In the latest escalation in the trade wars, the U.S. is contemplating deploying a focused, strategic maneuver that is distinctly asymmetrical in its impact. It’s been essentially all tariffs so far (the issues with Huawei aren’t really trade related), and the move under consideration to block U.S. investment in China, including potentially delisting Chinese companies from American exchanges, would be a major tactical and ideological blow to the anachronistic, mercantilist-esque Chinese economic model.
The thing is, with or without a trade war, this should have happened a long time ago.
U.S.-listed shares of Alibaba and Baidu (the Amazon and Google of China), among others, plunged on the news, and the Yuan weakened to 7.15 against the U.S. dollar. Chinese companies aren’t a trivial amount of American stock exchanges, amounting to about $1.2 trillion of their $43 trillion market capitalization. This reckoning has been a long time coming for a country that refuses to be transparent and reciprocal — its companies unsurprisingly don’t fall far from the tree.
SEC investigations and claims of fraud directed at Chinese companies have been going on for decades. From reverse-merger scams to cooking two sets of books, Chinese companies are notoriously opaque and misleading with their accounting practices. Even well-known behemoths like Alibaba are questioned for accounting methods that obfuscate critical pieces of information from American investors. Jim Chanos of Kynikos Associates casts doubt on the authenticity of the cashflows of this $430 billion company: “What the company is really earning we don’t know. … My experience with Chinese companies is that what you don’t know is generally not good news.”
The impact of this deceit transcends that of just retail and hedge fund investors. Even major U.S. companies have fallen prey to Chinese accounting malpractice. Back in 2012, Caterpillar’s acquisition of ERA Mining Machinery and its subsidiary Siwei, then China’s fourth largest maker of hydraulic roof supports, required a $580 million writedown after unearthing accounting inconsistencies and discovering it essentially lied about its inventory.
Beijing’s repeated, contemptible refusal to enforce competent accounting standards and permit overseas regulators to examine the audit work of domestic firms must be addressed head on with blunt-force tools. Policy wonks like Larry Summers or Yale’s Stephen Roach decry the move and the trade war broadly, giving us simplistic platitudes about “open access to each other’s markets” or providing middle-school-tier economics lessons that view tariffs in a painfully naive vacuum. In doing so, they continue to be emblematic of precisely why Beijing has been able to get away with this and so much protectionist hostility for so long. Academically attractive and ever so superficially agreeable, this approach has been demonstrably effete and supine in its effect against an opponent that flat-out dares you to do anything about it.
There is not reciprocated open access to each other’s markets, which includes access to information. It’s a false premise, the same that’s used when denigrating tariffs in the name of free trade, predicated on the fallacy that trade was free and open with the Communist Party before tariffs were implemented to force them to the negotiating table.
The U.S. has some of the most stringent, transparent, and enforced accounting standards in the world. Chinese investors reap the full benefit of this oversight and accountability when investing in the United States. As most relationships with China go, we receive next to none of that consideration in return.
China doesn’t respond to toothless threats, and the U.S. carries substantial leverage to force it to behave like the second-largest economy in the 21st century should. The bipartisan bill introduced by Congress that aims to delist U.S.-listed Chinese firms that don’t comply with basic auditing standards is a step in the right direction. However, China has shown it takes little seriously that isn’t accompanied with real ramifications for its malfeasance.
Trump is right to take steps to deny U.S. investment in China both as trade-war stratagem and as a genuine means of protecting American investors. The era of Chinese double standards is over.
Jason Orestes is a former Wall Street financial analyst who focuses on contemporary political developments affecting economics, markets, and culture. His financial commentary can be found on Jim Cramer’s TheStreet, where he is a regular contributor, as well as Seeking Alpha.
