Roger Garside - China Coup - The Great Leap to Freedom

Li Keqiang, Chinas premier and second-ranking member of its Communist Party, stares in horror at the Reuters Chinese-language feed on his computer screen. He is reading a press release by the US Securities and Exchange Commission (SEC) announcing the imminent suspension of trading on all US exchanges of the securities issued by five of the Chinese companies with the highest capital valuations in the American markets. The reason given is that the SEC lacks confidence in the veracity of the financial information those companies supply to investors. The suspension will last from 9:30 a.m. Eastern Standard Time on Monday, 28 March, to 11:59 p.m. EST on Friday, 8 April.

Since the first China-registered company was admitted to listing on the New York Stock Exchange in 1992, nearly two hundred more have been listed on major US exchanges, raising tens of billions of dollars each year. For investors, a US listing carries with it the assumption that US rules and regulatory oversight apply, but when it comes to Chinese companies, that simply is not true. Beijing routinely blocks the efforts of the US Public Company Accounting Oversight Board (PCAOB) to gain access to the accounts of these companies held in China and the right to inspect their assets, so that it can verify the information they supply. Chinese law requires that financial records remain in China, and Beijing restricts access to accounting information, citing national security and state secrecy.

The US Congress has long been indignant that Chinese companies should be permitted to access the US capital markets, and apparently mislead American investors, while obstructing the legitimate demands of the SEC. The indignation is all the greater because US competitors of these companies have been subjected to discrimination or outright bans in China.

When US President Barack Obama urged President Xi Jinping to change Chinese law to allow disclosure, he refused and used a joint press conference with the US president to make clear how strongly he resented the pressure. On this issue, he has overridden the advice of Li and others, because he believes that China is now strong enough to defy attempts by the United States to influence Chinese law making.

Li has no illusions about Chinese financial and reporting standards. The scandals are legendary. He remembers the case of Sino Forest, which overstated the value of its forests in Yunnan by US$900 million, and Luckin Coffee, whose share price lost $5.5 billion when it was revealed that 40 percent of its sales had been fabricated in one quarter. Over the years, US regulators have acted against Chinese companies for problems of financial information, and dozens have been delisted, but never companies of such size as those now suspended for noncompliance, whose total capitalization is well over one trillion US dollars. They have been out of compliance for three years, so their time is up.

Li is all too aware that three weeks ago an international consortium of news media, consisting of the New York Times, the Asahi Shimbun in Tokyo, The Guardian in London, and the Sddeutsche Zeitung in Munich, featured front-page reports based on leaked documents that show that the accounts of two of the five, ChinaPay and JieChu, contained material inaccuracies. These companies are both leaders in Chinas financial services. They are highly innovative and have achieved phenomenal growth for a decade by financing Chinas private sector corporate borrowers, which are ill served by the state-owned banks, and depositors, who are denied a proper rate of return by those banks. They harness fintech brilliantly, but have engaged in shadow banking, taking risks they have concealed from the financial regulators, except for those whose complicity they have bought with large bribes. Naturally, the companies have denied the accusations just published, denouncing the documents as forgeries. The SEC has responded by saying that if they will grant the PCAOB full access to their books, the truth or falsehood of the allegations can be established.