ROBBY STEPHANY SAUNDERS, NATIONAL SECURITY ADVISER, COALITION FOR A PROSPEROUS AMERICA
January 12, 2023
For two years, China has aggressively pursued a zero-COVID policy of strict lockdowns. Beijing's harsh enforcement of this approach has generated widespread internal opposition—and demonstrated the heavy-handedness of President Xi Jinping's authoritarian regime. But now, in the face of significant supply chain disruptions, Xi has chosen to lift the quarantine. Wall Street is praising the move—and calling for new investments in China.
However, little has changed within the Chinese Communist Party (CCP), and U.S. investors would be wise to steer clear of such a flawed, totalitarian regime.
There's an obvious risk when it comes to investment in China: Beijing's continuing opacity. Consider the recent, sudden disappearance of export data for Xinjiang—the region of western China that's home to the slave labor of thousands of ethnic Uyghurs. Now that U.S. law has banned Chinese goods produced by Uyghur forced labor, Beijing has simply removed Xinjiang's export data from its economic reports.
Essentially, China wants to keep using Uyghur labor—and try to hide it from the world.
Wall Street should want no part of such unacceptable behavior. But if human rights concerns aren't enough, there's also the basic question of financial security. It's hard to trust a regime that prioritizes political control, disinformation, and internal crackdowns above all else.
For starters, a wide array of Chinese companies trading on U.S. stock exchanges continue to hide their books from U.S. investors. Despite the passage of the Holding Foreign Companies Accountable Act (HFCAA), retail and institutional investors still face significant risks from questionable Chinese companies.
The Public Company Accounting Oversight Board (PCAOB) has been tasked with scrutinizing Chinese companies traded on U.S. exchanges—and delisting them after three years if they fail to provide proper audits. However, PCAOB's agreement with Beijing only allows U.S. investigators to scrutinize a small subset of audit firms—and an even smaller sampling of transactions and audits. It's unlikely that the PCAOB will be able to fully investigate accounting firms headquartered in mainland China and Hong Kong.
This lack of thorough oversight means U.S. investors simply don't know what they're getting. And it certainly precludes any meaningful guarantees that Chinese companies are following U.S. securities laws.
Even if Wall Street has no qualms about such lawlessness, there's also China's poor track record. That's evident in the tens of billions of dollars in western investment capital that have been wiped out by risky opportunities.
Consider the failed IPO of ride-hailing giant Didi, which collapsed under the weight of an investigation by the Securities and Exchange Commission (SEC). Or, the preemptive delistings of five major Chinese companies from the New York Stock Exchange (NYSE)—including PetroChina and Sinopec. All five companies simply pulled out of the NYSE when it became clear they couldn't comply with U.S. regulations. Or, consider China's sprawling real estate giant, Evergrande, which is now crashing due to roughly $100 billion of debt.
This is not the track record of a reliable investment market. Of course, Beijing likes to tout its "developing" economy, and that it's an "emerging market." However, the World Bank has projected that China's economy will continue to slow—and that its recent growth is "unsustainable."
If U.S. investors don't want to get fleeced by Beijing, they should look to the wise scrutiny employed by the state of Tennessee's Treasury Department. That's because Tennessee's treasury regularly evaluates emerging market portfolios. And for the last 10 years, the Tennessee Consolidated Retirement System (TCRS) has not invested in China. The country simply has never scored well enough to merit investment from the TCRS.
The risks of China investment are already increasing, and at some point, companies will likely have to pull out of China. But Wall Street remains focused on Beijing following the recent Global Financial Leaders' Investment Summit in Hong Kong. At the summit, China offered assurances on the security and stability of its internal market.
However, China can never provide the safe, stable business climate that investors want. Any regime that prioritizes control above all else is hardly concerned about the solvency of U.S. investors.
It's time for Wall Street to disentangle from the mess that Beijing is cooking up. Whether it's human rights abuses, political crackdowns, fraudulent companies, or massive debt, China's economic sprawl poses a widening problem. And Wall Street should get out before it's too late.
Robby Stephany Saunders is the national security adviser at the Coalition for a Prosperous America.