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US-China financial ties are fraying as conflicting national concerns about technology transfer, corporate transparency, and data security threaten everything from Wall Street trading in Chinese corporate giants to American venture-capital investments in China’s startups.
The pressure to separate the two countries’ financial markets came to a head over the past year, mirroring the centrifugal political forces that are straining bilateral trade in technology and other goods.
Washington has to calibrate whether it is willing to risk that market instability and whether it wants to face a backlash from powerful US financial interests who are happy to make money in China.
Foreign capital surged into China’s markets—especially government bonds—as the country’s economy recovered from its pandemic-induced 2020 slowdown and as US venture capitalists pumped money into Chinese startups at close to the pre-pandemic pace.
Actions like these have already reduced the market capitalization of Chinese companies listed on Wall Street by some six hundred billion dollars, and those losses likely will mount as more Chinese firms shift their listings to China’s stock markets.
Nonetheless, US institutional investors continue to buy substantial amounts of Chinese government bonds and stocks on the other side of the Pacific, and Chinese holdings of US government securities consistently top one trillion dollars.
That seed money has played an important role in funding Chinese industries ranging from semiconductors to biotechnology, and one industry estimate shows that around one third of all Chinese venture-capital deals by value in recent years include US investors.
Other types of investment in China facing scrutiny are securities based on market indices that include Chinese stocks and bonds, which generate large amounts of passive institutional investment.
Regulators have proposed rules to limit overseas share issues based on variable interest entities, shell companies that have operated in a gray area of Chinese law and enabled billions of dollars of Wall Street IPOs.
Over the past year, the Chinese government has put in place data-protection laws aimed at tightly controlling the use of corporate data in China and its transfer abroad.
Under the Holding Foreign Companies Accountable Act , passed unanimously by the US Congress in 2020, Chinese companies can no longer avoid the scrutiny that all other companies listed in the United States endure.
The SEC’s Public Company Accounting Oversight Board last month issued a determination that it has been unable to inspect or investigate sixty-three public accounting firms in China and Hong Kong that conduct audits of Chinese-listed companies, the first step under the HFCAA toward an SEC determination that it cannot audit the 2021 accounts of Chinese-listed companies.
In apparent anticipation of this outcome, the Hong Kong Stock Exchange already has loosened the rules for companies to make secondary listings, a move that could open the door to at least twenty-seven of the largest New York-listed Chinese companies, according to Goldman Sachs .
For Chinese corporations that once commanded a global stock-market capitalization of more than two trillion dollars on Wall Street, the issue becomes whether the process of separation will accelerate.
As with trade sanctions against China, the best course for US policy would be to retain a singular focus on technologies with national-security implications, including those being funded by venture capital.