CSRC vice chairman: U.S. limit on Chinese companies is 'self-sabotage'
By CGTN's Global Business
Washington's move to limit Chinese companies from listing in the United States is "self-sabotage," as the move reduces the service of one of the country's strongest industries, Fang Xinghai, vice chairman of the China Securities Regulatory Commission (CSRC) said in an exclusive interview with CGTN's BizTalk.
U.S. President Donald Trump signed into law the Holding Foreign Companies Accountable Act in December. It threatened to bar securities of foreign companies from being listed in the U.S. if they have failed to comply with auditing oversight rules within three years. The act is widely regarded as targeting Chinese firms listed in the U.S., as part of the Trump administration's escalating hostility toward Chinese companies.
China's securities regulator has offered to join hands with U.S. audit inspectors to solve the problem. "Unfortunately, our U.S. friends don't seem to be interested in solving this problem," according to Fang.
Fang said the world is better off when China and the U.S. both prosper. China is a large country that's growing rapidly and needs high-quality financial services, and that makes for a natural combination for Beijing and Washington to cooperate, he said. China is ready to continue the talks with the U.S. when the new president takes office, he said.
If the U.S. hostility toward Chinese companies were to continue, the U.S.-listed Chinese companies have alternative options and can return to Hong Kong, Shanghai and even London to list, the vice chairman said. Actually, two Chinese companies have recently listed their global depositary receipts in London instead of in New York, as a result of international competition for good companies, Fang said.
Commenting on the China-European Bilateral Investment Treaty, Fang said it would open markets in Europe and China "much wider" to each other's investors. Other countries such as the U.S. and Japan could also stand to gain from the treaty, he added.
Despite the pandemic that has been jolting the world since 2020, China has not slowed down its reform and opening up of its financial market. It started the trading of the stock market right after the Chinese New Year in February even though the epidemic was raging on. It reformed the registration rules for IPO. Fang said that 396 companies were listed in China in 2020 and raised 470 billion yuan, or nearly $72 billion in capital. That makes China the second largest IPO market in the world behind the United States. The number of companies and the amount of capital raised were among the highest totals in China in the last 10 years, he said.
This interview has been edited for brevity and clarity:
CGTN: Dr. Fang give us your thoughts first on the Trump administration now signing into law, a move that would delist Chinese stocks from U.S. stock exchanges if they don't comply with audit oversight rules.
Fang: It's an issue which has been there for some time between the U.S. and China. The problem is that U.S. audit inspectors, namely the PCAOB have not been able to come to China to examine the audit paper of Chinese companies listed in the U.S.
The CSRC actually, under my leadership in this area, has been trying to find a solution between the U.S. and China for some time. We have the intention to solve this problem with them. And it is not a very difficult problem to solve now. Unfortunately, our U.S. friends don't seem to be interested in solving this problem, but then they turn around pointing to this problem, saying, this is the reason for the law to be passed. And I don't know exactly what the motivation behind that is.
It is self-sabotaging for the United States. This cannot be good for the U.S., because you're reducing the service of one of your strongest industries. And further, these Chinese companies have alternatives. They can come back to Hong Kong, they can come back to Shanghai, and they can list in London nowadays. So, I think our U.S. friends have to think about that as well.
CGTN: The CSRC has been speaking with its counterparts in the U.S. for quite some time about this, but now that this legislation is signed into law, where do we stand in terms of the talks?
Fang: Right now, because of the transition in the U.S. government, we are not talking to the PCAOB nor the SEC (U.S. Securities and Exchange Commission) at this point regarding this issue. We made our latest offer to them in the middle of August. The offer is about how we can solve this problem, the inspection problem. And they have not responded yet. But I expect when the new administration comes in the U.S., I think they will become a lot more receptive to a proposal and we stand ready to solve that problem with them.
CGTN: And like you mentioned, even if Chinese companies do not list on U.S. stock exchanges, they could list at home, for example, in Hong Kong and also now in London. So, it doesn't mean if Chinese companies don't list in the U.S. they will be barred away from American capital. Because American investors can simply invest in these cities where the Chinese companies are listed.
