US stabs itself in back; China complains

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Will forcing all foreign firms to comply with US audit standards be the straw that breaks the camel’s back in Beijing?

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A bill passed by the United States Senate that aims to force all foreign firms to comply with US audit standards has received short shrift in Beijing.

China’s securities regulator – the CSRC – hit back, saying the proposal will “weaken confidence” in US stocks, and accusing lawmakers in Washington of “politicis[ing] securities regulation” and creating a law “directly targeted at China”.

Two of those charges are true; the third may be, too. The bill is certainly conveniently timed from a US point of view. Donald Trump has been bashing China for months, his fears of losing re-election due to the Covid-19 pandemic, which started life in the mainland city of Wuhan, clear for all to see.

But in recent weeks, he has banged the rhetoric up a notch. In mid May, he ordered the main government pension fund, the Federal Retirement Thrift Investment Board, not to invest any of its $600 billion portfolio in Chinese securities.

Sino-American relations are further assailed by threats to reignite a trade war, renewed unrest in Hong Kong, and Washington’s decision to tighten sanctions on technology firm Huawei.

Final straw

In an attempt to justify the bill, US officials can point to the case of Beijing-based Luckin Coffee, a Nasdaq-listed coffee chain whose shares collapsed after it admitted to fabricating more than $310 million in sales.

It wasn’t the first mainland firm to be caught with its trousers down, nor will it be the last.

But is the US reaction proportionate, or even logical? Does it makes sense during a pandemic, when economies are being hollowed out and investors are seeking signs of good sense, to make decisions so clearly based on politics and passing whim?

China is opening the doors wider to foreign banks and institutional investors while building bourses – notably Shanghai’s Star Market – that are well run and easier to access. The US seems if anything to be travelling in the opposite direction.

If the bill is approved by the House of Representatives, some Chinese firms will retain a US-listing: a Nasdaq or NYSE ticker is a financial green card of sorts, as it lets mainland promoters get out from under Beijing’s thumb.

But “many others will want to leave”, says one Shanghai-based investment banker. “It will be the straw that broke the camel’s back, and China will be the winner.” 

The CSRC, surely, should not be complaining but cheering.