Wall Street struggles to avert peril in latest US-China flashpoint

Wall Street dodged the carnage of the US-China trade war, but it could be among the biggest losers from the latest flashpoint between the two nations — and it’s struggling to mount a defence.

Financial firms’ angst is focused on legislation pending in Washington that threatens to kick Chinese companies, including widely held behemoths like Alibaba Group Holding and Baidu, out of American stock markets. The crackdown, which US lawmakers say will protect investors from fraud and safeguard national security, would impact much of the financial industry.

The New York Stock Exchange and Nasdaq Stock Market are fretting about losing listing fees. Giant asset managers are worried about the effect on emerging market indexes and exchange traded funds that they sell to investors. And investment banks that take companies public are concerned that it might be too late to mobilise against the bill, which gained significant headway last month when the US Senate approved it unanimously.

With perhaps billions of dollars in revenue at stake, it’s surprising how tight-lipped Wall Street has been about the push to impose the tougher restrictions. Financial executives say their hesitancy to speak out stems from how widespread the hostility toward Beijing has become on Capitol Hill, particularly with the backdrop of a bitter presidential election.

Lobbying against the bill arguably means siding with Chinese companies over US investors, a position that would anger Republicans and Democrats. But if the legislation clears the House and is signed by President Donald Trump, US financial companies might be among the businesses that bear the brunt of any reprisals from Beijing. Firms also fear an escalating tit-for-tat between the countries that could bring even costlier policy changes.

“Tensions are very high,” said Shaswat Das, an attorney at King & Spalding in Washington who previously worked for the Public Company Accounting Oversight Board — the regulator that’s at the heart of the dispute over Chinese companies listed on American exchanges. “It’s sort of like a perfect storm for legislation like this to be passed.”

The strains are especially dicey for firms such as Goldman Sachs Group, JPMorgan Chase & Co and BlackRock that have charged ahead with plans to expand their businesses in China. They’ve been lured by the chance to make inroads into the nation’s $47 trillion financial industry, which serves the fastest-growing cohort of millionaires on earth. China this year allowed Wall Street to apply for full ownership of its local ventures, a major step in opening up to foreign firms.

This overview of how stock exchanges, banks and mutual-fund companies are grappling with rising friction between the world’s two biggest economies is based on interviews with more than 15 executives, lawyers and government officials. Most asked not to be named to avoid blowback from US lawmakers and the Trump administration, which has clashed with China over trade policy and blamed it for the coronavirus pandemic.

Surprised senators

The Senate bill, which took the SEC and even some members of Congress by surprise when it passed without debate on May 20, would prohibit Chinese companies from trading in the US if PCAOB inspectors aren’t allowed to review their auditors’ work for three consecutive years. The businesses would also have to certify that they’re not controlled by China’s Communist Party.

China has long refused to let the audit regulator scrutinise its accounting firms. Despite not adhering to that regulation, there are more than 200 Chinese corporations that have been allowed to trade on US exchanges, according to the PCAOB. Their market capitalisation is roughly $1.8 trillion, with Alibaba making up about one-third of the total.

Luckin Coffee Inc.’s recent disclosure that it’s being investigated for accounting irregularities in the US and China has exacerbated concerns about potential misconduct. Since reaching a high of $50 a share in January, the fast-growing Chinese chain has fallen more than 90% in Nasdaq trading, a plunge that’s erased about $11.5 billion in market value.

“It’s asinine that we’re giving Chinese companies the opportunity to exploit hardworking Americans,” said Senator John Kennedy, a Louisiana Republican who’s sponsoring the bill with Maryland Democrat Chris Van Hollen.

Outspoken lawmaker

Kennedy, known for being outspoken, has been quick to attack those he thinks are undermining his effort. After learning that Securities and Exchange Commission officials had discussed revisions to his legislation with House lawmakers, Kennedy accused the agency of lobbying against it in a Fox News interview.

While the agency denied the charge, it had given House staff members a long list of suggested changes to the Senate bill, documents obtained by Bloomberg News show. The SEC ultimately offered a much narrower set of recommendations that are mainly aimed at limiting the legislation’s impact on US corporate subsidiaries operating in China.

Still, the episode served as a warning to Wall Street about the backlash it would likely face for aggressively opposing the legislation.

SEC Chairman Jay Clayton supports the Senate bill and believes the status quo of Chinese companies listing on American exchanges without adhering to US regulations is “unacceptable,” Chandler Costello, an agency spokeswoman, said in a statement. Before joining the SEC, Clayton was a partner at law firm Sullivan & Cromwell, where he worked on Alibaba’s 2014 US IPO.

The delisting measure appears to have momentum, and is likely to pass the House, lobbyists said. Financial Services Committee Chairwoman Maxine Waters has told people that she will not impede its progress as long as the Senate agrees to pass a separate bill that requires public companies to report annually on the ethnic, racial and gender diversity of top executives and board members.

In a Fox Business interview last month, Trump indicated he’s frustrated that Chinese businesses aren’t following US accounting rules, though he cautioned that companies might just move their stock listings to London or Hong Kong if the US got tougher on compliance. Trump subsequently ordered the Treasury Department, SEC and other agencies to study the issue, and submit recommendations to him by early August.

Exchanges’ lobbying

NYSE and Nasdaq would be among the hardest hit if the US kicks out Chinese businesses because they would lose millions of dollars in fees the companies pay to be listed on their exchanges. Their lobbyists have succeeded in killing similar legislative efforts in the past.

This time, however, it’s clear the ground has shifted. Lawmakers haven’t been receptive to suggestions that the legislation should only impact companies seeking new stock listings, which would insulate businesses already trading in the US

And the exchanges, according to three people familiar with the matter, haven’t been able to persuade the US Chamber of Commerce to weigh in against the bill. The nation’s biggest business lobby sees little upside in opposing it.

In a statement, NYSE said that if the bill passes, the exchange hopes regulators implement the legislation in a way that “delivers investor protection based on transparency” and ensures it’s not just “a privileged few” who can buy shares of Chinese companies. Nasdaq declined to comment.

Tom Quaadman, executive vice president of the chamber’s Center for Capital Markets Competitiveness, said “it is important for the US and China to come to agreement on these issues.”

For Wall Street, there’s also a view that they should save their ammunition for more important fights — and there are many more likely coming. One piece of legislation that is especially troubling would punish financial firms for doing business with Chinese officials who are seeking to impose a sweeping security law on Hong Kong.

The bill, introduced last month by Van Hollen and Republican Pennsylvania Senator Pat Toomey, responds to criticism that China’s proposed law would curb freedoms in Asia’s financial hub. Bank lobbyists privately say that they fear the legislation would pass easily if it ever reaches the Senate floor.

© 2020 Bloomberg