US-China: Maybe breaking up is not so hard after all

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By Claude Barfield

Several weeks ago, I noted that with all the talk of decoupling, Wall Street was
busy forging stronger financial and investment bonds with Chinese companies and
investors. It turns out both Wall Street and I underestimated Beijing’s
determination to have its cake and eat it too — that is, continuing to entice
Western financial firms to service Chinese mainland investors while embarking
on a determined campaign to restrict data collection and movement as well as
Chinese firms’ investment abroad (i.e., in Wall Street).

Two weeks ago, just days after
the ride-hailing firm Didi Global had successfully pulled off a $4 billion
initial public offering (IPO) on the New York Stock Exchange, the Cyberspace
Administration of China (CAC) demanded the company pull all of its apps from app stores for
having violated data security regulations. Subsequently, Didi stock promptly lost a fifth of its value. Then, in a move with
potentially much broader implications, China’s State Council announced a sweeping crackdown on “illegal securities
activities,” particularly with regard to offshore listings that would
henceforth be subject to stricter regulations and a full security review by the
CAC. Then, last week, underscoring the depths of Beijing’s concerns, the
Ministry of State Security led a group of six other agencies in stationing staff in Didi’s

Didi’s logo displayed on a smartphone, via Reuters

Before commenting further, here is the
economic universe we are discussing — the future of which is now highly
uncertain. For the past decade, Chinese startups have flocked to US stock
exchanges. There are now almost 250 Chinese firms listed in New York, with an estimated market
capitalization value of some $2 trillion. Chinese companies have raised an
estimated $75 billion from IPOs in the US since 2012, and this year alone some
36 Chinese companies have gone public in the US.

For Chinese tech companies, US financial
markets offer both a greater depth of resources and a level of sophistication
unmatched around the world — and more leeway on capital and data movement. For
US investment bankers (viz., JPMorgan Chase, Goldman Sachs, and Morgan
Stanley), fund managers, and individual investors, Chinese listings have led to
huge IPO management profits and large capital gains as companies such as
Alibaba and Tencent prospered greatly.

These potentially devastating changes are
still being played out, but here are several early conclusions. First, security
issues (particularly data security) have become inextricably linked with
economic and commercial considerations. Thus, China’s lead agency for the
unexpected new foreign listing rules is not the finance or trade ministry but
the CAC — the aforementioned cyberspace regulator — which has often been at odds with
economic regulators. Armed with new legislative powers it helped craft, the CAC
is now the lead agency not only on information security, but more broadly on
overseas foreign investment policy. (As one close observer noted:
“The cybersecurity regulator has become the new securities regulator.”) “Wolf warrior
diplomacy seems to have come to Chinese
investment policy as part of the larger crackdown on Chinese tech companies.

Second, Chinese entrepreneurs are already
rethinking plans for US-listed IPOs, with Hong Kong and Shanghai as
alternatives. Those who brave to disobey Chinese regulatory policy and list in
the US will inevitably face a
“Chinese penalty” of steeper IPO fees and fundraising difficulties.

Finally, on a separate decoupling track,
the US is moving to force US-listed Chinese firms to adhere to the same
standards it demands of other foreign corporations. For years, the US has
acquiesced to Beijing’s edict that requiring such information constituted a
national security threat. With new mandates from Congress, US regulators are
moving to enforce US standards, a course that will lead to a game of chicken
with almost $2 trillion of Chinese US listings at stake.

Breaking up still may be hard to do, but both
China and the US seem ever more ready to test the guardrails.

The post US-China: Maybe breaking up is not so hard after all appeared first on American Enterprise Institute – AEI.


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