At the risk of trafficking in hyperbole (which I usually only do tongue-in-cheek), relations between the US and China are close to careening completely off the tracks.
It’s never a good sign when a US senator utters the phrase “I don’t want to get into a new Cold War”, which is what Senator John Kennedy said Wednesday while discussing legislation that could lead to the delisting of Chinese stocks from US exchanges.
The bill is co-sponsored by Chris Van Hollen and was passed by unanimous consent. Long story short, the legislation calls for companies to certify they aren’t controlled by a foreign government. If the Public Company Accounting Oversight Board can’t audit three straight years of financials to make that determination, companies would be banned from US exchanges.
“The Chinese Communist Party cheats, and the Holding Foreign Companies Accountable Act would stop them from cheating on US stock exchanges”, Kennedy very “calmly” explained, during an interview with Fox’s Maria Bartiromo on Tuesday.
Both Kennedy and Van Hollen released forthright statements Wednesday as part of a press release that carried the not-at-all-accusatory title: “Senate passes bill to kick deceitful Chinese companies off US exchanges”. Here’s Kennedy:
The SEC works hard to protect American investors from being swindled by American companies. It’s asinine that we’re giving Chinese companies the opportunity to exploit hardworking Americans—people who put their retirement and college savings in our exchanges—because we don’t insist on examining their books. There are plenty of markets all over the world open to cheaters, but America can’t afford to be one of them. China is on a glidepath to dominance and is cheating at every turn. I hope my colleagues in the House will immediately send this bill to the president’s desk so we can protect Americans and their savings.
And here’s Van Hollen:
As we continue to experience the economic fallout and volatility caused by the COVID-19 pandemic, the need to protect main street investors is all the more important. For too long, Chinese companies have disregarded U.S. reporting standards, misleading our investors. Publicly listed companies should all be held to the same standards, and this bill makes commonsense changes to level the playing field and give investors the transparency they need to make informed decisions. I’m proud that we were able to pass it today with overwhelming bipartisan support, and I urge our House colleagues to act quickly.
There’s a companion bill in the House introduced by Brad Sherman, who remarked that “had this legislation already been signed into law, US investors in Luckin Coffee likely would have avoided billions of dollars in losses”.
This comes on top of the dizzying array of contentious rhetoric, threats and other pending legislation aimed at turning the screws on Beijing.
Sino-US relations normalized a bit in January after the “phase one” trade deal was signed, but in the pandemic, lawmakers on both sides of the aisle see an opportunity to combine a “blame China” message with long-standing concerns about national security and human rights, to curry favor with voters who are searching for answers after seeing their livelihoods destroyed during the lockdown protocols associated with efforts to stop the spread of COVID-19 in the US.
To be sure, most of these efforts do have some merit, even as accounting fraud is hardly the sole purview of Chinese corporates, and the hypocrisy of America playing human rights cop is too much for some observers to bear.
But the point here isn’t so much to weigh the myriad normative considerations. Rather, I simply want to ensure that market participants keep themselves apprised of the rapidity with which this situation is deteriorating.
Just to recap, last week, US lawmakers pressed for sanctions against Chinese officials in connection with human rights abuses in Xinjiang, while a separate piece of legislation championed by Lindsey Graham called for additional sanctions in the event Beijing doesn’t provide a satisfactory account of COVID-19’s origins. At the same time, the White House moved forward with the first capital restrictions aimed at choking off investment to Chinese equities, and put new rules in place designed to further strangle Huawei.
All of that has transpired in a very short window, which speaks to the sense of urgency among US politicians ahead of November.
Now, we have a fast-moving push to squeeze publicly-listed Chinese corporates, and it’s got plenty of bipartisan support. Earlier this week, Trump said he was “looking very closely” at Chinese stocks listed on the NYSE and Nasdaq.
It’s entirely possible that China is holding back when it comes to responding due to the proximity of the NPC. But, eventually, Beijing will respond.
On Wednesday evening, Bloomberg’s Ye Xie penned a quick guide to what China may or may not do. Ye contends China won’t devalue substantially and likely won’t sell Treasurys either.
“Not only does the Fed have unlimited purchasing power to buy the bonds China sells, Beijing’s sway in the market is a lot less than before as the US debt pile explodes”, Ye notes. “At $1.1 trillion, China’s holdings accounts for 6% of the US debt outstanding, compared with a peak of 14% in 2011″.
So, what might they do if not devalue or sell their Treasury hoard? Here are several possibilities from the Bloomberg blog post cited above:
- China could put companies on the “unreliable entity” list.
- Restrict American casino operators, such as Las Vegas Sands, Wynn Resorts and MGM Resorts, in Macau. Gross gaming revenue there is five times bigger than Las Vegas.
- Block the supply of rare-earth elements.
- Beijing could target some American high-tech sectors, including biotech and electronics, of which exports to China have been rising.
None of that is “new”, per se, but that’s kind of the point. We’re right back to where we were during the worst days of the trade war.
Underscoring just how contentious things really are, Trump on Wednesday briefly lost his cool and took to Twitter to lambast an unidentified “wacko”.
“Some wacko in China just released a statement blaming everybody other than China for the Virus which has now killed hundreds of thousands of people”, the president declared, before asking his 80 million Twitter followers to “please explain to this dope that it was the ‘incompetence of China’, and nothing else, that did this mass Worldwide killing!”
Xi’s media man Hu Xijin fired back. “I have never heard of such a wacko in China making this statement”, Hu said, dryly, in a tweet of his own. “So I have reason to [think] that this dope is actually a fictional one based on someone in your [administration], because there are too many liars in your team”.
Funny? Well, sure. Assuming you think Cold War propaganda wars are funny. But it’s also dangerous. Because it’s not just an unhinged reality TV show host and a shameless propagandist trading barbs on social media. It’s also US lawmakers, and officials in Beijing, whose patience one imagines is wearing quite thin.
In the same interview with Bartiromo mentioned above, Kennedy said “I would not turn my back on the Chinese Communist Party if they were two days dead”.