Josh Rogin
In the past month alone, the Chinese Communist Party has destroyed hundreds of billions of dollars of U.S. investors’ wealth as a side effect of its widening crackdown on its own corporations. But the top Wall Street firms and regulators still won’t do what’s necessary to protect Americans from getting fleeced by Beijing.
The Securities and Exchange Commission is dragging its feet on implementing a new law to kick opaque Chinese companies off U.S. exchanges, several GOP lawmakers claim. Meanwhile, leading Wall Street firms continue to funnel U.S. investor dollars to untrustworthy Chinese firms through various investment vehicles even as the risks continue to rise. Chinese companies listed on U.S. exchanges lost $400 billion in July alone, according to the Wall Street Journal, as the CCP expanded its regulatory attacks on various industries.
First, the Chinese authorities crushed China’s largest ride-share company, Didi Global, just days after Wall Street firms helped it raise over $4 billion in a U.S.-based IPO. Beijing then attacked its online gaming industry, decimating the value of tech giant Tencent, which along with three other of the biggest Chinese tech companies lost an estimated $344 billion of value last month. Then, Chinese officials banned all foreign investment in private tutoring, costing those companies tens of billions in market value.
“That’s life in the fast lane,” JPMorgan Chase CEO Jamie Dimon told Fox Business last week when asked about the startling losses caused by Chinese President Xi Jinping’s regulatory crackdowns. “I’m not breathless over it. … I am not as worried about China as everybody else.”
For Dimon, billions of dollars in losses may be just another day at the office; the investors who entrusted him with their savings likely aren’t so cavalier. He pledged to continue expanding his business inside China and said it was not his job to make foreign policy, just to follow the law.
There are two problems with Dimon’s position. First of all, Wall Street firms have a fiduciary responsibility to protect U.S. investors beyond what’s required by the letter of the law. Also, the SEC, which is supposed to enforce laws passed by Congress to protect U.S. investors, has allowed China’s abuses to fester.
“It’s discouraging to see some Wall Street executives work so hard and be complicit in trying to make sure these Chinese companies have access to American capital,” Sen. Dan Sullivan (R-Alaska) told me in an interview. “For far too long, these Chinese firms have been able to access American capital markets and investors without having to abide by the laws that Americans companies are required to follow.”
Chinese companies are allowed to list on U.S. exchanges without being subject to the same financial and corporate disclosure rules as U.S. firms. Also, Chinese companies raise money on Wall Street by using complex investment vehicles such as Variable Interest Entities (VIEs), which are essentially shell companies that give U.S. investors no real equity.
Congress passed a new law late last year, signed by President Donald Trump, meant to force Chinese companies to comply with the U.S. rules or be kicked off U.S. exchanges within three years, called the Holding Foreign Companies Accountable Act. But SEC Chairman Gary Gensler isn’t implementing that law fast enough, Sullivan and six other GOP senators wrote in a letter to him July 28.
The SEC hasn’t even started the clock that would determine when the three-year grace period for the Chinese companies begins, the letter stated. The GOP senators also want the SEC to investigate the risks of VIE structures to U.S. investors and investigate the Wall Street firms that are funneling U.S. investor money to Chinese companies through index listings and other methods.
“It’s unconscionable that the SEC has chosen to delay action on implementation of the Kennedy-Van Hollen Act, seemingly in deference to Wall Street and accounting firms,” said Roger W. Robinson Jr., former chairman of the Congressional U.S.-China Economic and Security Review Commission. “Such inaction only exacerbates massive U.S. investor losses at the hands of the CCP.”
In a July 30 response, Gensler wrote that he would require more disclosure from Chinese companies that use VIEs but he did not say when Chinese companies that don’t comply with the new law would be delisted. Sen. Chris Van Hollen (D-Md.), who did not sign the letter to Gensler, told me in a statement that Gensler had taken some steps to implement the law, including by issuing two proposed rules.
“Following the Government of China’s highly suspicious actions around Didi, it’s vital that the SEC is taking the necessary steps to protect U.S. investors,” Van Hollen told me in a statement. “I’ve called on the SEC to investigate this incident and determine what more we can do to safeguard American investors.”
Dimon’s statements disavowing responsibility show that Wall Street firms will continue to funnel U.S. money into Chinese companies regardless of the risks, collecting their fees with glee. Gensler’s response, in which he promised to push for more disclosure from Chinese companies, shows that the SEC still doesn’t understand that Xi has no intention of allowing that to happen.
The CCP’s recent actions show clearly that the risks of investing in Chinese companies that have no real accountability and transparency are growing quickly — and steps to protect U.S. capital markets must be hastened accordingly. Wall Street firms and regulators who ignore this now are failing in their responsibility to protect the American people.
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