In recent weeks, a number of large Chinese firms have delisted from western stock markets, including the Dow Jones and even the Hong Kong exchange. This appears to be driven by a combination of tighter state control in both the U.S. and China.

Derek Scissors is a senior fellow at the American Enterprise Institute, and a specialist in the Chinese economy.

SCISSORS: There are two different things going on. There are several high-profile companies de-listing from stock markets like DiDi, China Mobile, and China Telecom. And then there’s the prevention of new listings. It’s hard to quantify what kind of lost business there is because we don’t know what would have happened if the U.S. hadn’t required more disclosure at the same time that China is insisting on less disclosure. 

Beijing wants more data control and is telling its firms they can’t go overseas without passing various security reviews, which basically means don’t share any information. The Chinese market cap in the U.S. has definitely plunged, I would say, on the order of 50%. There’ll be a comeback, because sentiment won’t always be this negative. But I do think for that segment of the market, it’s been a big hit.

There’s an increasing risk because the most lucrative firms that turn profits in China are private, and they’re the ones that have been targeted by the policy intervention on the Chinese side.

BRINK: Could you just unpack what is driving this on both sides? You mentioned the Chinese requirements, and then there’s the new SEC requirements for foreign companies. 

SCISSORS: So the U.S. has been, I don’t know how else to put it, engaged in essentially a fake policy for years, where we said we demand more disclosure from China, but we don’t do anything. The Obama administration demanded this, but then negotiated a “settlement” with the Chinese where nothing changed at all. The Trump administration brought this up again. And then we passed legislation saying, “If you don’t fix this in three years, we’re going to delist you.” 

Last month, the SEC finalized its rules for implementing what is called the Holding Foreign Companies Accountable Act, which permits the SEC to de-list companies if the Public Company Accounting Oversight Board decides it is unable to audit a company fully.

There was this idea that somehow we could come to a negotiated agreement where the Chinese would obey our disclosure laws. As a China expert, I knew that was never going to happen. The Chinese are never going to put disclosure requirements for foreign regulators above their own law.

Beijing Is Concerned About Data Loss

At the same time, the Chinese have become much more concerned about data loss. They’re now treating data like they treated manufacturing 10 years ago. Manufacturing is allowed to come to China; it’s not allowed to leave. Data is allowed to flow into China, it’s not allowed to leave. 

Which means if you have Chinese consumer data, for example, you cannot under any circumstances share that with a foreign regulator. 

The pressure from Wall Street to say “Don’t take away our service fees” has been reduced because the Chinese have just said, “Well we’re not going to let people list in America anyway.” So the reason this is happening now is not because the U.S. has become serious, it’s because China has made this business less lucrative.

BRINK: Do you see any kind of political solution to this, or is this just going to continue to roll on?

SCISSORS: Well, we may end up being backed into a corner because the Chinese will not disclose properly, so any concession would leave them less transparent than they were two years ago because Chinese laws have moved so far away from transparency. 

I don’t see how there’s a solution that isn’t just a complete climb down by the United States, and I don’t think that’ll happen this time because less money is involved. At some point, the nominal market capitalization of Chinese firms listed in the U.S., peaked at over $2 trillion. And now it’s not much more than $1 trillion. So a lot less money is now involved.

Money Is Still Moving Into China

BRINK: But meanwhile, the amount of U.S. money being invested in Chinese stocks listed in China continues to grow.

SCISSORS: Oh, it soared. At the end of 2016, the amount of U.S. money listed as invested in Chinese stocks and bonds was given by the Department of Treasury as $370 billion. And at the end of 2020, it was at $1.15 trillion. It more than tripled. That’s a $780 billion dollar increase. 

An important reason you don’t see Wall Street screaming about losing Chinese listings here is that they’ve just decided we’ll just send our money over there. The only people who are losing money are people who have services fees for listing on U.S. bourses, which is much smaller than the broader financial community. So the financial community’s response to, “Okay, we’re not going to get a flood of new Chinese IPOs in the U.S.” is like, “Fine. We’ll just go over and invest in Chinese firms in China.”

But there’s an increasing risk because the most lucrative firms that turn profits in China are private, and they’re the ones that have been targeted by the policy intervention on the Chinese side. So you can invest in state enterprises, but that’s sort of like deciding you just want to keep your money level, not actually make any.

An important counterforce to this is that the Chinese want the money. They have given U.S. brokerages more rights to own their business in China. So while the risk associated with some very important Chinese companies has risen, the control of the investment tools that American brokers have in China has also risen. And that fights against the negative sentiment.

We’ve sort of put up some barriers in front of the trade relationship, not that big, but some. And there are barriers in front of Chinese listings in the U.S. So where’s the opportunity to do business in China? It’s investing in China. 

While you could look at a couple of measures of U.S-China economic relationships, and they’re flat, or even declining, there’s this other measure that swamps those, and that’s the amount of money that’s pouring into China from the U.S. You can’t honestly talk about decoupling when you’ve tripled American portfolio investment in China in four years.