Wolf Richter: Treasury’s Weak Denial Acts as Confirmation: US Weighs Crackdown on Capital Flows to Chinese Companies, Stocks & Bonds, Listed in the US or China

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.

The US Treasury Department’s denial on Saturday focused on only one item, omitted to deny the other crucial items, and made the denial even soggier by ending it with “…at this time.” With this statement, sent to Bloomberg on Saturday, the Treasury was reacting to revelations by Bloomberg on Friday:

“The administration is not contemplating blocking Chinese companies from listing shares on U.S. stock exchanges at this time.”

According to sources, a group led by Peter Navarro, Assistant to the President and Director of the Office of Trade and Manufacturing Policy, is pushing a multifaceted and broad crackdown on capital flows from US investors to Chinese companies.

The National Security Council and the Treasury are part of the discussions. The National Economic Council has been chairing meetings on the issue and is working on an analysis of the potential impact of any limits on these capital flows.

According to Bloomberg’s sources, action is not imminent, but the officials are discussing options and repercussions, and “even more dovish advisers have rallied behind some of their suggestions.”

The benefits and risks of a financial decoupling from China — including how it could even be done and what impact it might have on American investors — was discussed last week at a dinner hosted by the Center for Strategic and International Studies in Washington. Attendants included White House economic adviser Larry Kudlow; Number 2 on the National Security Council Matt Pottinger; and members of Congress.

The measures that the Trump Administration is contemplating are running roughly in parallel with efforts by Florida Republican Senator Marco Rubio and others in Congress who have already put forward legislation to that effect. The Trump Administration is discussing its plans with Rubio and is considering backing his legislation.

Rubio said in a statement: “This administration deserves credit for their efforts to deal with the threat that the Chinese government and Communist Party poses to U.S. national and economic security, including how Beijing takes advantage of its access to U.S. capital markets for predatory purposes.”

Among the Items Contemplated by the Trump Administration:

Delisting Chinese companies from US stock exchanges. Most of these companies trade as American Depositary Receipts (ADRs) in the US that do not convey ownership in the company in China, but only in some kind of off-shore entity. This includes Alibaba.

The dollars involved are big. According to the US-China Economic and Security Review Commission, cited by Bloomberg, the combined market capitalization of ADRs of 156 Chinese companies traded in the US was $1.2 trillion as of late February. This includes at least 11 state-owned companies. Alibaba alone accounts for $432 billion of this, as of Friday.

Curtailing Americans’ exposure to Chinese companies via US government pension funds. These are retirement funds administered by the Federal Retirement Thrift Investment Board. “According to several people involved in the discussions,” there is new momentum among lawmakers on this issue as these funds are facing a deadline next year to plow billions of their beneficiaries’ dollars into Chinese companies.

Imposing limits on Chinese companies included in stock indices managed by US firms. There are many funds that track these indices. Americans that buy these funds, indirectly own shares of the hundreds of Chinese companies that have been included in these indices. These may be companies listed in China or in the US. It includes Chinese bonds that have filtered into bond funds sold to Americans.

One of the reasons for curtailing capital flows from American to Chinese companies is that with these investments, unwitting Americans – they only know that they bought some broad equity or bond fund – are supporting the Chinese Communist Party and an increasingly difficult strategic and economic rival.

Other reasons are focused on protecting unwitting Americans from being indirectly exposed to the risks of Chinese companies with their opaque and sorely lacking financial disclosures.

Chinese ADRs Have Been a Fiasco Recently for US Iinvestors.

In reaction to the news on Friday, the ADRs of Chinese companies traded on US exchanges sank even further. Here are some of the legitimate Chinese companies that I track. There is a slew of toxic ones traded in the US, but I don’t bother with them. This is the cream of the crop. All but one have plunged from their peaks, and some went public in the US fairly recently:

  • Alibaba [BABA]: -5.2% on Friday; -20% since its peak in June 2018
  • com [JD]: -6% on Friday; -44% since its peak in January 2018.
  • Baidu [BIDU]: -3.7% on Friday; -59% since its peak in May 2018.
  • Weibo [WB]: -3.1% on Friday; -68% since its peak in February 2018.
  • Pinduoduo [PDD]: -4.2% on Friday; -15% since its peak on September 13. Its US IPO was in July 2018.
  • netEase [NTES]: -4.6% on Friday; -43% since its peak in December 2017.
  • Tencent Holding [TCEHY]: -2.6% on Friday; -33% since the peak in January 2018.
  • Tencent Music [TME]: -1% on Friday; -33% since its peak in April 2019. Its US IPO was in Dec 2018.
  • Sina Corp [SINA]: -3.8% on Friday; -68% since its peak in March 2018.
  • Tal Education Group [TAL]: -4.5% on Friday; -28% since its peak in June 2018.
  • Ctrp.com [CTRP]: -2.7% in Friday; -51% since its peak in July 2017.
  • New Oriental Education [EDU]: -7.45 on Friday, from a new high on Thursday.
  • iQiyi [IQ]: -4.1% on Friday; -59% since its peak in June 2018, three months after its US IPO in March 2018.
  • NIO [NIO]: -10.7% on Friday; -83% since its peak in March this year. The collapsing EV maker had its US IPO in October 2018, when it extracted $1.1 billion from US investors.

