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"All I want is for China to play by the rules”, said Senator John Kennedy, who recently introduced a key piece of legislation that sailed through the US Senate, sparking a sharp uptick in already sky-high tensions between the two countries.
The SOX act of 2002 requires all audits (local or foreign) of every US-listed company to be inspected by a body called the Public Company Accounting Oversight Board (PCAOB). Several companies based in China have refused to comply with this additional inspection, citing (backed by the Chinese government) that revealing the China-based audit records would violate state-secrecy laws. It is suspected that in extreme cases, inspections could reveal financial improprieties at the highest echelons of the organization.
Gaining momentum in the wake of the USD 310m Luckin Coffee accounting fabrications, the new bill aims to increase the financial transparency of China-based US-listed corporations. It also provides SEC the needed ammunition to ax public trading of any company that fails to undergo inspection by the PCAOB for 3 consecutive years, reducing the possibility of companies defrauding American investors.
But will it be effective? Chances are, it is more of a work in progress.
a. Most of the China-based companies are incorporated in tax havens, which innately provides investors much less protection than if they were incorporated in the US.
b. As observed with Luckin Coffee, the fear of the stock becoming untradeable caused a rush to dump it as quickly as possible wiping out 75% of the company’s share price in less than a day and hurt investors in the process.
c. FT reports that over the past decade, 90+ China-based US-listed companies have squeezed out American investors through low price “take private” transactions and re-listed successfully on Chinese/HK based exchanges at a much higher valuation.
What’s more, HK Bourse recently announced that it would be allowing weighted voting rights on shares for the first time, canceling out a major reason why these firms preferred US-listings in the first place and laying the red carpet for a glorious homecoming for its crown jewels. Economic policy, asserting geopolitical influence, the WHO, censorship.....the list goes on.
These are just a handful of the many topics on which China and the USA don’t see eye to eye. Tensions between the two countries have been explosive in recent weeks, with Washington fiercely criticizing and threatening sanctions against Beijing’s recent passing and enactment of a National Security Law in Hong Kong.
The countries have been locked in a tit-for-tat trade-war, going back and forth for the better part of 3 years by imposing and raising tariffs on nearly $200 billion of traded goods, ranging from commodities to aircraft components to medical devices and photovoltaics.
In-spite of stock market turbulences and jumping consumer price indices, both nations’ economic output remained relatively unaffected compared to previous years in nominal terms, with the US growing at a steady 2+% in every quarter of 2019 & China averaging c. 6.0% growth over the year.
Recent reporting improprieties that led to the Luckin Coffee fiasco led to the US Senate passing a bill that could potentially see several large China-based US-listed companies like Alibaba and Baidu de-list from the US. In addition, relaxation in dual-class share norms (allowing weighted voting rights) by the HK Bourse has prompted many of these companies to contemplate their listing future in the US, with NetEase and JD.com already filing for secondary listings in Hong Kong.
With overtly efficient supply chains crumbling around the world in the wake of the pandemic, the world at large looks like it is ready to partially de-globalize. A myriad of factors, including the ones above, are successfully pushing all firms into their respective country’s corners. An East vs West corporate all-star battle for economic supremacy looks imminent!