Weblog with daily updates of the news on a frugal, fair and beautiful China, from the perspective of internet entrepreneur, new media advisor and president of the China Speakers Bureau Fons Tuinstra
China is heading for a fundamental breakdown, argues Harry Broadman, Partner, and Chair, Emerging Markets Practice, Berkeley Research Group LLC, at a wide-ranging speech at the Charleston Chamber of Commerce, November 2022 (Charleston, South Carolina). It started by bailing out investors at its stock markets, which are no real markets, he says.
China’s most talked-about downturn in stock value is business as usual, says JP Morgan’s Santos at Bloomberg. Financial analyst Sara Hsu disagrees and sees a more structural change in how China is dealing with its business compared to previous regulatory interventions, she says at her vlog China Rising. “She misses out at the political risks,” Hsu adds.
China and US regulators have been tightening rules for Chinese companies to list at US stock markets, sending shockwaves through the financial and tech industry. Financial experts Winston Ma and Victor Shihlook at the Wall Street Journal at what has happened over the financial cleaning operation in the past few weeks.
The Wall Street Journal:
On one end are China’s regulators, led by the cyberspace authority, which are moving to make it harder for Chinese companies to sell shares overseas. On the other are American lawmakers, such as Sen. Marco Rubio (R., Fla.), who are stepping up calls to block Chinese firms from going public in the U.S. unless they submit to U.S.-style audit requirements.
In China, “the cyber regulator has become the new securities regulator,” says Victor Shih, a University of California, San Diego, professor of political economy who focuses on Chinese policies. “Investors and companies will find it much harder to manage the listing process.”…
One option being considered by the regulators is to require companies using the VIE structure to seek regulatory approval before selling shares in foreign markets, the people said. That could make it a more cumbersome process.
“This would be a significant tightening of Chinese securities regulations,” said Winston Ma, an adjunct law professor at New York University and author of The Digital War, a book about China’s growing technological prowess. “Almost every U.S.-listed Chinese company that foreign investors like pension funds and endowments can buy is listed through a VIE structure.”
Former US President Donald Trump tried to derail relations with China by banning stocks from Chinese companies at US stock markets. Now, under President Joe Biden, certainty for stock markets including the Chinese shares is key, says former White House advisor Harry Broadman at US News. Although there might be some other dangers.
US News:
The use of investment bans on Chinese stocks is a “curious tool,” says Harry Broadman, managing director with Berkeley Research Group, who has served in two White House administrations. He was chief of staff of the president’s council of economic advisers under President George H. W. Bush and then served as a U.S. assistant trade representative under President Bill Clinton.
“One would think having U.S. investors in [Chinese] firms could produce salutary outcomes for people interested in reforms,” Broadman says.
“You don’t need a Ph.D. in economics to understand that if you’re going to continue to change the regulatory treatment, including the listing and delisting of firms,” uncertainty will follow, Broadman says…
Another risk that’s generally well understood by investors is the tight control that Chinese President Xi Jinping and the Chinese Communist Party have over industries within their borders. Investors can’t expect to challenge unfair government policies with sound legal maneuverings as they might in the U.S.; China’s whims instantly become reality – just ask Jack Ma, the majority shareholder in Ant Group, whose IPO was unceremoniously put on ice in the wake of Ma’s criticism of Chinese regulators.
But there’s another risk that’s a bit more alarming, says former U.S. diplomat Broadman, and it’s arguably a much bigger concern for U.S. investors than any future delisting threat.
“I’ve been surprised that U.S. regulators over the years have treated Chinese firms and investments as being of the same quality as firms from the EU or Brazil,” Broadman says. “The notion that these firms are following international accounting rules is a bit of a fantasy,” Broadman says of Chinese stocks in general.
“The reason why U.S. regulators are interested in allowing these Chinese firms to be listed is you’ve got U.S. stock exchanges that are in competition (with other international) equity markets,” Broadman says.
“You come to the age-old question of public policy and what’s the right call to make. But I see no real discussion of the quality of their accounting. And I think it’s a big issue,” Broadman asserts.
The Wall Street Journal says the proposed regulation is expected to be issued for public comment in December but would be finalized under the Biden administration. It appears to be part of Trump’s attempt to rush through policies before he is removed from office, betting that Democrats will not have the political will to reverse them.
