During the past few weeks of this presidency, both the Trump administration and Congress have levied additional sanctions against the People’s Republic of China. Financial markets and U.S. corporations have largely ignored those efforts; here’s why:
Investors have learned over the past four years that tough talk on trade tariffs, blacklisting and other threats were largely ineffectual in curtailing the world’s second largest economy. The facts are that U.S. tariffs on Chinese goods have been a failure. Our trade deficit with China is higher now than it was before the trade wars.
China’s trade gap with the U.S. was 43% bigger in September, for example, than when Donald Trump took office. The surplus overall is 18.86% higher than a year ago and the trade gap between the two nations is on track to exceed $600 billion by the end of this year. That would be the highest since 2008.
The only difference investors could see in all this expended energy is that U.S. corporations (and consumers) have had to pay more for some imported Chinese goods. Aside from that, our farmers lost billions of dollars and had to be compensated by additional tax dollars for losing market share to Brazil and other nations in certain agricultural products like soybeans.
Last week, on the financial front, the delisting of Chinese companies under the House passage of the Holding Foreign Companies Accountable Act, looks good on paper, but not so much once you read the fine print. The act would require U.S. regulators to review the audit books of all U.S.-listed Chinese companies. If they refuse or fail to come into compliance under U.S. acceptable accounting standards, they will face delisting.
Conveniently, the bill’s authors failed to mention that most U.S.-listed Chinese companies are already audited by the largest U.S. accounting firms. The “Big Four” accounting firms (PWC, Deloitte, Ernst & Young, and KPMG) apply the same standards in auditing these Chinese companies as they do in auditing companies in the U.S. and Europe, as well as their clients around the rest of the world.
In addition, the Securities and Exchange Commission (SEC), which is charged with enforcing the act, has already made quite a bit of progress in developing a workable framework that would solve these issues. The SEC proposes having Chinese companies listed in the U.S. audited and reviewed by firms located in jurisdiction that are accessible to U.S. regulators.
The China Securities Regulatory Commission (CSRC) appears to have no problem with that solution or the act. The CSRC already assumes that Chinese companies listed on U.S. stock exchanges follow U.S. laws and regulations for financial reporting and information disclosure. From China’s point of view, anything that can help regulate and identify the few bad apples among thousands of listed Chinese companies is a welcome addition to their own regulatory efforts.
For Wall Street, the delisting threat may, at most, create some minor, short-term sentiment that could pressure Chinese stocks, but there is simply too much at stake to see a wholesale delisting of Chinese stocks. There is almost $2 trillion of U.S. money invested in Chinese equities today. Companies such as Alibaba, Baidu and JD.com have become as familiar to Americans as IBM, and delisting the lot would throw the financial markets into chaos.
The U.S. strategy of blacklisting certain other Chinese companies such as telecom giant, Huawei, plus dozens of other companies, has done as much harm as good to the U.S. and its corporations. Our semiconductor sector, for example, has experienced severe supply dislocations and costly business interruptions because of the Huawei crackdown.
Dozens of other firms that the Commerce Department has added to its “entity list” have caused unexpected repercussions as well. Many of these Chinese firms are accused of either helping to spy on China’s minority population, the Uighurs, or of having ties to China’s military. Many of them are customers of our own technology and cloud-based computing firms. Some U.S firms may have had joint ventures with these companies or garnered a substantial portion of business from these companies.
From my perspective, the incoming Biden Administration gives the U.S. a chance to re-examine the direction our country has taken in answering the “threat of China.” If Director of National Intelligence, John Ratcliffe, was right when he said last week that “the People’s Republic of China poses the greatest threat to America today,” then we better up our game in ways that may not make great headlines, but instead protect our interests far more effectively than they have in the past.