White House Weighs Blocking Chinese Companies From U.S. Exchanges

Source: By Alan Rappeport and Ana Swanson, New York Times • Posted: Sunday, September 29, 2019

President Trump has given mixed signals about the prospect of a trade deal with China. The prospect of further limiting American investment in China underscores the challenge that the two sides will continue to face.
Doug Mills/The New York Times

WASHINGTON — The Trump administration is discussing whether to block Chinese companies from listing shares on American stock exchanges, the latest push to try to sever economic ties between the United States and China, according to people familiar with the deliberations.

The internal discussions are in their early stages and no decision is imminent, these people cautioned.

The talks come as senior officials from both countries are scheduled to resume trade negotiations in Washington early next month. President Trump, who has continued to give mixed signals about the prospect of a trade deal with China, said earlier this week that an agreement could come “sooner than you think.” His decision to delay an increase in tariffs until mid-October and China’s recent purchases of American agricultural products has fueled optimism that the talks could produce an agreement.

But the prospect of further limiting American investment in China underscores the challenge that the two sides will continue to face even as they try to de-escalate a trade war that has shaken the global economy. The administration has already increased scrutiny of foreign investment with a particular eye toward China, including expanding the types of investments that can be subject to a national security review.

Last week, the Treasury Department unveiled new regulations detailing how a 2018 law, the Foreign Investment Risk Review Modernization Act, will work to prevent foreign firms from using investments like minority stakes to capture sensitive American information. And the United States has already blacklisted some Chinese companies, including Huawei, effectively barring them from doing business with American companies.

Stocks dropped on Friday after a report on the deliberations was published by Bloomberg News. The market continued to slide through most of the day. At close, the S&P 500 was down 0.5 percent and the Nasdaq composite index was down 1.1 percent.

Losses were particularly steep in the technology sector, and among semiconductor stocks, two parts of the market that have been sensitive to the latest updates on the economic tensions between China and the United States.

Details of how the United States would restrict Chinese companies from American stock markets were still being worked out and the idea remained in its early stages, the people familiar with the deliberations said.

China hawks within the administration have discussed the possibility of tighter restrictions on listed Chinese companies for many months. Supporters say the efforts would close longstanding loopholes that have allowed Chinese companies with links to its government to take advantage of America’s financial rules and solicit funds from American investors without proper disclosure.

Skeptics caution that the move could be deeply disruptive to markets and the economy and risk turning American investors and pension funds into another casualty of the trade war.

The effect of limiting Chinese firms from raising capital inside the United States could be significant. As of the beginning of this year, 156 Chinese companies were listed on American exchanges and had a total market capitalization of $1.2 trillion, according to the U.S.-China Economic and Security Review Commission.

“The underlying concerns have merit, but how to deal with them without creating a lot of collateral damage is tricky,” Patrick Chovanec, managing director at Silvercrest Asset Management, wrote in a post on Twitter. “Abruptly delisting Chinese firms en masse would clearly send shock waves through markets.”

The idea gained traction on Capitol Hill this summer when Republicans and Democrats in the Senate and the House introduced legislation that would delist firms that were out of compliance with American regulators for three years. The lawmakers argued that Chinese companies have been benefiting from American capital markets while playing by a different set of rules.

American complaints center on a lack of transparency into the ownership and finances of Chinese firms. The business community has long criticized China for classifying some auditor reports on company finances as state secrets and outlawing cross-border transfers of auditors’ documentation.

In 2015, the Chinese affiliates of the Big Four accounting firms — Deloitte Touch Tohmatsu, KPMG, PricewaterhouseCoopers and Ernst & Young — paid $500,000 each to settle a dispute about their refusal to provide documentation on Chinese companies to the Securities and Exchange Commission, which an American judge had ruled was a violation of United States law.

The White House has grown more interested in blocking Chinese firms in recent weeks, with some in the administration describing it as a top priority. Officials say the topic is not yet an issue in bilateral negotiations with the Chinese and inserting it into the talks could lead negotiations to fall apart again.

“This would be another step in ratcheting up the pressure,” said Michael Pillsbury, a China scholar at the Hudson Institute who said he raised the concept of investment restrictions with the White House after negotiations with China broke down in the spring.

The White House declined to comment.

The concept has divided Mr. Trump’s advisers along their usual fault lines, with Peter Navarro, Mr. Trump’s trade adviser, advocating action and Treasury Secretary Steven Mnuchin urging caution.

Discussions about new restrictions comes as the Trump administration has been pushing President Xi Jinping to open Chinese markets to American businesses and investors and as China has begun to relax some of its regulations that limit foreign investment.

The logistics of enacting such a proposal remain somewhat murky, particularly with legislative action in Congress largely stalled amid political gridlock. The S.E.C., which oversees publicly traded companies and the stock exchanges, is an independent agency with three Republican commissioners and two Democrats and is not required to honor edicts from the White House.

The Trump administration could unilaterally impose restrictions on national security grounds, as it has with tariffs, on the basis that American money is flowing to Chinese companies that pose a threat to the United States.

The administration is also reviewing how leading investment funds, including pension plans for public sector employees, funnel money to Chinese firms and could try to place limits on those vehicles.

For example, the Thrift Savings Plan, the retirement plan for government employees, is expected to change its composition next year to include more exposure to emerging markets, including China.

That trend has been a natural consequence of China’s economic growth. In 2019, China accounted for 129 of Fortune Magazine’s list of the 500 biggest global companies by revenue, while the United States produced 121. Chinese companies, including many state-owned enterprises, have become more important components of major stock indexes in recent years.

But China skeptics in Congress, the administration and elsewhere fear that the arrangement is still funneling American taxpayer money into firms that support the Made in China 2025 plan to dominate global industries, or a troubling surveillance state in Xinjiang.

“We have unlimited financing for the Chinese Communist Party, and their front organizations,” Stephen K. Bannon, the president’s former chief strategist, said at a Sept. 12 event hosted by the Committee on the Present Danger: China, an organization that warns of an existential threat from China. “The Frankenstein monster that we have to destroy is created by the West. It’s created by our capital. It’s created by access to our technology.”

“We have financed all this,” he added.

Matt Phillips contributed reporting from New York.