Simone Gao: Hello everyone, welcome to Zooming In China Chat. I am Simone Gao. More Chinese companies have been removed from global indices recently. Is that trend irreversible? Will DIDI set off a US-China capital market decoupling, and does the Biden administration have the power and will to rein in Wall Street? I had these discussions with Roger Robinson. He is chairman of the Prague Security Studies Institute and former Chairman of the Congressional US-China Economic and Security Review Commission. He earlier served as Senior Director for International Economic Affairs at the National Security Council under President Reagan.
Simone: Thank you, Mr. Robinson, for joining Zooming In China today.
Roger: Nice to be with you, Simone.
Simone: Reuters reported that FTSE Russell is going to remove more China stocks from the indexes over U.S. ban. So, can you tell us what this means and why they made that decision?
Roger: Well, it’s hard to know precisely what’s on FTSE Russell’s mind. They have been notorious, frankly, in holding on to U.S. sanctioned Chinese companies as well as other Chinese corporate bad actors engaged in egregious national security and human rights abuses for a long time. I remember there was one month a couple of years ago when they added a thousand Chinese companies to their index, that obviously very little, if any, due diligence was performed concerning who these companies are, who their subsidiaries are, and what they’re really about, particularly in terms of the track records that I’ve talked about that are of such concern. So, I would say that FTSE Russell is not a leader in terms of responsible, prudent behavior and risk management vis-a-vis China. Let’s start there. This report suggested that they’re removing some 20 companies. I understood that they were from the Treasury Department’s Office of Foreign Asset Control list, which is the one that is associated with executive order of President Biden, 14032. And, uh, this does require all U.S. persons to be out of such listed stocks within, within 12 months. And effective August 2nd of this year, they’re no longer able to buy those securities, be they stocks or bonds.
Uh, they can only sell. So, the writing’s on the wall, and I think that Wall Street is finally figuring out, at long last, that the Biden administration is not going to ride to the rescue and rescind the executive order of President Trump. Indeed, they issued their own, which was not only a preservation of that executive order but was a strengthening and expansion of it, which you can be sure caught Wall Street off-guard. So, now that they don’t have a protector in President Biden and, with all due respect, Janet Yellen is not as ferocious a Wall Street supporter as was the previous Treasury Secretary, Steven Mnuchin, who worked very hard to deliver for Wall Street in making sure that these sanctions had as little teeth as possible. That’s not going to be as easy for Secretary Yellen. So, I think that FTSE Russell may understand, finally, that the writing is on the wall and that they’re going to start to do reputational damage to their brand. After all, we have to understand that the companies that they hold in their indices are associated, in part, with aiding and abetting genocide, with equipping concentration camps, with being responsible for funding advanced weaponry later to be used by the PLA to target U.S. forces, including submarine-launched ballistic missiles targeting American families.
I don’t think if you’re an index provider in the United States or, for that matter, a fund manager like a BlackRock or a Vanguard, you have in mind advertising that you’re holding these types of Chinese companies. So, at long last we seem to be making progress there, but much more needs to be done. I mean, 20 companies is a drop in the bucket compared to what’s required. So, I think the key here, Simone, is that we watch this space closely and judge these companies on what they’re doing as opposed to what they’re saying. So, we’ll see.
Simone: Right, yeah, even with that, actually you know some Chinese companies that are on the Communist Department’s entity list are publicly traded on the U.S. Stock Exchange for many years, and we’ve been talking about that for, for years. What is the situation now?
Roger: Well, it’s not good. The truth is that Wall Street has basically stonewalled or ignored the entity list since the inception of the capital markets issue back in March of 2019 when we first brought this to public awareness out of our firm. And, uh, as a result, they’re still holding companies that are on the entity list, and are there because of egregious national security and human rights abuses. For example, at the end of June of this year, as you know, five polysilicon companies of China were placed on the entity list. Why? Because they’re engaged, or were determined to be engaged by our government, in forced labor, read slave labor, practices. Well, that’s a very serious human rights abuse. I think we’d all agree. And yet, three out of those five companies are traded not only publicly in U.S. markets but are being held by some of the more prominent, some of the more prominent exchange-traded funds in the United States as well as the indexes. For example, Hoshine is one of the companies. It’s, uh, it’s held by MSCI and S&P’s emerging, uh, I believe S&P’s emerging markets index. In the case of Xinjiang Daqo, which is a subsidiary of a company, if you can believe it, that’s traded on the New York Stock Exchange. Uh, the case of Xinjiang GCL New Material, New Energy Materials Corporation.
It, too, is in the S&P BMI index. So, in other words, millions of Americans are still holding these companies. And I think the glaring inconsistency now, Simone, is that you can be on the entity list, which basically prohibits the sale of U.S. equipment technology services and components to those companies because of these serious offenses, and yet they’re free to fundraise in the U.S. capital markets. They’re free to be traded. They’re free to be included in indices and exchange-traded funds. They have all the prestige associated with being in the world’s deepest and most voluminous markets which is, you know, is a favorite of Chinese companies. So, they have, they’re being rewarded at the same time as they’re being penalized. And that is a major concern that has to be corrected by the Biden administration and by the congress.
