Tech Talk: Could U.S. Financial Markets Become Next Front in Trade War?
U.S. President Donald Trump’s trade war with Beijing has so far mostly spared China’s high-tech community, with the notable exception of embattled telecom giant Huawei. But that could soon change, or at least the first hints of change are in the air.
This time the weapon would be U.S. capital markets, and access by Chinese high-tech firms to those markets. Tech giants like Alibaba, JD.com and Baidu have grown to their current size mostly by feasting on their huge home market and massive demand from its consumers and businesses. But U.S. capital markets, most notably the New York Stock Exchange (NYSE) and Nasdaq, have provided critical funding to help finance that rise.
Thus limited access to those two stock markets could be highly inconvenient to China’s high-tech machine at best — and catastrophic at worst — if the unpredictable Trump somehow tried to cut off access completely. In the past I would have said such a nuclear option was impossible. But Trump seems to confound everyone, including myself, with an element of unpredictability that frequently sees him do things that previously seemed highly unlikely or impossible.
The buzz that has people talking involved the quiet introduction of legislation in the U.S. House of Representatives and Senate last month, and came to my attention via an article this week in the Nikkei Asian Review. The legislation appears to have relatively bipartisan support, with two Democratic and two Republican sponsors in the Senate and two Republicans and a single Democrat in the House.
According to a press release from Democratic Sen. Bob Menendez, the legislation would “increase oversight of Chinese and other foreign companies listed on American exchanges, and delist firms that are out of compliance with U.S. regulators for a period of three years.”
The lawmakers’ complaint isn’t anything new, namely that Chinese companies listed in the U.S. are far less heavily regulated than their U.S. counterparts due to their overseas status. Whereas the U.S. securities regulator has the right to demand information from U.S.-based firms and their auditors when it conducts investigations, it lacks similar powers for information based in the home offices of Chinese firms.
The issue came to a head during a China stock crisis that ran for about a year in 2011 and 2012, with several Chinese companies collapsing after irregularities were revealed in their financials — often by opportunistic short sellers. The U.S. securities regulator embarked on an aggressive cleanup after that, which saw numerous smaller Chinese companies delisted.
Tensions between China and the U.S. during that period were partly mitigated when the two sides signed a landmark agreement in 2013 on information sharing. But that agreement marked only a partial victory, as it simply allowed U.S. inspectors to examine China-based records from company auditors in suspected fraud cases. China-based records from companies themselves were still exempt.
Now it seems this group of lawmakers is capitalizing on recent tensions to revisit the issue and threaten companies that defy the U.S. regulator for three years with potential delisting.
Reason to fear?
Honestly speaking, this particular law doesn’t seem to be that much cause for concern, at least based on the simple explanation in Menedez’s press release. The U.S. regulator already aggressively pursues companies when it discovers they fail to meet its requirements, regardless of where they are based. What’s more, the three-year period gives plenty of time for settlements if a company wants to maintain its U.S. listings.
The fact of the matter is that premiere Chinese tech companies like Alibaba and JD.com are quite widely regarded in the financial community, and few believe they would play with their books in illegal ways. It’s really the smaller companies that are more problematic.
Given the current state of U.S.-China trade tensions, I wouldn’t be at all surprised if Trump were to sign the bipartisan bill if it reaches his desk. What’s more worrisome is the possibility that the unpredictable U.S. president could try to take things a step further and place restrictions on Chinese tech companies seeking U.S. listings, or even ban such listings outright.
From a U.S. perspective, such a move wouldn’t have a huge impact. The two major U.S. stock exchanges combined are home to companies with total market value of about $35 trillion. By comparison, the seven top U.S.-listed Chinese internet companies have a combined market value of just $650 billion, or less than 2% of total U.S. market capitalization. Alibaba accounts for the lion’s share of that with a current market value of about $460 billion.
Loss of access to American stock markets would certainly be inconvenient for Chinese tech firms, though not really catastrophic. The Nikkei article points out that Hong Kong, which is easily accessed by most international investors, would welcome such firms. That fact is evident in recent trends, which saw smartphone up-and-comer Xiaomi and online-to-offline services leader Meituan Dianping both choose Hong Kong for their large IPOs last year.
Relaxing profitability requirements are at least partly driving that trend, since Hong Kong previously barred nearly all money-losing companies from listing on its main board. China also had similarly tough restrictions. But it loosened them somewhat with the launch last week of a new Nasdaq-style board, the STAR Market, which allows loss-making companies to list if they can meet other requirements.
I polled a few of my friends that work closely with many of the Chinese tech companies that list in the U.S., and they agreed that any moves to restrict such listings would be highly inconvenient. At the same time, nobody believes Trump will actually do anything beyond perhaps signing the new legislation if it reaches his desk. But then again, Trump never fails to surprise, and could become even more unpredictable as the next U.S. presidential election nears.
At the end of the day, the U.S. would really be shooting itself in the foot by limiting access to its financial markets for these Chinese firms. America has gained a reputation over the last few decades as the place where nearly any major company should list, either through a primary or secondary offering. Writing China out of that equation would deal a huge blow to that reputation, not to mention depriving U.S. investors of some of the world’s hottest companies.
Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com
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