China doves convinced President Biden would go easy on Beijing, changing tone and direction from the Trump trade war-era, were sorely mistaken. The Trump and Biden administrations definitely see eye-to-eye on China.
Only a handful of Republicans and Democrats in the Senate have even tried to weaken tariffs against China. Biden, his Commerce Secretary Gina Raimondo, and his Trade Representative Katherine Tai, have given no indication that tariffs were on the chopping block.
But while tariff movement has stalled, with no new trade tariffs in the works, capital market sanctions have increased. First started by Trump, Biden has taken the baton and run with it.
China companies are increasingly restricted from accessing computer components from the U.S., and in some cases are being forced to delist from the NYSE and Nasdaq. Call Biden Trump-lite if you want. The new president has not changed tack on China.
Trump-Biden: First-Ever China Capital Market Sanctions Imposed
On November 12, 2020, then President Trump used his authority under the International Emergency Economic Powers Act (IEEPA) and the National Emergencies Act to issue Executive Order no. 13959. It was the first-ever capital markets sanctions deployed against China.
With it, Wall Street was barred from investing in Chinese defense contractors, officially referred to in the EO as “Chinese Communist Military Companies” (CCMCs). The idea was to limit the degree to which companies affiliated with the Chinese military could benefit from raising money in the U.S. Forty-four companies were put on the list, 11 of which were listed on New York exchanges. But that’s not all. Out of the 44 companies, approximately 133 publicly traded subsidiaries listed in China were implicated. Wall Street had money in many of those companies. Now firms like BlackRock had to dump those shares over a roughly one-year time period.
China’s three biggest telecoms were put in the crosshairs in January.
China Mobile, China Unicom, and China Telecom sent letters to the Board of the NYSE within hours of President Biden’s inauguration, in hopes that the new administration would take the preferred knee-jerk approach to policy and issues of national debate. If Trump was for it, Biden had to be against it. Such was their hope and the hope of investment firms that owned millions of shares in each. The final appeal of these companies to remain on a U.S. exchange was rejected on May 7, 2021, and the NYSE proceeded with delisting them all.
Once Biden became president, one of his first Executive Orders was EO no. 14032, which made some tweaks to Trump’s EO 13959. It signaled that the Biden Administration was not hesitant to prevent U.S. capital from funding China’s defense sector.
Biden’s EO preserved the fundamental principles of Trump’s, streamlining the process for targeting companies and broadened the number of companies that were listed as officially implicated by these sanctions.
CCP Says “Xie Xie”, Wall Street!
The rise of the CCP owes much to U.S. and European multinationals treating it as their outsource manufacturing partner of choice. But over the last seven years, Beijing has increasingly granted Wall Street and London its wish to allow for investment directly into China’s stock and bond market. This has led to tens of billions of dollars flowing into Chinese state-owned companies that are not listed on the NYSE. In a way, U.S. investors have funded China’s rise. We are their Dr. Frankenstein. China says xie xie, or thank you, Wall Street.
The U.S. capital markets are usually off-limits when it comes to sanctions. This has persisted despite the dominant position held by the United States in the world’s capital markets. We hold approximately half of the world’s investible capital and more than half of global liquidity.
Trump and Biden’s actions say that this financial market cannot be openly used by a power rival to raise capital; capital that can be wielded against us in all sorts of ways. Not just militarily, but commercially as well.
China is notorious for not playing by the rules upheld by advanced economies in the World Trade Organization, of which China is a member. The world’s no. 2 economy maintains a relatively closed economy, protects industries that have often grown through forced technology transfers in exchange for market access and joint venture deals with Westerners, and outright theft. Now funded by American investors, these same entities take aim at commercial enterprises in the U.S, putting American companies out of business. This isn’t something that happens with Japanese companies or German ones. But with China it does.
Since the days of Deng Xiaoping, China has counted on American business interests and Wall Street’s desire for new growth markets to invest in as a tool to finance its development. No other emerging market has counted on this, which is why no other emerging country has grown the way China has.
More to Come?
Are there more capital market sanctions to come? We think it is within reason for Congress to ban investors from owning any company, including its parent company, that is on the Entity List – the Commerce Department list that requires U.S. firms to get permission before selling certain items to listed companies.
Trump and now Biden’s actions have broken through the Wall Street firewall. Congress is now saying that they, or the White House, will ban investors from holding stocks of companies they’ve issued warnings against.
Some pundits argued that Biden would reverse course on Trump’s policy, calling it an “ill-considered, last-minute” action by an outgoing president probably mad that Wall Street invested in the other candidate.
But President Biden proved to be independent and above the noise. His EO 14032, titled “Addressing the Threat from Securities Investments” went so far as to include tech companies that provide surveillance equipment monitoring Muslim minorities in the far western Chinese province of Xinjiang, which is both an open-air prison to many, and home to the live-action Disney movie Mulan.
On June 3, the Biden Administration declared that the White House “will not hesitate to prevent U.S. capital from flowing into China’s defense and related sectors, including companies that support the Chinese military, intelligence, and other security research and development programs; or into Chinese companies that develop or use surveillance technology to facilitate repression or serious human rights abuse.”
Now a bipartisan Congress wants in on this action.
If there is one thing Republicans and Democrats agree on, it’s China. That includes Trump’s policies on China, and Biden’s existing and proposed policies on China. There is very little daylight between the parties on this, Rep. Eric Blumenauer of Oregon said this week in a House Ways and Means Subcommittee on Trade hearing.
Congress unanimously passed the Holding Foreign Companies Accountable Act in December 2020, an effort to unwind financial auditing exemptions Chinese companies were given by the Obama administration. This will require the delisting of any Chinese company that doesn’t comply with the same auditing rules as American or any other foreign listed company on the NYSE or Nasdaq exchanges. China has declared these financial books to be state secrets. Fine. Then go list in London or Frankfurt or Shanghai instead.
Wall Street has failed, for the first time, to prevent U.S. policymakers from moving into their protected “air space”.
Today’s capital market sanctions, still in their infancy, represent a new focus by the U.S. security community, particularly the National Security Council, on an area where the economic and financial ambitions of the CCP are laid bare. It’s the biggest leverage the U.S. has on China.
China’s own capital markets are growing.
They will entice American companies to list there. And without Washington blocking it, subsidiaries of American icons will indeed list in Shanghai one day to capture Chinese capital, next.
But that is for another time. Today, the dominance of the United States in the world’s capital markets means that Washington has the capacity to lead European markets too, in a way that carries a real cost for the CCP and the Chinese companies that are engaging in behavior that raises national security and human rights concerns in Xinjiang.
For CPA, our position is that anytime the U.S. government identifies and lists bad actor CCP companies on military, human rights, surveillance, or national security risk grounds, those new Entity List names should be barred from receiving American investment in their U.S. and China listed securities.
The U.S. is in a great power rivalry with China. Xi Jinping, like others before him, has cleverly, and increasingly, used one of our biggest assets – our capital markets – against us. It is time to stop helping the CCP win the rivalry.