By Cristobal Lorenzo Rodriguez Flores
Now a days the wars are not longer in the field of the weapons, the war has turned into an economic field.
That’s why US President Donald Trump accused China of unfair trading practices and theft of intellectual property in March 2018. While China had the perception that America was trying to curb its rise as a global economic power. This triggered the trade war, the United States imposed tariffs on more than $ 360 billion of Chinese goods, and China reacted with tariffs on more than $ 110 billion of US products.
Nevertheless, the war was just getting started. In august 2020, President Trump signed two executive orders affecting TikTok and WeChat, two of the most popular applications in China. The fist one have more than 2 thousand millions downloads worldwide. According to the executive orders, US companies must stop their operations with these companies in order to “protect the national security”, unless this two Chinese giants sell their actions to US companies.
As most of us know, also China protects their own Tech giants. Google, Facebook or YouTube are not allowed in China, because of the censure, but in reality also for the protection of their own apps like WeChat. Other countries, like Vietnam or South Korea control Internet, but they allow the American tech giants to establish operations in their countries.
The US problems with reference to TikTok and WeChat are related to the Chinese National Intelligence Law (signed in 2017) that, in the article 7, says:
“Any organization or citizen shall support, assist and cooperate with the state intelligence work in accordance with the law”.
This means that all the data kept by the companies belongs to the Chinese government, the companies like it or not. It is like the case of Cambridge Analytica. It could know all the data of the users and utilize them for the benefit of the Chinese government. However not only the US ban Tik Tok. Also India and Australia, for the same reason of the US.
The solution that the American government offers to China is to sell Tik Tok to a US company. So Tik Tok could reside in US soil and have access to Canada, Australia and New Zeland. The American acquiring company should be Microsoft (Facebook and Google could not buy Tik Tok due to the antitrust law). Therefore, at the time of this article is written, Bytedance (Company owner of Tik Tok) is in talks to sell its actions and pass the property to Microsoft.
But this is not the only Trump´s plan to bend China. On May 20 of 2020 the US Senate unanimously passed the Holding Foreign Companies Accountable Act, which could have significant implications for China companies that trade in the American stock markets.
The Act focuses on the inability of the US Public Company Accounting Oversight Board (PCAOB) to inspect, or audit, companies based in China and Hong Kong because the Chinese government consider the files of this companies as State secrets. Companies like Baidu (Chinese Google), Alibaba (Chinese Amazon) or NIO (Chinese Tesla) could be removed from the list of American stock markets if they continue to refuse to be controlled.
It means that these companies no longer have to be under the control of the Chinese government. The act also establish that Companies whose auditors fail to be inspected by the PCAOB for three consecutive years will be subject to mandatory
To increase tensions, in June 2020, the Securities and Exchange Commission (SEC) released proposals of Nasdaq rules that would apply additional restrictions to companies in so-called “restrictive markets”, that have laws or regulations that restrict access to information from part of the regulators of the United States companies listed in such jurisdictions.
If the Act will become law, and the proposed Nasdaq rules will be adopted, China companies will face additional challenges to become and remain publicly listed companies in the United State, as long as China continues to block PCAOB access to auditors in China. This is a very important point because 230 Chinese companies trade in the different US stock markets.
The questions is, why the US do this? The answer is into the Luckin coffee case. This was like the Chinese Starbucks. The company offers their coffee cheaper and developed an app where it is possible to make order and so increase the consumption. Since 2018 Luckin Coffe had more than 4,500 coffee shops in China. One year later (2019) started to trade in the NASDAQ .
From the fist day of quote their shares was valued more than 50% of their base price. However, in January 2020 Muddy Waters published a report with evidence that Luckin Coffe distorted the sales information and made fraud. The company accept the charges, the shares fall down and the NASDAQ expelled it. Consequently, Luckin Coffes shares lost the 95% of their value. Other cases related to fraud are also the Chinese enterprise TAL (On line formation) and QIY (streaming).
However, China started to open its financial sector. For example in 2019 and early 2020 PayPal bought the 70% of the Chinese company GoPay. Goldman Sachs, Morgan Stanley, JP Morgant started their operations in China in the future markets Another example is American Express that became the first foreign company in China to launch credit cards. Visa and MasterCard are starting to do the same. In order to create a trust financial environment S&P y Fitch were accepted to make qualification services in China.
This means that the Chinese market is very important for the US companies. It could make thousands of millions of dollars. For example, Chinese bond holdings exceeded 600 million dollars.
China remains the main creditor of the US with an investment in US public debt that amounts to 1.18 trillion dollars. However, the trade war has not been an impediment for Beijing to continue betting on US bonds and bills. Between April and May it bought another 1,200 million. Behind China are Japan, with 1.04 trillion dollars in treasuries, and Ireland, which has 301,000 million, according to the latest figures published by the US Treasury for the month of May 2020.
Therefore, we should consider three important aspects into the US-China relations:
As a geopolitical strategy, the US is trying to destabilize the East-Asia region, selling weapons to Taiwan by Lockheed Martin, sending soldiers in the Indian region, increasing the tensions in the South of China also with the support to the Xinjiang autonomous Islamic republic movement and to the protests in Hong Kong against the Security Law.
The Trump administration want to buy back the US Treasury Bonds owned by China. In effect, the way in which China would charge the Treasury Bonds could have impact into the economy of the US. This implies a geoeconomic strategy for both sides. From the Chinese side it could mean that they could release the bonds impacting the US economy, making struggles and creating a financial crisis on the US soil, that could mean a global financial crisis. That’s why the Trump administrations wants as many bonds back as possible.
There are Chinese companies that are leaving the US stock markets and establishing into the Hong Kong stock market. Companies like Alibaba, JD.com, Netease games (videogames) are now in the two stock markets. However SMIC (semiconductors) left the NY stock market to trade into the Hong Kong´s one.
According to the last reports, 42 companies are ready to quote in Hong Kong. That means that Hong Kong stock market becomes the third most important market, just below NY Stock Exchange and NASDAQ. This means that, a part the trade war, also a financial war could start between the two super powers.
Author: Cristobal Lorenzo Rodriguez Flores
(The opinions expressed in this article are solely those of the authors and do not necessarily reflect the views of World Geostrategic Insights)