This is why no one should be an unwitting investor in Chinese companies! If you make a conscious decision on the risks and rewards of investing in NIO, and you get your face ripped off, so be it. But no one buying an equity fund or bond fund should be exposed to Chinese companies until they get their act together – that includes financial disclosures and scrutiny in the US on at least the same level as US companies face in the US.

But hundreds of Chinese companies – those traded in the US and those traded in China – have recently been added to indices that are tracked by mutual funds, ETFs, and pension funds that Americans have their money tied up in.

How to Do It? It Gets Complicated.

How to turn any proposals put forward into action is not going to be easy under US law, and the mechanism for some of them have not been worked out yet, according to sources cited by Bloomberg. The proposed mechanisms include:

  • Imposing the same financial disclosure and transparency rules and the same scrutiny on Chinese companies that US companies are subject to in the US. And if they fail to comply, delist them in the US.
  • Creating a level of reciprocity between China and the US.
  • Raising national-security concerns over some Chinese companies that US pension funds are exposed to.

One source told Bloomberg that President Trump has given the green light for the discussions, but if a plan emerges, he would still need to approve it. The administration – particularly the Treasury Department and the National Economic Council – is hesitant to pursue this, fearing that investors could get spooked, and “that the already fragile economic relationship between Beijing and Washington could collapse.”

Those hesitant officials want to convey to stakeholders that the rule of law in the US can be trusted and that any such policies are directed against companies that have persistently been out of compliance with US laws.

These are layers of complex ideas that are difficult to implement, though one of them – putting Chinese companies under greater scrutiny and imposing US transparency and disclosure requirements – should have been implemented years ago.

Another piece in the Chinese capital-flow puzzle. ReadDebt-Wracked Chinese Companies Dump US & Other Foreign Assets, Become Net Sellers Overseas for First Time

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. MIchael

    Wait, we aren’t imposing the same disclosure reqs on Communist companies? And including them in funds unbeknownst to average investors?

    How about a level playing field on wall st for the average investor? I know hahahaha!
    Democrats what say you?

  2. TroyIA

    If anyone is interested in Alibaba and their questionable accounting practices I recommend this blog – The BABA Investor Call…….Trade War?…What Trade War?

    Every quarter he dissects the BABA earnings report and points out irregularities and possible fraud like this –

    So here’s what we really have:

    Alibaba took $730 million of US Shareholder Money and loaned it to a CPC Member, so he could create a brand new unnamed ShellCo, which will hold/acquire a 29.9% stake in STO. Further, Alibaba agreed to buy 49% of this brand new entity for RMB 4.7 Billion (US$686 Million)

    If we do the math, when this transaction is completed, Alibaba will have paid US$686 Million for a 14.65% minority stake (29.9% x 49%) in STO which is currently worth $711 Million today…..not too bad, except that they’ve also allegedly “invested” $730 million in the loan (terms undisclosed) to Mr. Chen. Moreover, if we examine the chart above, we note that the value of STO Express was roughly a third less than it is now just a few months ago (i.e. it was worth US$470 Million before the Alibaba investment was announced and Chinese shareholders assigned the “CPC Stamp of Approval Premium” to the company).

    Even if we can somehow get past the diversion of funds to a CPC Member, the odd structure of this deal and the misrepresentation and missing details in the press release, what makes this even worse is the probability that this is yet another weird, fake CPC business, shipping fentanyl and synthetic opioids around the globe, laundering money and somehow facilitating the never ending CPC dollar grab and financial asset purchases.

    I might also ask, if Alibaba management was truly intent on buying a 14% stake in a goofy, hot-mess of a fake company like this, why would they go through all of this intrigue and these odd structural mechanics? Why not just call a broker and buy the shares on the exchange over the next three years? Unless, perhaps, they are setting this up to record yet another series of step acquisition “valuation gains” like they did with Alibaba Pictures, Alibaba Health, Wasu Media, Cainiao, etc. etc…to continue to goose the bottom line with fake asset valuation income…

    Gotta keep the enthusiasm and the Ponzi going!

    1. workingclasshero

      Why am i supposed to care how the Chinese run their corporations.it never ends with wall st./u.s. govt intervention in other nations economies edpecially concerning semi socialist economies.the worries of a neo liberal interventionist.

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