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Washington wants to halt US investment in Chinese companies

Questions about Beijing’s actions in preventing the spread of Covid-19 and the imposition of security laws on Hong Kong are a gift to Washington’s China hawks.

Garry white employee

by
Garry White

in Features

12.06.2020

The controversy over the initial stages of the Covid-19 infection in China has allowed a raft of measures to be put on the table to ensure the superpower advantage remains with the US. Washington wants to starve Chinese companies of money, with investors required to consider “America first”.

In a speech given in the White House Rose Garden, President Trump said he was taking action to “protect the integrity of America’s financial system”, as he announced an investigation by White House officials into the differing practices of Chinese companies listed in the US because American investors needed “protecting”. Many in the administration want to halt Chinese IPOs in the US completely.

China needs to comply

Calls for such a move were accelerated after allegations of fraud at Chinese companies that have listed in America.  In April, Nasdaq-listed Luckin Coffee, which aimed to become China’s Starbucks, revealed that some of its employees had fabricated sales accounts. This eventually resulted in Nasdaq issuing a delisting notice for the group, with the notice citing public interest concerns raised by the fabricated transactions and Luckin’s failure to disclose material information.

The Sarbanes-Oxley Act, introduced by the US in 2002 after the dot-com boom, requires US-listed companies to have their accounts investigated by US officials. China argued that this will violate its state secrecy laws, so these businesses do not comply, so a bill was introduced on Capitol Hill in May. It will allow any company that will not allow an audit investigation by the Public Company Accounting Oversight Board (PCAOB), a body set up by Sarbanes-Oxley, for three consecutive years to be delisted.

Chinese officials said this bill will harm the interests of both Washington and Beijing and that political forces in the US were pushing the two powers into a new Cold War. Chinese companies listed in the US via ADRs have a total valuation of around $1 trillion.

The Trump administration is now widening this net and appears to be targeting all means by which Chinese companies get funding from the US. It was also revealed that Republican representatives will bring legislation this week to prevent Americans from investing in foreign defence companies with ties to the Chinese military.

“On one hand, Congress is asking taxpayers to help grow our military so we can compete with China. On the other hand, large US investment funds are dumping US dollars into China’s military industrial base,” Representative Jim Banks said. “We need to end our cognitive dissonance and stop funding the rise of our chief global adversary.”

The bill will require Treasury Secretary Steve Mnuchin to submit a report to Congress listing foreign defence companies that had “substantial contracts with, ties to, or support from” the Chinese military. Six months after the report is issued, Americans will be required by law to disinvest from these businesses.

China threatens

The proposals prompted a stern response from China through its state-owned tabloid and Communist Party mouthpiece The Global Times. An editorial in the newspaper said that the disinvestment law and actions to limited visas for Chinese students in the US foreshadowed “a further escalation” in the trade war and it will surely be met with “swift retaliation from China.”

The move against the Chinese military followed action last month by federal pension funds, which Mr Trump believes should not be investing in any Chinese companies at all. Following pressure from the White House, the Federal Retirement Thrift Investment Board – the independent body charged with overseeing billions in federal retirement dollars – said it will delay plans to invest in some Chinese companies – indefinitely.

Its main $50bn (£39.2bn) pension fund, known as the I-Fund, is currently indexed to the MSCI EAFE, which invests in companies from Europe, Australia and Japan. However, it was proposed that the I-Fund would switch out of EAFE to a more global index, the All Country World Index (ACWI). However, following the part inclusion of Chinese shares in MSCI’s indices last year, about 4.5% by weight of this index is invested in Chinese companies listed in Shanghai and Shenzhen.

The new Cold War

Some doubt that we have entered a new Cold War between China and the US because the economic links between the two countries are too significant. Trade between the USSR and America was virtually non-existent during the cold war with Communism, but the depth of mutual reliance by industry and trade between China and the West means that there is too much at stake.

However, this argument is clearly absurd. It is exactly these links that are now being unpicked by Washington’s China hawks, with both sides seeing the battle as existential. Even if the Democrats win in November’s presidential election, moves against the Chinese military are likely to stay, as alleged human rights abuses by Beijing remain a key priority for many in the party.

The Trump administration is now clearly targeting all financial links between the US and China. The new cold war is about unpicking these links, a move that Washington hawks believe will allow outsourced jobs to be brought home – and China be starved of investment to limit its rise.

As Donald Trump said on Saturday: “This pandemic has underscored the crucial importance of building up America’s economic independence, reshoring our critical supply chains and protecting America’s scientific and technological advances.” It looks like the battle with Beijing is only just getting started.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

A version of this article appeared in the Daily Telegraph.

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