There are no details available at this time. The SEC and PCAOB have always had the power to do this, but it was considered a ‘nuclear option” that would be a step too far for the regulators. Congress stepped in to propose legislative changes, and the President established a working group that made similar recommendations as the proposed legislation.
I expect the proposed regulation will have a long transition period of at least a year. In the end I expect the issue will be resolved through normal diplomacy, with China agreeing to allow inspections by the PCAOB.
Despite the trade tensions between China and the US, many tech companies from China still turn to American stock markets for their need for capital. Shanghai-based VC William Bao Bean explains why China’s markets can still not match the capital requirements of domestic companies, he tells at Emerge 2020.
US legislators might support a bill to force Chinese firms listed in the US to let the US stock regulators, The PCAOB, check their files. But those checks will not prevent frauds like those by Luckin as some US senators claim, warns audit expert Paul Gillison his weblog Chinaaccountingblog. Some predictions on what will happen after the bill has been adopted.
Paul Gillis:
EY in China is not inspected by the PCAOB. Would a PCAOB inspection have stopped the Luckin fraud? No, PCAOB inspections are after the fact, and EY had already discovered the fraud. Additionally, the PCAOB is not going to inspect every audit, but rather a selection of them and there is no guarantee that Luckin would ever have been inspected. Would EY have audited Luckin differently had it been subject to PCOAB inspections? Possibly, but I think that is unlikely. The Big Four member firms in China are not subject to PCAOB inspections but are regularly subject to inspections by teams from their own networks. While self-inspection is never as effective as independent inspection, I believe that the auditing culture of these firms has been effectively implemented in China, and that inspections would provide for a marginal increase in quality but would be unlikely to prevent future fraud. I believe that PCAOB inspections are useful, but the threat of inspections and the existence of inspections elswhere in the world has already brought those audit practices to China. The bigger problem for the firms is a shortage of experienced partners – who are sometimes called the no hair/gray hair partners. The firms have been recruiting and auditing in China since the early 1990s, but the firms only became large in the early 2000s. Given it takes 15-20 years for an accountant to make partner in these firms, and another five before they are ready to serve as engagement partner on public companies, the firms are seriously short of highly experienced partners. Partner/staff ratios are completely out of whack for the Big Four in China. For example, PwC reports 720 partners and 20,000 staff in its China firm (which includes HK, Taiwan and Singapore) for a partner/staff ratio of 27.8. The US firm of PwC has 3,249 partners and total staff of 30,000 for a partner/staff ratio of 9.2. While I would not argue more partners means higher audit quality, the difference between the two staffing models is too extreme.
I believe that this legislation will pass but China will moot it by agreeing to some form of inspections. The sticking point is likely to be state secrets. China will want to vet the working papers to make certain no state secrets are inadvertently disclosed. China does not seem to have focused on the fact that many audit partners are foreigners and the internal inspection teams include foreigners who see these state secrets. Auditors should cooperate with regulators to minimize the presence of state secrets in working papers. I call for joint training sessions between auditors and regulators to determine what must be in working papers and what should not be recorded. I expect that most of China’s concerns can be alleviated if unnecessary state secrets are omitted from working papers in the first place.
Chinese listings at US stock markets got recently under fire. Former US assistant trade representative Harry Broadman looks with some amazement at this market at the International Finance Law Review (IFLR). "After decades of working in China intensively on financial accounting, there is not a single state-owned enterprise I've worked on that I can think of that abided by international accounting standards," Broadman says.
The IFLR:
The catalyst for the move is likely Luckin Coffee, the fast-growing Chinese coffee chain that created a network of fake employees and customers that enabled it to grossly fabricate its revenues. Only eight months after going public – on Nasdaq's exchange – the company's valuation had doubled to $12 billion. News of the doctored numbers caused stock to fall by as much as 75% overnight.
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After decades of working in China intensively on financial accounting, there is not a single state-owned enterprise I've worked on that I can think of that abided by international accounting standards," said Harry Broadman, partner and managing director of the emerging markets practice at Berkeley Research Group. "Some of these firms are now listed on the US markets. I've not examined those firms' recent financial accounts, but even if we were given their upstream numbers, the source and integrity of those numbers has always been, in my mind, very dubious."
"I am surprised that it has taken this long, just in terms of the sheer due diligence and regulatory integrity check. I wasn't aware of exactly how many of those Chinese firms were listed on US markets, but I'm actually quite shocked there were that many," he added, "That's not a comment about the Chinese, but about US regulators."