Simone: Yeah, so this problem continued from the, from the Trump Administration into the Biden administration. What is the real cause of it? It’s just the inter-agency communication problem, or is there any bigger problem that caused this, and what do you think of the possibility of this problem being solved during the Biden administration?
Roger: I think the chances of it being resolved are pretty good, because simply it’s politically unsustainable. It can’t withstand the light of day. You can’t on the one hand deny American equipment and technology but allow tens or scores of millions of Americans to be funding those companies unwittingly in their investment portfolios and retirement accounts at the same time. If they don’t get that this is a, this is a glaring problem, then the Congress and the media surely will. So, I just don’t think it’s sustainable, but it does, it does have those in Congress concerned about this I think going forward, increasingly, with legislation that says if you’re one of the three hundred or so Chinese companies on the entity list, then you can forget about having the privilege and advantages of accessing the U.S. capital markets and raising funds there and trading there, etc. So, that day is coming, but as you know, this is been a very slow moving train in many respects because, again, the capital markets never saw the light of day, in U.S. policy, for better than 20 years prior to, uh, prior to 2019.
And it was only when it was the Thrift Savings Plan was gonna be adulterated with Chinese companies that were, again, guilty of human rights and national security violations that the President of the United States stepped in, in this case the previous administration, and said, “no that’s not happening. We’re not gonna have the american military and State Department human rights champions holding companies in their federal retirement account that are aiding and abetting these kinds of activities, that are building the weapons designed to kill Americans, that are engaged, again, in genocide and concentration camps. When you spend your life fighting for human rights as a government servant and employee, that’s not on, Simone. And so, that got the ball rolling, but as you can see, remember Wall Street, and we’re talking tens of trillions of dollars lobbying against this, trying to slow it down, trying to narrow it, and even trying to derail it entirely. And we’d be remiss if we don’t, if we forget that.
Simone: Right, right. So, this is not an inter-agency communication problem. It is the power of Wall Street. Okay. Next, I know you spoke highly of President Biden’s executive order on restricting U.S. investment in Chinese companies that are in the surveillance technology sector, but only surveillance. Don’t you think the scope is too narrow?
Roger: Oh, I do. I agree with you completely. And it shows very clearly in the example I gave you earlier concerning the five polysilicon companies engaged in forced labor. Well, the reason that they never got on the cap market sanctions list, which is, of course, the OFAC list of the Treasury Department, is because they weren’t in the technology surveillance sector. Well, excuse me, forced labor? And that’s okay? It’s not okay, right? And so, as a consequence, that human rights set of conditions in the executive order needs to be expanded or there needs to be a new list created by the Congress, which I call the Chinese corporate human rights abusers list, another official list that covers the entire human rights spectrum of abuse and says in clear, automatic circumstances that if you are this kind of egregious human rights corporate abuser, then you are not going to have the privilege of accessing or funding yourselves in the capital markets of the United States or anywhere else. As an American citizen around the world, you will not have access to those companies by law, and that will be an automatic feature of a new list if it’s required. So, it’s really up to the Biden administration, it seems to me. They can expand the current executive order to increase the scope of human rights coverage. That would be the easiest.
Or, they can go the hard way and have the Congress build an entire new list with automatic capital market sanctions awaiting any company, Chinese company, that ends up on that list.
Simone: Okay, okay. So, what do you think of the prospect of the Biden administration adopting a human rights abuser list?
Roger: I think it’s pretty high, reasonably high, despite the fact that the Treasury Department and the SEC and other like-minded agencies will be opposed because of Wall Street concerns, largely. But I don’t think, again, that you can, you can buck the tide of this political, uh, this political tsunami that’s happening here. The bipartisan support for getting tougher on China is now well understood, and the Congress is outraged in many cases by the fact that Americans, over a hundred million of them, are unwittingly engaged in funding the most nefarious activities of the Chinese Communist Party. They didn’t have in mind hundreds of billions and even trillions of dollars moving from American retirement accounts and investment portfolios into the People’s Liberation Army and into the construction or architecture of China’s surveillance state, for example.
That’s not what the American people have in mind. The Congress understands that. Nancy Pelosi’s a champion of human rights, and the Democrats are known for that position. And I don’t think you can just pretend as though you’ve solved the problem when you take such a narrow ban, as they have initially, even though it’s a good thing that they’ve done, but again, the surveillance technology sector? Good step. Too small, too narrow.
Simone: Speaking of Congress, they passed the Holding Foreign Companies Accountable Act in 2019. So, how much impact do you think this Act will have on Chinese companies who are contemplating a U.S. IPO?
