US-China economic decoupling starts at the stock market | He Jiangbing

Published (HKT): 2021.04.08 10:48

In late 2020, Donald Trump signed into law the Foreign Company Accountability Act, which had been passed by both houses. The US Securities and Exchange Commission (SEC) was then to come up with an actual proposal within 90 days. On March 24, the SEC launched a set of new requirements targeting Chinese companies publicly listed in the US. The new rules, designed to improve existing disclosure requirements, require Chinese enterprises listed in the US to comply with certain audit inspection requirements, reveal the names of Chinese Communist Party (CCP) officials who are members of the board of directors of the listed companies, and prove that they are not under the CCP’s control. The rules also stipulate that Chinese companies publicly listed in the US risk facing delisting if they fail to comply with US auditing rules for three consecutive years. When news about the new rules broke, Chinese concept stocks listed in the US plunged. GSX Techedu, Tencent Music and VipShop fell at least 50 percent for several trading days, while Baidu has been falling continually. On April 5, GSX Techedu dropped a further 10 percent. Currently its price stands at US$28.76. From the high point of US$149.05 in January, it has decreased by 80 percent and the company’s market value has shrunk from US$38 billion to US$7.3 billion. The loss amounts to 200 billion yuan.

Last year, there were talks of US-China decoupling. Now, the decoupling has moved to an operational stage, manifesting itself through closures of embassies as well as Confucius Institutes, armament race and high-technology embargoes. According to a Pew Research Center survey, 89 percent of American people consider China an enemy or competitor, not a partner. A Gallup poll indicates that the number of American people holding favorable views of China have hit the lowest point of 20 percent since 1979. Amid the drastic change of public opinions, bills aimed at sanctioning or containing China have been passed by both houses at US Congress unanimously or by a majority. Sino-US economic ties are the anchor of relations between the two countries, but now there are signs of economic decoupling. The two countries used to have a lot of overlapping in production, and the US had been highly dependent on China’s rare earth. A few years ago, Professor Jin Canrong, an academic well respected in mainland China, called for China to stop exporting rare earth to the US. Currently, the US is establishing a rare earth production chain with Japan, Australia and Canada. It is also planning to collaborate with Taiwan, Japan, Europe and South Korea in chip production. Meanwhile, TSMC will construct a high-end chip production plant in the US. At the same time, the US is establishing a pharmaceutical production chain with India, Japan, and Australia. In what is the latest progress, US pharmaceutical firms have agreed to provide a formula for the development of a new Covid-19 vaccine in a plan that features Japan capital and technology and Australia’s logistic support. The vaccine will be produced in India. In effect, India will be the biggest Covid-19 vaccine manufacturer. In the realm of finance, stock market decoupling is the easiest form of decoupling. American and other foreign companies are not allowed to be listed on China’s A-share market, and yet more than 200 Chinese companies are currently listed in the US. When the aforementioned new rules take effect in the US, a large number of Chinese concept stocks will be delisted, not least because of the rule that requires Chinese companies to prove they are not under the CCP’s control.

Decoupling will remain challenging for China despite new bourse plan

In the face of stock market decoupling, Beijing and Chinese enterprises are forced to respond. Some companies such as Qihoo 360 have decided to return to the A-share market after having been privatized in the US. Some have chosen to be listed in Hong Kong. Alibaba, and NetEase are examples.

In late March, Reuters reported that China was considering establishing a stock exchange to attract US-listed firms back to China and to lure global firms such as Tesla and Apple. Based on the report, however, one can hardly come to the conclusion that China is fully opening itself to foreign companies, given that the renminbi is still a currency that cannot be freely exchanged. I would at best call the proposed bourse a “quasi international stock market”. Obviously, the idea of a new bourse is China’s response to the US-China stock market decoupling. The second objective is to provide a shelter for US-listed Chinese companies returning to the country. Third, China wants to strengthen its economic ties with the US, so that the US can hardly decouple with China. In reality, however, it is only the US stock market that has Chinese elements whereas the Chinese stock market does not have any US participants. Fourth, in terms of complying with World Trade Organization rules and the internationalization of the renminbi, it is necessary to establish a new stock market. Yet one can also look at things from a different perspective: Chinese enterprises can be listed on the US stock market but no US company can be listed on the Chinese stock market. The US can oust Chinese companies from its stock market or impose fines on them, but China cannot get back at US companies in the same way. Fifth, there is the Hong Kong factor. Since 2019, many countries and institutions have stopped regarding Hong Kong as a free economy. That has had a big impact on the Hong Kong’s international financial status. Although the rules of the Hong Kong Stock Exchange have not changed, the city’s financing capacity today is significantly lower compared with two years ago. The Heritage Foundation annual Index of Economic Freedom issued recently no longer included Hong Kong. The future of Hong Kong as an international financial hub is worrying. As its financing capacity and financial functions are going to become much weaker, Beijing has the incentive to build a quasi-international bourse.

Nevertheless, in a country that has no freedom - or at least without economic freedom, it is impossible to have a truly international financial center. Even if it does, the financial hub will not last. Think Shanghai more than 70 years ago and Hong Kong today. When factors undermining the status of a city as a global financial center exist, the city is bound to lose that status.

(He Jiangbing, Chinese academic in Financial Studies)

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