"Anybody who understands how state owned Chinese firms keep accounts, even some of the more privately oriented of them, knows they are just not completely grounded in international accounting standards, like a US firm or a British firm," he said. "Anyone who thinks that is quite myopic."
China's consumers are changing because of the trade war and food-driven inflation, says China expert Victor Shihat the Investor Place. They will pick pork over iPhones, he says, with a drastic impact on the stock markets.
The Investor Place:
In an email correspondence, Victor Shih, Ph.D., associate professor of political economy at the University of California, San Diego, wrote:
"Both the trade war and food-driven inflation likely will crimp Chinese consumers’ discretionary spending. While the trade war has slowed employment growth and wage growth, the African swine flu has driven up food prices substantially. For the average households, they are trapped between much higher food prices and uncertainties about future income. This will limit their spending on discretionary items."
Put another way, AAPL stock may be on a winning path right now. But that’s not guaranteed to sustain. As known pressures tighten their stranglehold, the impact will invariably filter down...
But at the present juncture, China is a major risk factor. As Professor Shih noted, the average Chinese consumer is feeling the heat. Given the choice of buying food to live or buying an iPhone 11, I don’t have to spell out the correct answer. Therefore, anybody who is not a day trader should probably avoid or cash out of AAPL stock.
The threat to delist Chinese companies from US stock exchanges has shocked observers, even though it is not yet clear whether the White House is moving forward. Financial analyst Sara Hsu warns the reputation of US financial institutions might be at stake. And also: her latest viewpoint on what the consumers might feel from the ongoing trade war.
China stocks show some volatility right now, but superinvestor Jim Rogers is not going to sell his shares in the Chinese economy now, he tells. China stocks might have been overpriced, but there was certainly no bubble, he adds.
Renowned investor Jim Rogers learned from the China market 23 years ago in a painful boom-and-bust cycle. Now he is bullish on China, but shares a few tough lessons he learned in those early days, he will not forget, he writes in the Daily Wealth.
Jim Rogers:
A lot has happened in 23 years. A lot has changed.
Today, I'm incredibly bullish on China. Prices are rising. And trillions of dollars are set to flow into Chinese stocks in the coming years.
That's because of three big stories we've been covering here in DailyWealth...
Stocks trading locally in China could see inflows of up to $2 trillion over the next 10 years as index provider MSCI continues to add them to its benchmarks.
After 23 years, this is the setup I've been waiting to see... And I believe this time, the gains could be even bigger than what I experienced during my first China boom.
But if you're going to invest in China, you've got to be smart. You've got to learn from my mistakes.
That means you need to avoid catastrophic losses. You need to have a plan and stick with it.
I suggest using trailing stops on your investments. That's how you stay in for the upside – and protect yourself on the downside. And it's the right way to benefit from the China boom that's happening right now.
No market stays in bad shape forever... least of all China. I've seen what the Chinese markets can do, firsthand. And you really want to invest in this incredible boom.
So make a plan... and take advantage of it!
Investors in Chinese equity know from the past they have put their money on a roller-coaster. But the recent drop is very rough, and - says financial analyst Sara Hsu to the ChinaUSFocus, the drop is worse because much stock has been used as collateral for loans.
Sara Hsu:
However, there is fear that too many of the listed company shares have been pledged as collateral for loans. The total amount is equal to 10-12% of the A-share market cap, according to Sean Darby, chief global equity strategist at Jefferies. This is starting to create a downward spiral as margin calls (demands for additional securities to cover losses) and forced liquidations are carried out and threaten to bring contagion to the real economy, which is already under pressure from dampened demand.
At the moment, it appears that risk is under control, but just barely. If the stock market continues to melt down, government intervention may be required to stem sharp price declines and reduce the impact on the rest of the economy due to the knock-on effects of margin calls. All of this only serves to compound the lack of funding and bearish sentiment that are worsening the slowdown.
Government intervention is necessary but certainly not desirable, as it moves China’s economy even further away from the market-oriented system it has been striving for. At this point, the prospects of reform appear dim, as the nation attempts to curb assaults on its very economic viability. A lot must happen in order to improve the country’s prospects: calling off the trade war, removing bad debt, and stimulating consumption and investment will all have to occur before China gets back on its feet and the stock market appears healthy once again.
