US
regulators complete access to those Chinese companies’ financial documents.
To which you might be wondering...wait, US regulators don’t already have access?
And yes, that’s right. They don’t. And that’s been a huge problem.
For example, the Chinese company Luckin Coffee.
They were listed on the Nasdaq stock exchange. Americans bought their stocks like hotcakes,
thinking, “Oh this could be a good competitor to Starbucks.”
But then it turned out, Luckin had faked $300 million in sales. And when
that was discovered in 2020, their stock plummeted, and US investors lost billions.
They could never have committed such a giant fraud
if US regulators had been allowed to audit their books in the first place.
And it’s not just Luckin Coffee. For years, American investors have been pouring money into
hundreds of Chinese companies through exchanges like NASDAQ and the New York Stock Exchange
.But unlike for every other company on those exchanges, US auditors aren’t
allowed access to verify whether what Chinese companies were telling investors was true.
That’s because the Chinese Communist Party only allowed Chinese companies to be audited
by *Chinese* auditing companies. And it made sure those audits had no US oversight.
The Communist Party claimed that by opening their books to US auditors,
Chinese companies could be giving away “state secrets.”
Wall Street didn’t like China’s stonewalling either, but hey,
when the goose keeps producing golden eggs, do you really need to inspect how those eggs are made?
Of course, some of those eggs turned out to be fake gold. Like Luckin Coffee.
But hey, you win some you lose some, right? Some of them still produce golden eggs. For now.
So Wall Street put up with this for more than 10 years. If you’ve seen the movie The China Hustle,
you know why. Spoiler alert: it was greed and stupidity.
Now, it’s not like the US government just watched from the sidelines. The Public Company Accounting
Board—or PCAOB, is the regulator that oversees the audits of US-listed companies. It tried over
and over again to get access to China. So did the Securities and Exchange Commission.
In 2013, the PCAOB signed a Memorandum of Understanding with Chinese regulators.
It was supposed to make it easier for both countries to share documents with each other.
The problem was, it wasn’t legally binding. And there were some *huge* loopholes.
Like it only allowed the PCAOB to gain access for investigations of Chinese companies,
*not* for regular audits. ••So basically, the US could investigate after US
investors had been screwed, but couldn’t prevent them from getting screwed in the first place.
The Memorandum of Understanding also allowed China to withhold documents if they were considered
in the public or national interest. Which turned out to be almost every document.
So almost 10 years after that Memorandum was signed,
the PCAOB said it was worth about as much as the paper it was written on.
That wasn’t even the first Memorandum of Understanding they’d signed either.
They signed an earlier one in 1994 that also wasn’t legally binding.
And as you can probably guess, it did little to give US regulators access to Chinese companies.
Fortunately a few years ago, Congress stepped in and put its foot down. I’ll tell you how,
after the break. Welcome back.
For years, Chinese companies have basically been able to list on US stock exchanges
without being scrutinized by US regulators. The PCAOB and the SEC were pretty much shut
out of looking at Chinese companies’ documents for quote unquote “national security” reasons.
So in 2020, Congress passed a bill that Trump signed into law.
It forced companies to comply with US auditing rules, or get kicked off US stock exchanges.
It was called the Holding Foreign Companies Accountable Act although it really should
have been called the “Holding China Accountable Act” That’s because
China’s the *only* country that doesn’t comply with US auditing requirements.
The bill also makes companies disclose whether they have a Chinese Communist
Party official on their board or whether they’re chartered by the Party…
…so clearly this wasn’t aimed at countries like the UK or Germany.
The law also says companies have to allow the PCAOB to inspect their accounting. If
they don’t allow that access for three years in a row, they’ll be delisted from US stock markets.
The law went into effect in 2021, so Chinese companies that don’t comply
could be delisted as soon as 2024Which is still a ridiculously generous timeline.
Now with this law forcing China to let US regulators in or face being cut off from
US capital markets, China came to the table. But before it did, five state-owned enterprises
delisted from US stock exchanges. And yes, I said *State-owned enterprises.*
Which raises the question...why did the US allow state-owned companies from a genocidal regime
to list on US stock exchanges in the first place? Spoiler alert: it was greed and stupidity.
