US-China financial war is just beginning to take shape
Now that there is a nearly meaningless truce in the US-China trade war, Wall Street and corporate America can move on to preparing for the financial war. As you would expect, China is better prepared than America, but neither of them really knows how much they have to lose — which is a lot.
The opposition to China’s continued access to US capital markets is only beginning to take shape. It is an odd alliance of rebranded “national security” conservatives (you might call them neocons), navy-centric military people, intelligence and internal security types, research-intensive China short sellers and a few political people who see this is a long-term cause.
They exchange a lot of sidelong glances. The short sellers are not natural neocons, the navy does not trust civilians, let alone spies or politicians. The spooks want to understand how the financial markets fit in to their order of battle and political risk estimates, but cannot readily translate what the short sellers tell them. The politicians are constantly trying to triangulate their party’s positions, the voters’ whims and their donors’ whispers. The lawyers wonder when they can start getting paid real money for their opinions.
The US-China financial war hawks do not even have an agreed map of how each economy is dependent on the other. The military and the spies worry most about China’s appropriating defence-related technologies, the short sellers point to cloudy corporate reporting or outright fraud. The politicians worry about the loss of constituents’ jobs and savings, or a depression-inducing freeze in Treasury or private markets.
All of them know there is a lot at stake. According to the federal US-China Economic and Security Review Commission, 172 Chinese companies are listed on big US exchanges, with a total market capitalisation of more than $1tn. China short sellers say that when you add over-the-counter equity and bond issues the total Chinese corporate issuance in the US is closer to $2tn.
While the cash flowing from US investor accounts to Chinese businesses is a fraction of either total, a financial war would have a huge effect on both countries. Even the inchoate political bombast of the past couple of years had an effect. Chinese listings in the US have mostly dried up, and private equity and venture investment has declined sharply.
The real opposition to the financial war hawks comes not from Chinese officials but from corporate America and Wall Street. At any time there may be tens of millions of dollars that can be committed by a handful of US China short sellers, but JPMorgan, BlackRock, Goldman Sachs and their peers are on the long side. They are joined by Boeing, General Motors, semiconductor manufacturers and farm groups in lobbying to loosen or avoid official restrictions on Chinese companies’ access to US capital markets.
The China finance war hawks call their American opposition “pandas”. They know that for now key political authorities such as Senate majority leader Mitch McConnell will carefully deflect any serious financial market sanctions on China.
The panda hunters know that candidates for Congress can be denied factory-floor photo opportunities by China-dependent companies, and that they will have a hard time raising campaign money for their friends. They say that they are also ready to play the long game.
There is not much in the way of legislation on offer to slow Chinese access to capital markets. Last year, senator Marco Rubio, the Florida Republican, was joined by four Republican and Democratic colleagues to sponsor the Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges Act, known as the Equitable Act.
As you might guess from the press conference-friendly name, the panda hunters are trying hard to make it all about transparency, and not just anti-China (or Russia) discrimination. Conceptually, even companies based in allied countries such as Ukraine and Vietnam would be covered by the law.
Corporate disclosure could be covered by US Securities and Exchange Commission enforcement. But apart from head-shaking and fining accountancy firms, the SEC appears to have abandoned its trenches in the China conflict.
The Equitable Act has not gone anywhere. That has not dissuaded the panda hunters. Dan David, veteran short seller of Chinese companies, says that despite its anti-China rhetoric and tariffs, “the administration has not even mentioned this bill. I don’t know why, but I think they didn’t want it to gum up the works in the trade deal”.
The panda hunters will make another push for federal legislation this spring, so Chinese capital markets access can be a line, or maybe a footnote, in the political campaigns. They worry their moneyed US opponents will ensure any actual law will be weak and one-sided, as they characterise the vague trade deal.
In any case, the true bloodbath in any financial war would follow any serious attempt to unwind the dollar-based banking system’s intertwining with the Chinese economy. So far, the panda hunters are not prepared to deal with that nightmare.