President Donald Trump’s trade war with China has prompted a broad rethinking of how the American and Chinese economies have become so intertwined, leading some manufacturers to trim supply chains in China and the American authorities to start cutting off access to crucial technology for Chinese companies like Huawei.
Now another important area is getting a close look: financial markets.
Some trade experts and others urging the Trump administration to keep a hawkish stance are discussing whether the White House should curb China’s access to Wall Street. Chinese companies have raised tens of billions of dollars through American financial markets in recent years.
The so-called decoupling is part of a broader effort by trade hawks to weaken the economic relationship between the two countries, which they argue has grown too close.
Steve Bannon, Trump’s former chief strategist, said there were ongoing efforts inside and outside the administration to rethink China’s role in U.S. stock markets, in part because of a lack of transparency about the ultimate owners of Chinese companies.
“The New York Stock Exchange and Nasdaq are breaching their fiduciary responsibility to institutional investors, the pension funds of hardworking Americans,” Bannon said. “It’s outrageous. All of it should be shut down immediately.”
Bannon pointed to the surge of “reverse mergers” in the early 2000s, in which Chinese companies with often inaccurate financial disclosures were able to gain listings on stock exchanges in the United States by acquiring very small, publicly traded American companies. Through these transactions, these companies gained access to significant capital in the United States, but proved to be empty shells.
Adding fuel to the discussion, Alibaba, the Chinese e-commerce giant that held a hugely successful initial public offering in New York five years ago, is now considering also listing its shares in the semiautonomous Chinese city of Hong Kong, according to a person familiar with the matter. The person, who asked for anonymity because the discussions were not public, said the move was not under consideration because of geopolitical worries.
The outlook for the financial sector on both sides of the Pacific is starting to change. “There are growing calls on the U.S. side for complete decoupling, which is causing Chinese enterprises to re-evaluate their reliance not just on U.S. technology but also on other U.S. resources, including financial markets,” said Andy Mok, a senior fellow at the Center for China and Globalization, a leading research group in Beijing.
China has long considered Wall Street an ally. In the late 1990s, Beijing appealed to senior financial executives to lobby the Clinton administration to allow it to join the World Trade Organization, the club of nations that sets global trade rules. Senior executives of major firms like Goldman Sachs and Blackstone Group often meet with top Chinese leaders.
Big banks see the fast-growing country as an important source of business, even if they have largely been blocked from competing in China’s tightly controlled financial system. Chinese companies have raised tens of billions of dollars through American financial markets in recent years. Wall Street banks have earned big fees from advising Chinese businesses on IPOs and on acquisitions of American businesses and real estate.
“China is full of amazing entrepreneurs whom we look forward to welcoming,” said Robert H. McCooey Jr., a senior vice president of listing services at Nasdaq.
The Trump administration hasn’t announced any moves to cut off China, and Chinese companies continue to enjoy access to American markets. Just two weeks ago, Luckin Coffee, a Chinese competitor to Starbucks, surged in its trading debut in New York, though its shares have since traded lower.
But both sides have offensive plays if the trade war intensifies. Limiting access to the American financial markets would leave Chinese companies without a ready source of capital for their expansion plans.
Chinese entities, mainly the country’s central bank and sovereign wealth fund, own at least $200 billion in shares in the United States, by one estimate, giving Beijing a possible additional weapon should Chinese leaders decide to sell. China’s economic policymakers are aware of that extreme option, people familiar with the policymaking said. They insisted on anonymity because of the political and diplomatic sensitivity of the issue.
Such a move could shake the American stock market, which Trump considers a barometer of his success. For many years, policymakers, economists and bankers have asked what might happen to the U.S. economy should China suddenly dump much of the $1.3 trillion it holds in U.S. debt.
Selling stocks could be more potent than paring back bonds. Stock markets tend to respond to smaller sums of money than U.S. government bonds do because the market for Treasury bills is simply so big.
There is no sign so far of a Chinese desire to escalate the trade war that way.
China is unlikely to dump shares quickly, said Mark Sobel, a former longtime Treasury official who is now the United States chairman of the London-based Official Monetary and Financial Institutions Forum. Doing so would not only upset the United States but could also mean selling shares at a loss during a temporary dip in prices, which would hurt the investment return on China’s assets.
“In my experience, China’s reserve managers have always acted in a professional manner and sought to promote financial stability,” Sobel wrote in an email.
In the past, Chinese government agencies have quietly and gradually sold part of their American stock holdings when they have needed extra dollars to help manage the value of the currency, said Brad Setser, an economist at the Council on Foreign Relations in New York.
Chinese firms that start changing their relationship with American financial markets now face questions over whether their moves are trade-related.
Shanghai-based Semiconductor Manufacturing International Corp., a Chinese computer chip maker traded mostly in Hong Kong, is shifting the trading of its American depositary shares from the New York Stock Exchange to the far less visible over-the-counter market. SMIC, as it is known, attributed the decision to low trading volume in its shares in New York.
“SMIC has been considering this migration for a long time and it has nothing to do with the trade war” or with the trans-Pacific dispute over Huawei, a Chinese tech company, SMIC said in a statement in response to questions. “The migration requires a long preparation, and timing has coincided with the current trade rhetoric, which may lead to misconceptions.”
For Alibaba, a Hong Kong share sale could allow more Chinese investors to put their money in a company that many of them use in their daily lives. China heavily restricts how much money its people can move overseas but has allowed them greater access to markets in Hong Kong, a territory governed by a different set of laws.
Alibaba’s stepped-up discussions over listing in Hong Kong were reported earlier by Bloomberg.
Alibaba has long discussed selling its shares in China or Hong Kong, so it is not clear what role, if any, the trade war had in its considerations. Jack Ma, the co-founder of Alibaba, had said at a conference in January 2018 that he would consider whether to do another stock listing in Hong Kong.
Mok, at the Beijing research group, said that Chinese companies are now more likely to think twice about depending on American financial markets. “There is no desire on the Chinese side for decoupling,” he said, “but it is maybe a prudent management decision to reduce risk exposure.”