Roger: Well, it should, it should concern them greatly, Simone, because there’s two forces at work here. The Chinese Communist Party for their part are, in effect, cracking down on Chinese companies seeking to list in the U.S. Perhaps they know that, that something we don’t, which is they’re not ever going to allow Chinese-audited companies to be subject to review by the Public Company Accounting Oversight Board of the United States. They’ve made plain that they have no intention of ever allowing our auditing entity to engage in reviewing their audited companies. And right there, that means a continued violation of federal securities laws. There’s not one Chinese company in the U.S. markets today that’s not in violation of U.S. federal securities laws, primarily Sarbanes-Oxley and this PCAOB audit trail. And you know that they don’t disclose their financials, because they’re regarded as State secrets. I mean, these companies are black boxes, and that’s in part why the Didi, the Didi Global IPO debacle is of such concern to Congress. Again, another black box that, on day four of trading, lost $16.4 billion, a value almost 20% of the stock’s value disappeared in the first four days of an IPO on the New York Stock Exchange. So, Congress is very concerned about this. That’s why they passed the accelerated Holding Foreign Companies Accountable Act by the Senate just recently. They were trying to reduce the years that, uh, from three to two, where those Chinese companies will have to be delisted if they don’t come into compliance, full compliance, with U.S. federal securities laws.
And as you may know, the SEC was just revealed by the Financial Times to have tried to undermine the intent of the Congress, and the earliest possible protection, of scores of millions of unwitting American retail investors by not issuing a rule on the delistings. And they’re claiming that the clock hasn’t started on those three years, even though it was passed in 2019. And the FT speculates that there won’t be any delistings of Chinese companies till 2025, because, simply, they didn’t issue the rule necessary to start the clock. They think a clever little gambit like this is going to work. I mean it’s, it’s, it’s naive and it’s very disheartening that they would try a maneuver as cynical as this, particularly given the national security and human rights stakes. And it will not stand. I mean the Congress isn’t going to sit there and permit the SEC to overwhelm American law just because they don’t want to issue the rule. Really? I don’t think so. So, I’ll tell you what, either the administration’s gonna step in there and preserve the integrity of the timetable and make sure that it’s no more than the three years and, hopefully two years once the accelerated bill is passed, and that if they don’t, then there should be veto-proof legislation passed immediately which offers a date certain by which Chinese companies that are not compliant are delisted, by law, and that’s it. So, it’s one way or the other, but imagine the SEC trying a gambit like this, as transparent as it is.
Simone: Right. Just out of curiosity, when do you think the Holding Foreign Companies Accountable Act will be fully implemented? I know July 12th is the date they finish the public feedback on the bill. Does that mean after July 12th, the bill will be fully implemented? I’m not talkin about the Chinese companies being given three years to submit their accounting records otherwise they will be delisted. I’m talking about the date they are required to submit detailed accounting records when they go public in the U.S. Is that after July 12th this year?
Roger: That’s not my understanding. My understanding of the original bill, the Holding Foreign Companies Accountable Act, passed at December 2019, I believe it was, unanimously by the House and Senate I might add, called for the clock to start on the three years within 90 days of enactment of that legislation coming into law which, which would obviously create a date years before 2025, right? Uh, so it’d be 2020, it should be 2023, worst case, and with the new bill that’s been going, already gone through the Senate, it’d be 2022, so then this is not going to be left to the SEC. I don’t know where they think that they can step in and take over and deliberately undermine the will of the Congress and American law. I don’t know where they think that they’re somehow above the law and that they’ll decide what the timetable is, and if they wanna keep Chinese companies in the U.S. markets against the law, they’ll do it till 2030 or 2035. In other words, what’s to stop this from just turning into a fiasco? I think it already is. So, that’s not going to stand, in my opinion, Simone.
Simone: Okay, okay. Well, as far as I know, I mean they seem to be going through a process, a due process. For example, you have to have these discussions of the details, how this is going to be implemented, and then after that, you’re gonna have the public feedback, uh, period. And after all that is finished, then the law will be fully implemented, and that’s July 12th this year. What is your understanding?
Roger: I think it’s 90 days after enactment of the law which, uh, the Holding Foreign Companies Accountable Act, the original one, and three years from that date, it’s over for Chinese companies that didn’t submit themselves to PCAOB reviews of their audited companies. So, we may have a little different take on this but, and I have to study it more, I confess, so this is just my off-the-cuff estimate, but if I had to err, I would not err on the side of SEC procedures. I would err on the side of what does the law say? I think that I’m reflecting what the law says.
Simone: Right, right. Okay, so I mean it’s very likely SEC is just, you know, trying to postpone this law from being fully implemented by going through all this process, right?
Roger: So it seems to me.
Simone Gao: This concludes our program for today, please like, share and subscribe to our channel if you like our production. Also, please sign up for my membership website, we will provide video, audio and transcript of our shows. There will also be member only articles and in-depth reports and live Q&A with me. The website is zoomingin.tv, 5 dollars a month or 20 dollars a year. You can also donate to me on my website zoomingin.tv.
Thanks for watching, I am Simone Gao and I see you next time.