The Trump administration is considering cutting back on investments in China, a source familiar with the matter told CNBC Friday. Stocks fell in response, with the Dow Jones Industrial Average shedding over 150 points.
Stephen Roach, a senior fellow at Yale University and former chairman of Morgan Stanley Asia was quoted as saying: If the Trump administration were to go through with that move, “it would be an unmitigated disaster.”
“Open access to each other’s markets [is] really important, especially with China likely to be the biggest consumer market in the world in the first half of this century,” he told CNBC’s “Trading Nation” on Friday.
Just in: White House weighing limits on U.S portfolio flows into China. Stocks fall pic.twitter.com/CmQFdfR6Ei
— Bloomberg Markets (@markets) September 27, 2019
It goes against everything the two countries have been working on for over ten years – negotiating what is called a “bilateral investment treaty..” U.S. investment in China’s domestic markets are limited — residents had US$203 billion of long-term mainland Chinese financial assets as of June, according to the U.S. Treasury.
On the other hand, Chinese companies have US$1.2 trillion in market capitalization on three key U.S. exchanges as of February, according to a report by the U.S.-China Economic and Security Review Commission.
“It obviously adds yet another layer of uncertainty and does not bode well for a positive outcome for coming trade negotiations,” said Amir Anvarzadeh, a market strategist at Asymmetric Advisors Pte. in Singapore, according to BNN Bloomberg. “It will force Chinese firms to relist in Hong Kong and China.”
Roach is very concerned. “We have bilateral investment treaties with 42 countries. China has them with 145. Free and open investment is the best way to enhance cross-border opportunities for multinational corporations, so we’re going the wrong way. This really would concern me if we were to make progress on it.”
I will be on @cnbc at 1:00pm ET today to discuss this. September 27, 2019
U.S.-listed Chinese companies already under pressure
According to Market Watch, Chinese companies are already experiencing pressure because their financial statements are allegedly not at the same standard of U.S. firms, exposing American investors to potential corporate governance problems and outright fraud.
Congress has introduced at least two bipartisan pieces of legislation aimed at pushing U.S.-listed Chinese firms to comply with auditing rules in the U.S. and if those companies failed to submit to regulatory oversight, they would face delisting. Beijing has pushed back, saying they don’t want overseas regulators examining the audit work of domestic accounting firms.
Patrick Chovanec is the Managing director, Chief Strategist at Silvercrest Asset Management, an Adjunct Professor at Columbia SIPA, and former business professor at Tsinghua University in Beijing. He is worried that if US investors weren’t allowed to include Chinese stocks and bonds in their portfolios, they could risk underperforming their benchmark indexes.
The underlying concerns have merit, but how to deal with them without creating a lot of collateral damage is tricky. Abruptly delisting Chinese firms en masse would clearly send shock waves through markets.
— Patrick Chovanec (@prchovanec) September 27, 2019
