Biden’s China policy greater risk for U.S. financial firms than Trump

The Fearless Girl sculpture is seen outside the New York Stock Exchange (NYSE) during a snow storm in New York on February 1, 2021.

Brendan McDermid | Reuters

BEIJING – As US-China tensions continue to ease under a new administration, the risks for American investors with exposure to China will only increase, according to a report by Cowen.

“We believe President Biden poses a greater risk to financial firms on the Chinese front than President Trump,” wrote Cowen Washington Research Group’s DC-based analyst Jaret Seiberg in an April 7 release. “We believe that Team Biden will be more strategic, multilateral and more effective in confronting China than Team Trump.”

The relentless pressure from the US will likely turn Trump-era policies into a reality with initially long grace periods. This includes the deletion of Chinese companies from US stock exchanges, said Seiberg.

Tensions between the two countries escalated under former President Donald Trump, with an emphasis first on trade and then on technology and finance. The Trump administration wanted to curb US investment in Chinese companies and stocks through new regulations, but the policy had relatively less impact than tariffs and sanctions against Chinese companies.

US President Joe Biden has taken a firm stance on China since he took office in late January. His government called the country a more confident “competitor” and added more Chinese tech companies to a US blacklist on Thursday, citing national security concerns.

“(Delisting) will happen. Congress passed laws last year and we don’t see a likely scenario in which this law will be repealed,” said Seiberg, noting that Beijing is unlikely to allow the US to inspect audits . “This will likely force these Chinese companies to act in Hong Kong.”

In December, Trump signed a law stating that foreign companies cannot be listed on a US stock exchange if they fail to pass US Public Accounting Oversight Board exams for three years.

The board’s website lists around 300 cases of denied inspections, with the vast majority coming from US-listed Chinese companies like Alibaba and Baidu. Over the past 15 years, some Chinese companies were able to raise billions of dollars through stock market listings before their financial fraud was exposed, resulting in huge investor losses.

Despite growing political tensions, 30 China-based companies went public in the U.S. last year – they raised the most capital since Alibaba’s giant IPO in 2014 – and many more have gone public since then. Optimists said the three-year compliance deadline would give companies and politicians time to act.

Further investment restrictions

Cowens Seiberg believes the Biden government will block US investments in Chinese banks and expand a US investment blacklist to include more Chinese companies, especially those with alleged links to the Chinese military.

Chinese companies are likely to face greater challenges in acquiring US financial firms, including fintech startups, as restrictions on Chinese US consumer data acquisition remain in place, Seiberg said.

One of the extreme but very unlikely measures the Biden government could take is banning Hong Kong from clearing US dollars, he said. However, he does not expect the US to cancel China’s holdings of US Treasuries.

“It would destroy global demand for US Treasuries as foreigners fear it will become the next target,” said Seiberg. China is the second largest treasurer in the world.

The Biden government should also watch out for Beijing’s retaliatory measures.

China could suspend compliance with previous commitments and revoke changes that would allow foreign companies to gain a majority in their activities in China, including in the financial sector, Seiberg said.

– CNBC’s Michael Bloom contributed to this report.

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