The jousting between the U.S. and China has spilled into the financial markets as both countries look to rein in technology companies for both national security and domestic policy reasons. Policymakers in the U.S. have become concerned that China is using access to U.S. capital markets and technology to improve its military and security apparatus.
The U.S. policy response has taken the form of an executive order, issued by former President Donald Trump and amended by President Joe Biden, to bar Americans from investing in firms owned or controlled by the Chinese military, and to put Chinese companies on the U.S. “entities list” to bar export of certain “dual use” technologies to those firms.
Congress also stepped up and passed a law in late 2020 that would delist a foreign company after three consecutive years of non-compliance with Public Company Accountability Oversight Board (PCAOB) audit inspections. The regulatory process to implement this new statute is underway with SEC Chairman Gary Gensler, who warned in August that “the clock is ticking.”
The Biden administration, in amending the original executive order, listed 59 Chinese companies with ties to China’s military or its surveillance industry. The amendments made by Biden clarified that subsidiaries of listed companies would be subject to the investment ban only if they were designated as subject entities by the Treasury Department’s Office of Foreign Asset Control (OFAC). The changes were made after two Chinese companies successfully challenged the original order in court.
This summer, the National People’s Congress Standing Committee approved a new “anti-foreign sanctions law” providing the government with sweeping new powers to seize assets and block business transactions. The law is aimed at “any individual or organization that is directly or indirectly involved in the formulation, decision or implementation of foreign sanctions.”
Specifically, the government in Beijing is empowered to refuse visas, ban entry, invalidate visas, and deport foreigners. In addition, the government may now seize or freeze assets and prohibit transactions with Chinese companies or individuals. Lastly, it also allows Chinese nationals to file lawsuits against individuals who implement “discriminatory restrictive measures.”
The Chinese have also moved to limit their companies’ access to foreign capital. The Chinese Cyberspace Administration has proposed new rules that limit Chinese companies that possess data of more than 1 million people from conducting an initial public offering (IPO) abroad until they have undergone a cybersecurity review.
This move is viewed just as much as an attempt to rein in technology companies that Beijing fears could become a source of competition for power with the ruling party as it is an effort to limit the influence of U.S. and other foreign investors.
What comes next?
This summer, as investors priced in the news of increased scrutiny from Beijing, share values of Chinese companies plummeted. Almost three quarters of Chinese companies listed on foreign exchanges were trading below their IPO price.
For example, share prices for Didi, the ride-hailing company, dropped almost 40%1 and shareholders sued the company after it failed to disclose that it was in talks with the government over failure to comply with China’s cybersecurity laws.
Some companies that were planning IPOs in foreign markets have decided to delay them, like Link Doc Technology, a health care firm; and Ximalaya, an audio-sharing platform. Others have decided to move their business to Hong Kong.
Meanwhile, Congress continues to look for creative ways to limit Chinese company access to U.S. capital markets. Efforts continue in both the U.S. House and U.S. Senate to prevent the Federal Retirement Thrift Investment Board, the manager of the U.S. government’s 401k plan, from investing in Chinese companies.
The House continues its work on China-related legislation in response to the Senate-passed United States Innovation and Competition Act last spring. The Senate will also turn to the National Defense Authorization Act for fiscal year 2022, which will carry some China-related provisions. To summarize, look for more action on China policy in the Congress over the balance of the year.
Congress isn’t the only actor to watch over the next few months. The executive branch has been busy too. United States Trade Representative Katherine Tai had a call with her Chinese counterpart Vice Premier Liu He on Oct. 8 where they reviewed implementation of the U.S.-China Economic and Trade Agreement and agreed to further consultations on outstanding issues.
Two days before that, National Security Adviser Jake Sullivan met with Chinese Communist Party Politburo Member and Director of the Office of the Foreign Affairs Commission Yang Jiechi in Switzerland as follow-up to a phone call between Biden and Chinese President Xi Jinping the previous month. The Switzerland meeting produced an “agreement in principle” for the two leaders to hold a “virtual” meeting before the end of the year.
This flurry of activity indicates that both sides at least agree on the need for open lines of communication. Whether or not communication results in progress on the relationship remains to be seen.
1 Source: Washington Post, ‘Why China and U.S. Are Clashing Over Stock Listings,” August 30, 2021