But anyway, these 5 enterprises took themselves off US exchanges shortly
before a deal with US regulators was announced. “And obviously in that regulatory statement that
you mentioned there, they didn’t actually mention the delisting. They said that these
companies have their own business reasons for delisting, but you have to figure that, if
they saw the writing on the wall, that they’re going to potentially get delisted,
that they were trying to be proactive about it.” Or maybe it was because they didn’t want US
regulators to discover that the only thing they reliably manufacture was … lies.
So with those state-owned enterprises gone—in a totally not suspicious way at all—China
agreed to give the US unfettered access to Chinese companies’ financial documents.
But there’s a big fat asterisk next to that. The agreement does in theory give US regulators
pretty much full access to see any document or talk to anyone in China they want. But
US officials and politicians are pretty skeptical that China is actually going
to comply with the thing they agreed to. The Head of the PCAOB said “The real test
will be whether the words agreed to on paper translate into complete access in practice.”
The Head of the SEC warned that “The proof will be in the pudding.”
And Senator John Kennedy, one of the sponsors of the Holding Foreign Companies Accountable Act,
called it “only a first step in a long journey”.
It’s not just because of China’s poor track record of working with the SEC.
China has a long history of lies and broken promises.
Like how the US-China trade deal that Trump negotiated fell apart when China
effectively bought none of the $200 billion in goods it promised to buy.
China also never cracked down on fentanyl being sent from China to the US like it said it would.
And China famously said it wasn’t going to militarize islands in the South China Sea
But then did just that.
“Sorry, I’m not sure how all those anti-aircraft guns got there.
They must have just washed ashore.”
If China does give the US unfettered access though, it could be a sign that China
is worried about losing US dollars. “The new agreement appears to reflect
recent concerns of officials in Beijing, who are struggling to manage a sharply slowing economy.”
For years, Wall Street has been a big cash cow for Beijing. Foreign investment
was like a tap that just kept pouring money on China’s economy, and it didn’t turn off,
no matter how risky Chinese investments were. That was thanks to useful idiots like Blackrock.
And Bridgewater Associates, which encouraged investors
to increase their investments in Chinese assets.
It’s not clear exactly how much China stands to lose if all China-based companies are
forced to delist in the US. But according to the SEC,
around 200 companies are in the crosshairs. That’s either a lot of golden eggs or a lot of
rotten ones. And soon, we’re going to find out. And this episode has been sponsored by you.
With YouTube ad revenue being so low, we rely on viewer support to
help us keep making this show. And as a thank you to our supporters on Patreon and Locals,
I answer their questions at the end of some of my episodes.
Today’s question comes from:
Eric Hegblom on Patreon.
“How did a man like Gorbachev rise in a system that he helped tear down? The CCP seems to believe
it was a mistake that he ever came to power. Could such an anomaly ever occur in China?”
Good question, Eric.
When Gorbachev came to power in 1985, the Soviet Union was facing an economic disaster.
At the beginning, Gorbachev’s ideas for fixing the Soviet economy required just minor changes.
It was only when those initial reforms failed to create economic growth, that he decided that
the Soviet Union also needed political reform. He thought political reform could force changes
to the bureaucratic status quo that was holding the economy back. But that led to
much more political reform than he bargained for. And the Soviet Union collapsed in 1991.
Yes, Gorbachev was praised for ending the Soviet Union, but that’s history looking back.
I believe his intention when he first took up his position was to save the Soviet Union, not end it.
So to answer your question, Gorbachev rose to power because after a series
of really bad Soviet leaders, he appeared to be the best guy available to fix the system.
And I guess, he was—just not in the way anyone predicted.
What does this mean with respect to China and Xi Jinping?
Only history will tell. And unfortunately, history usually takes a really long time.
Thanks for your question, Eric.
And thank you to everyone who watches China Uncensored. If you like this show,
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Once again I’m Chris Chappell, thanks for watching China Uncensored.