The U.S. Congress is advancing legislation to require Chinese companies to meet full SEC (U.S. Securities and Exchange Commission) transparency and accountability regulations to trade in U.S. financial markets.
U.S. Republican Senator Marco Rubio introduced legislation in June that would increase oversight of Chinese companies listed on American stock exchanges and delist those that fail to comply with the new requirements. The move launched Congressional competition from both parties to restrict U.S. institutional investing in China securities.
Endo Economics refers to the Congressional initiatives as expanding the U.S.-China trade war and tech war to add a third capital market war. The Trump administration confirmed in 2018 that Congress—since the start of the Korean War in 1950—has had the authority to restrict foreign investment by U.S. fund managers under the U.S. Treasury Office of Foreign Assets Control (OFAC).
The Treasury Department aggressively used OFAC in April 2018 during the “Russiagate” investigation to force U.S. money managers to divest in the shares and bonds of Russia’s top aluminum maker United Company RUSAL that are listed on the Hong Kong Stock exchange.
With combined sanctions against the RUSAL and its oligarch billionaire founder and close ally of Russian President Vladimir Putin, Oleg Deripaska, leading U.S. financial media leader Bloomberg Markets refused for months to publish RUSAL’s share price over fears of breaching the Trump administration’s sanctions regime.
When Senator Rubio introduced the “Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges” (Equitable Act) on June 5, 2019, the legislation had bipartisan Senate support from Bob Menendez (D-NJ), Tom Cotton (R-AR) and Kirsten Gillibrand (D-NY). The legislation would increase oversight of Chinese and other foreign-headquartered companies listed on American exchanges by forcing them to allow U.S. regulators to view full audit reports. Firms not fully complying with American disclosure standards would be delisted from U.S. exchanges for three years.
Enodo suggests there is an 80 percent probability that Equitable Act legislation will be passed into law. The U.S.-China Economic and Security Review Commission has already identified 156 Chinese firms with a market capitalization of over $1.2 trillion that are listed on the three largest U.S. stock exchanges.
The most significant impacts would be against China’s semi-private internet giants already trading in volume on the NYSE and NASDAQ exchanges such as Alibaba Group, China Telecom, China Mobile, Jingdong, NetEase, Baidu, and China Unicom.
Other Senators are now pressuring the Federal Retirement Thrift Investment Board (FRTIB) to reverse its decision to allocate a slice of its funds to passively track the MSCI All Country World Investible Market Index (I Fund) planned for 2020. The 26 nation emerging market index would direct about $50 billion into Chinese stocks. Enodo forecasts a 60 percent probability that FRTIB federal fund restrictions will pass.
U.S. Senators and Congressmen are also demanding President Trump to restrict U.S. pension funds and money managers from investing in private Chinese companies and blacklisting state-owned firms. Bloomberg Markets currently listsover 500 investment funds that predominantly focus on investing in the $6.9 trillion in stocks and $13 trillion in bonds that trade on China and Hong Kong exchanges.
After 20 years of lobbying by U.S. financial institutions to open its capital markets, China’s State Administration of Foreign Exchange (SAFE) in a meaningful goodwill gesture and in support of financial market liberalization, cancelled the $300 billion cap on foreign investors buying domestic assets.
SAFE has also been quietly moving to authorize foreign banks and insurers to convert from minority to controlling ownership interests in their China joint-ventures. JPMorgan Chase & Company, Nomura Holdings Inc. and UBS Group AG have already won approvals, while Goldman Sachs and others is pending.
Chriss Street is an expert in macroeconomics, technology, and national security. He has served as CEO of several companies and is an active writer with more than 1,500 publications. He also regularly provides strategy lectures to graduate students at top Southern California universities.