China’s market has been bottoming out, while US shares have reached a record high, Rogers said at a recent investment forum in Beijing, according to a report in China Business Journal. The billionaire investor buys on the dip, he added.
This is not the first time that Rogers has bought into a market trough. He invested in a large number of Austrian securities in 1984 when the country’s bourse was reaching its lowest point. The market sprang back to life a year later, surging 145 percent and handing Rogers a tidy return.
The 76-year-old, who co-founded the Quantum Fund with George Soros in 1970, has a reputation for being a visionary international investor and one of US’ most successful securities brokers.
The Belt and Road initiative is another source of his confidence in the Chinese market. The project will be vital to anyone who wants to make money, Rogers said, adding that he will closely monitor it for business and investment opportunities.
Twice last week China´s stock markets were forced to stop trading, sending panic signals across the globe. That drove even economist Arthur Kroeber to despair, writes the Washington Post. China´s financial authorities did not learn their lessons from last year´s disaster, he writes.
The Washington Post:
The performance of China's stock market is not closely linked to the rest of its economy, but a year of market turmoil has called attention to the country's economic slowdown and raised worries about the government's game plan.
“We began 2016 thinking that Chinese policymaker had absorbed the lessons of the last year’s stock market intervention and currency panic,” wrote Arthur Kroeber, managing director of Gavekal Dragonomics in Beijing.
“Obviously,” he added, “last week’s mayhem proved us wrong.”
The rout appeared to be linked to weak economic data and concerns about the currency, but was exacerbated by a ham-fisted attempt to regulate the market.
2016 is going to be a rough year for China´s stock markets, explains WSJ wealth editor Wei Gu to CCTV America. Chinese can not withdraw up to US$50,000 from their account, flooting out of the stock markets yesterday. The government is halting its support and new supply of listed companies will increase demand on the markets. Wei Gu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers´ request form.
China´s stocks caused a rough opening of 2016 as they dropped dramatically. Economist Arthur Kroeber expects the volatility to continue for a few months, as the government is slowly withdrawing its support, moving awaya from artificially higher values, he tells Globe&Mail.
Globe&Mail:
“Chinese stock prices are in for a rough ride for the next few months, I think that’s very clear, as the government gradually takes off the remaining life support,” said Arthur Kroeber managing director of independent global economic research firm GaveKal Dragonomics.
“To some degree, the prices established in the second half of last year were false prices, because they were not based on people buying and trading shares in the normal way. And if the government support retreats, the false price falls away and the true price arrives – and no one knows what that is.”
In the long run, he said, Beijing’s desire to pull back should lead to better markets. Reforms to IPO requirements could be passed as early as this spring and are expected to reduce political influence and allow more private companies to enter the stock market, making it more representative of the broader economy.
Chinese companies listed at US stock exchanges are talking about coming home, to the Chinese stock markets. WSJ wealth editor Wei Gu is analyzing the trend and explains who is likely to gain from such a possible buyout.
The badly handled crisis at the stock markets and the unfortunate devaluation of China´s currency are still casting shadows on the country´s financial future, says economist Arthur Kroeberat CNBC. At this stage it is very unclear whether the central government has the capability to handle needed financial reforms.
CNBC:
In addition to the increase in debt, China's missteps this year in the stock market intervention and shock currency devaluation raise questions on the leaders' ability to steer the economy towards growth.
"They have all the ingredients to execute a successful transition," said Arthur Kroeber, head of research at Gavekal Dragonomics. "The question is whoever is making decisions, does he know what he is doing? Leadership wants to execute this in a highly centralized way and we just don't know if that can be done."
China´s largest brokerage Citic is under investigation for causing the recent downfall in China´s stock markets. But they did just want the government initially wanted by cheering up the markets, says finance professor Paul Gillis to Bloomberg. The same government now needs a scapegoat.
Bloomberg:
Citic Securities is one of the brokerages whose margin lending fueled a spectacular stock market rally earlier this year that the state-controlled media cheered on. By singling out Citic Securities, said Paul Gillis, a finance professor at Peking University, the government has found a way to deflect public anger over the stock market collapse.
“In the past there has been little evidence of enforcement against market malfeasance and this sudden clampdown is just a knee-jerk reaction to a political crisis,” says Gillis.
“Regulators are looking for someone to blame for the meltdown though insider trading is not what caused the market bubble.”
