China-US Decoupling Gushes Out

In a flurry of statements on Friday against the backdrop of escalating US-China tensions, five of China’s biggest state-owned companies announced their intent to delist from the New York Stock Exchange — PetroChina Co Ltd, China Life Insurance Co, China Petroleum & Chemical Corp, Aluminium Corp of China and Sinopec Shanghai Petrochemical Co. which represent over 300 billion dollars in market cap.   

As of August 2022, the market cap of these Chinese giants are as follows: PetroChina ($132.11 billion); China Life Insurance ($94.88 billion); China Petroleum & Chemical Corp ($70.23 billion).  Aluminium Corp of China ($10.29 billion) is also the world’s second-largest alumina producer and third-largest primary aluminium producer; and, Sinopec Shanghai Petrochemical Co.($3.77 billion) is a subsidiary of Sinopec (market cap: $68.45 billion), and is one of the largest petrochemical enterprises in China. 

At work here primarily is a greater scrutiny of Chinese companies listed in the United States that the American regulators are insisting upon since the Congress’ legislation passed in 2020 during the Trump administration in this direction. The legislation followed the failure of protracted negotiations for the American regulators to gain full access to inspect the audit papers of US-listed Chinese businesses, which Beijing views as “crackdowns” on Chinese companies and as “financial decoupling.” 

Both in terms of the market cap of the New York Stock Exchange as a whole (which currently stands at $26.2 trillion) and in terms of American depository shares in the five Chinese companies, this development per se is not earthshaking but has implications.

Will it bring a bad name to the New York Stock Exchange? May be, eventually. Will it seriously impact on the Chinese companies’ operations? Unlikely. (For example, American depository shares in PetroChina represented approximately 0.45% of the total share capital of the company.) 

Nonetheless, it is a signpost that will be noted in financial markets, even as a growing number of Chinese firms are also positioning to delist from the US markets. Interestingly, the 2020 US legislation also includes a push to delist US-listed companies by changing audit rules. The US Securities and Exchange Commission has put 159 Chinese concept stock companies (companies that operate in China) on its delisting watch-list as of end-July. 

Considering that the race to maintain top position among global capital markets is fierce, the perceptions of global investors do matter and the exodus of high-potential Chinese firms cannot but reflect poorly on the New York Stock Exchange. The Wall Street is a powerful lobbyist, too. Therefore, the Chinese game plan would be to get the strict US regulations moderated, which currently is tightening the screws on Chinese companies raising money in the US unless they fully explained their legal structures and disclosed the risk of their business being interfered with by the Chinese government. 

Evidently, China’s interest lies in reaching a consensus. Going forward, the ultimate litmus test will be whether or not more large Chinese state-owned firms delist from the US markets. There are about 250 Chinese companies listed in the US. That is where the uncertainties in the US-China relations will come into play. 

It is only natural that Chinese companies will rearrange their financing approaches — for example, going public in the Hong Kong stock exchange — rather than expose themselves to rising political risks in the US. And political risks can come from a variety of sources. 

Traditionally, political risks could have been assessed in terms of policy decisions and shifts affecting trade tariffs, taxes, labour conditions, privatisation and regulation, political leadership changes, political volatility, or, uncertainty stemming from terrorism, riots, coups or war, etc. which could disrupt a company’s ability to execute its chosen strategy and ability to cost effectively deliver its products or services. 

But geopolitical risks, such as the Russian intervention in Ukraine, have introduced a new template altogether — the “sanctions from hell” froze Russian currency and gold reserves, confiscated Russian private assets, and evicted Russian banks from the western banking system. Top western politicians have hinted that similar horrible things could be done to China too,  if it extended help to Russia — although, that is easier said than done, given the sheer size of the Chinese economy compared to Russia’s and the high degree of interdependency in the EU-China trade and US-China economic relationships. 

Meanwhile, the Taiwan situation looms large. In the wake of House Speaker Nancy Pelosi’s visit to Taipei on August 2-3, Chinese commentaries have threatened “serious wide-ranging implications for bilateral ties, including in economic fields” — citing as example the decision by China’s leading electric-vehicle battery maker Contemporary Amperex Technology Co to put on hold its plans to announce a multi-billion dollar plant in North America. 

One unattributed commentary in Global Times threatened on August 4 that “With the start of major military drills around the Taiwan island, the mainland has actually started or accelerated the process of reunification, which the US cannot stop. That means China is, in effect, prepared for US intervention. One can only imagine what China will do to eliminate potential risks, including its massive holdings of US treasuries.

“China is the second-largest foreign holder of US treasuries, only after Japan. China’s holdings of US treasury securities dropped to $980.8 billion in May, falling below $1 trillion for the first time in 12 years… further deterioration of China-US relations will likely have a direct impact on China’s risk appetite for holding US treasuries, and reducing holding of US treasuries could become a precautionary option. That could deal another blow to the global standing of the US dollar— the real backbone of the US economy. 

“The Russia-Ukraine conflict has already dealt a severe blow to the credibility of the dollar. Now an escalation in China-US tensions could further weaken the dollar’s status if China cuts its holding of US treasuries. In this sense, in the long run, Pelosi’s graduation trip will eventually come back to bite the US economy in a way that will exhaust the dollar’s credibility.” 

That seems a stretch, but then, such blasphemous thoughts are being aired at all! The good part in all this is that both Washington and Beijing seem to agree that jaw jaw is better than war war. 

Broadly, the parting message that Kurt Campbell, the coordinator for Indo-Pacific affairs in Biden’s national security council, gave during his on-the-record press call yesterday on Pelosi’s visit was his confirmation that Biden and Chinese president Xi Jinping had raised the possibility of an in-person meeting when they last talked by phone in late July “and agreed to have their team’s follow up to sort out the specifics”.

Campbell said there were no new details to announce, but both leaders are expected to take part in the G20 meeting in November in Bali.

Interestingly, an influential Chinese editor noted on calm reflection, a full week after House Speaker Nancy Pelosi’s trip to Taipei, that “one of the reasons” could be that she intentionally used the Taiwan question to whip up “a storm of public opinion” and “create an atmosphere” for the passage of the CHIPS and Science Act last Tuesday, in a deft “combination of punches” against China. 

One never can tell in these extraordinary times in American politics! Actually, Campbell also singled out for disapproval Beijing’s  sanctions against Pelosi and her family members.

Campbell said the US would ensure freedom of navigation in the Taiwan Strait and in the region, but “We will not be reflexive or kneejerk. “We will be patient and effective. We will continue to fly, sail and operate where international law allows, consistent with our longstanding commitment to freedom of navigation and that includes conducting standard air and maritime transits through the Taiwan Strait in the next few weeks.”

Importantly, Campbell did not give details of when any such transits would take place, or confirm reports that the US had opted not to sail an aircraft carrier through the strait as the Biden Administration “did not want to escalate the tense confrontation.”