Last week, the US Congress officially passed a bill that requires secretive Chinese companies to remove themselves from American stock exchanges. The bill applies to all foreign firms, and was framed by the regulators as a means of protecting investors. In the wake of numerous corporate scandals in China, the policymaking is a welcome move. However, beneath financial concerns there are strategic ones. The Chinese state runs deep, and military suspicions are beginning to emerge around otherwise innocuous firms. The new bill is a restatement of a landmark piece of legislation passed in 2002, whose remarkable author, Paul Sarbanes, has just died.
Sarbanes was a former Senator who had a long and influential career outside of the Congressional spotlight. He introduced the first article of impeachment against the dethroned U.S. President Richard Nixon. However, he was best known for the Sarbanes-Oxley act of 2002, which underpins the bill presented to the House last week. The act sought to reform big business practices after a series of accounting scandals in 2002. In the space of a year, twenty-one of the world’s most valuable companies were found to have committed accounting fraud. Sales and revenue were being inflated where it suited them, and debt obligations masked to make their business models seem more sound. The now-defunct energy company Enron was at the centre of this, having earned the admiration of investors on the back of falsified and misleading numbers. The revelations also led to the collapse of one of the biggest accountancy firms in the world. After witnessing the record-breaking $115bn bankruptcy of WorldCom, Congress moved to disinfect corporate America. Standing in the shadow of the dotcom bubble burst, which saw frenzied speculation on internet stocks led to some $2tn of losses, they were all the more keen to make the real financial performance of firms clearer.
The bill just passed by the House is known as the Holding Foreign Companies Accountable Act. Few votes today are swayed by more than a token majority, but this bill was passed unanimously in the Senate earlier this year. Skopos Labs, a machine-learning platform for policy analysis, gave it a 96% chance of being signed into law by the president, which is the final stage of approval for any bill. On the one hand, Trump has argued that the toughened approach will simply cause Chinese firms to relist their stocks in other financial centres. But in the twilight hours of his presidency, it seems likely that he will want to maintain his image of being tough-on-China. In contrast to the trade war, or his ad hoc preventions of Chinese investment in strategic firms at home, the policy contained in this bill has a good chance of lasting.
At a time when publicly traded firms can be valued at a hundred times what they earn, the issue of proper accounting is becoming important once more. Investors in Chinese companies have been shaken by a series of scandals this year that parallel what happened in 2002. iQiyi, Luckin Coffee, and TAL were hot property on public markets before aspects of their finances were discovered to be fraudulent. Between them, they raised billions of dollars during their Initial Public Offerings, drawing from the deep pockets of the international community. iQiyi and Luckin were growing at a rate that could have seen them overtake their Western rivals, Netflix and Starbucks. The former was found to have inflated its number of active users by 200%, whilst the latter fabricated over $310m worth of sales. Although the issues with TAL to have been caused by a rogue employee rather than corporate conspiracy, electric vehicle maker Kandi was added to the roster of 2020 scandals whilst the bill sat in the House last week. The difficulties in knowing what is really going on inside firms is not helped by the fact that Western investors are often out of touch with the environments these firms operate in. Although those based in Asia cannot keep up with the Chinese government’s policy whiplash at the best of times, they have a better chance than far-off foreigners who do not speak the Chinese language.
The HFCAA, however, is not as simple as submitting foreign corporate accounts to more scrutiny. It may be impossible for Chinese firms to do what Congress wants them to do. As per a bill enacted by the Chinese Communist Party in March, companies incorporated domestically are not allowed to submit financial papers to foreign authorities without first seeking local approval. Permission is not likely to be granted, given that the legislation follows on from a number of state secrecy laws which, in practice, forbid foreign auditing too. One key problem is that most of China’s major companies are partly state-owned or controlled, meaning that disclosing the firm’s documents could also expose the workings of the government. This is dubious at the best of times, but given the militant secrecy of the Chinese state and increased tensions between the West and China, it is no surprise that disclosure is a punishable crime now. Mainland Chinese firms have always been reluctant to hand over their financial papers, and as far back as 2012, it had become a point of frustration for American government bodies.
Chinese firms will be given three years from now to submit their documents to audit, but even so they will be required to disclose state control. The choice is then to admit the involvement of the Chinese Communist Party, or to remove their listings from American stock exchanges. In China it is a requirement that every major company reserve a seat at the executive table for a state representative, and so the matter of state control is much more of a grey area than in other jurisdictions. Although the government rarely makes decisions for firms, the pressure of an official presence causes corporate leaders to act in line with political policy; beyond what is required of them by the technicalities of the law. In this way, Xi Jinping is able to maintain a firm grip on the neck of the world’s largest economy.
But concerns around government control betray the threat Washington is feeling from the Chinese state. Among streaming services and renewables projects, there are also rocket manufacturers listed on foreign stock exchanges. Growing military firms often list on public markets to fund their setup costs, as Britain’s BAE systems once did. The same goes for those in China. However, it is often difficult to separate military-industrial firms from the innocuous ones. Technologies needed to develop advanced weapons are often drawn from other industries, especially when guns and bombs are becoming increasingly digitalised. Chinese listed company SMIC has been keen to get its hands on some new machines to make latest-generation microchips, but a deal with the Dutch producer of the machines was blocked by the White House. In an unprecedented move, a team of delegates flew to meet with the Netherlands’ Prime Minister and intervened before the machines could be exported. The issue was that the new materials and processes used in the chips, whilst also improving consumer electronics, could enable China to build long-distance missiles that could strike the US from Beijing. Although the Chinese military is a long way behind that of the US technologically, it is not for lack of trying, and moves like this are increasingly seen as the way to preserve the global balance of power.
If enacted, the new legislation will be a nod to China’s rise. On the one hand, its accountancy requirements will allow America to reinstate its position as arbiter of truth, a central regulator of the economy and of politics. On the other, the fact that Congress has been keen to reassert this position amidst the massive growth of firms ideologically at odds with the US tells us that the American advantage is now beginning to slip.
State ownership and control of foreign listed firms have not caused trouble for American authorities until now, and so the bill makes the statement that the Chinese Communist Party now plays an outsized role in global business. American legislators do not want their money, or their country’s money channelled into firms that will ultimately fund the advantage of a foreign state. Who can blame them? For the past two-hundred years, the world has been ruled by people that speak their language. This period has coincided with an unprecedented peace for those living in democracies, and as many scholars have argued, it may be that this peace has been brought about by the military hegemony of single states – first Britain, and then the US. The structure of Atlantic capitalism has underwritten that strategic advantage, and so it is all the more abhorrent that these structures should beget the creation of a rival. Nonetheless, as China moves deeper into the workings of the global market economy, a better interpretation of what is happening is not to be found.