In recent weeks, a number of major Chinese companies have been delisted from Western stock markets, including the Dow Jones and even the Hong Kong Stock Exchange. This appears to be driven by a combination of tighter state control in the US and China.
Derek Scissors is a senior fellow at the American Enterprise Institute and a specialist in the Chinese economy.
THE SCISSORS: Two different things are happening. There are several prominent companies pulling out of stock markets like DiDi, China Mobile and China Telecom. And then there is the prevention of new registrations. It is difficult to quantify the type of cases lost because we do not know what would have happened if the United States had not demanded more disclosure at the same time as China insists on less disclosure.
Beijing wants more data controls and tells its companies they can’t go overseas without passing various security reviews, which essentially means not sharing any information. Chinese market capitalization in the United States has definitely plunged, I would say, around 50%. There will be a return, because the feeling will not always be so negative. But I think for that segment of the market it was a big hit.
There is a growing risk because the most lucrative companies making profits in China are private, and they are the ones that have been targeted for political intervention from the Chinese side.
EDGE: Could you just unpack what is driving this on both sides? You mentioned the Chinese requirements, and then there are the new SEC requirements for foreign companies.
THE SCISSORS: So the United States has been, I don’t know how else to put it, engaged in an essentially bogus policy for years, where we’ve said we’re demanding more disclosure from China, but we’re not doing anything . The Obama administration demanded it, but then negotiated a “settlement” with the Chinese where nothing changed at all. The Trump administration has again raised this issue. And then we passed a law saying, “If you don’t fix this in three years, we’re going to take you off the list.”
Last month, the SEC finalized its rules for implementing what is called the Holding Foreign Companies Accountable Act, which allows the SEC to remove companies from the list if the Public Company Accounting Oversight Board decides that it is unable to fully audit a company.
There was this idea that we could somehow come to a negotiated agreement where the Chinese would obey our disclosure laws. As a China expert, I knew that would never happen. The Chinese will never put disclosure requirements for foreign regulators above their own law.
Beijing concerned about data loss
At the same time, the Chinese have become much more concerned about data loss. They treat data now like they treated manufacturing 10 years ago. Manufacturing is allowed to come to China; leaving is not permitted. Data is allowed into China, it is not allowed out.
Which means that if you have data on Chinese consumers, for example, you cannot share it with a foreign regulator under any circumstances.
The pressure from Wall Street to say “Don’t take our service fee away from us” has been reduced because the Chinese just said, “Well, we’re not going to let people sign up in America anyway.” So the reason this is happening now isn’t because the US got serious, it’s because China made this business less lucrative.
EDGE: Do you see a political solution to this, or will it just continue?
THE SCISSORS: Well, we might end up being cornered because the Chinese won’t disclose properly, so any concession would make them less transparent than they were two years ago because Chinese laws have moved so far away from transparency.
I don’t see how there’s a solution that isn’t just a complete raid by the United States, and I don’t think that will happen this time because there’s less money at stake. At some point , the nominal market capitalization of Chinese companies listed in the United States peaked at over $2 trillion. And now it’s not much more than $1 trillion. So much less money is now involved.
Money is still circulating in China
EDGE: But meanwhile, the amount of US money invested in Chinese stocks listed in China continues to grow.
THE SCISSORS: Oh, it went up. At the end of 2016, the amount of US money listed as invested in Chinese stocks and bonds was given by the Treasury Department as $370 billion. And at the end of 2020, it was at $1.15 trillion. It has more than tripled. That’s a $780 billion increase.
A big reason you don’t see Wall Street screaming about the loss of Chinese listings here is that they just decided we’ll just send our money over there. The only people losing money are those who have service fees for listing on US exchanges, which is much smaller than the broader financial community. So the financial community’s response to “Okay, we’re not going to have a flood of new Chinese IPOs in the US” is like, “Good. We’re just going to go further and invest in Chinese companies in China.
But there is a growing risk because the most lucrative companies making profits in China are private, and they are the ones that have been targeted for political intervention from the Chinese side. So you can invest in state enterprises, but it’s a bit like deciding to just maintain your level of money, not earn it.
An important counterbalance to this is that the Chinese want money. They gave US brokers more rights to own their business in China. So while the risk associated with some very large Chinese companies has increased, the control of the investment tools that US brokers have in China has also increased. And it fights the negative feeling.
We kind of put up barriers in front of the business relationship, not so big, but certain. And there are hurdles in front of Chinese listings in the United States. So where is the opportunity to do business in China? He invests in China.
While you could look at a few measures of the economic relationship between the United States and China, and they’re stable or even declining, there’s this other measure that overwhelms them, and that’s the amount of money that flows into China from the United States. t talk honestly about decoupling when we tripled US portfolio investment in China in four years.