Fang: Yes, that is also true. Now there's a follow-up. The defense department in the United States has listed some Chinese companies, which they think that U.S. investors should not invest into. You're right. U.S. investors can still invest into Chinese companies. They just have to invest into a company listed in another exchange, not in the U.S. exchange. And this cannot be good for Wall Street, cannot be good for U.S. financial services companies, nor good for the U.S. stock exchanges.
CGTN: The senators who co-wrote this bill, they say that Chinese companies listed on U.S. stock exchanges have "cheated," have "exploited" U.S. investors. What's your response?
Fang: We have about 200 companies listed in the United States. Maybe one or two have had dishonest information disclosure, this is actually quite normal among listed companies around the world. Some U.S. companies also disclosed inaccurate information, but I'm not trying to argue for a company that has misled the investors. So, it's not some kind of a huge problem, but it is a problem. The most important thing that we have to find is a mechanism to make sure that companies are not allowed and are prevented from disclosing inaccurate information. And this is the mechanism that we are trying to find out with our U.S. counterparts.
CGTN: You mentioned the U.S. blacklisting certain companies saying that global investors should not invest in these companies. And as a result, global index compilers have removed some Chinese companies from their benchmarks. What do you think about that.
Fang: Again, this seems to me is to make a political statement on behalf of the United States. The reason that they use the excuse, is that these companies, according to them, have close links with the Chinese military. Therefore, U.S. investors should not be allowed to invest into these companies. I think some of the reasons are very tenuous. They're not very strong because you think about an economy, which in China is an interlinked economy, you can almost point to any company and this company can be seen as linked to the military. Take Alibaba, for example, it may sell certain goods to the military or to military personnel. Is that linked to the military or not? They used some very weak kind of links to designate these 41 companies. As a result, the index providers have to remove some of the companies from their indexes because the investors who use the index are not allowed according to the U.S. law to put their money into these companies.
But the impact so far actually is very minimal because they removed eight or 10 companies from the index. The index has 400-500 companies inside it. In any case, international institutional investors' enthusiasm of investing into Chinese companies has not been affected at all. Since that executive order was issued in the middle of November, we have witnessed a continued inflow and even increased inflow of foreign capital into the Chinese stock market. So far this year, we have close to 200 billion yuan ($31 billion) of foreign capital flowing into our A-share market. So the real impact actually is just minimal.
CGTN: But long term, Dr. Fang, do you think Chinese companies will still view the United States as a relatively attractive destination to raise capital?
Fang: In the U.S. there are certain long-term investors who are very good at identifying value in certain types of companies. The internet company and the IT company and so forth. So the U.S. market remains an attractive market for Chinese issuers. But as a result of all these laws, executive orders, I think the U.S. will become a less attractive market for Chinese companies relative to now. And also alternative listing venues are developing real quickly in Shanghai, Shenzhen, Hong Kong, and London. We recently have two companies listing their global depositary receipts in London instead of in New York. So, there's international competition for good companies.
CGTN: But despite the tensions, when it comes to financial ties, we're actually seeing U.S. financial institutions increasing their presence in China in 2020.
Fang: Yes. I think there's a gap between how the U.S. financial industry feels about the Chinese economy and the Chinese capital markets, and how the U.S. administration feels about the Chinese economy. U.S. financial industry firms are still very enthusiastic about investing into China, whether in terms of investing into Chinese-listed companies, or in terms of setting up their own subsidiaries in China to do underwriting, brokerage, and investing. So far this year, we approved six U.S. companies to set up either an investment bank here or a mutual fund management company here.
CGTN: So long-term, do you expect, China and the United States, the financial links to deepen?
Fang: At least I hope so, because cross-border capital flows, cross-border talent flows, any economic linkage between the U.S. and China will be, first of all, good for both countries in terms of economic gains. They're also good for a peaceful relation between our two countries.
Americans respect Warren Buffett very much. I respect him as well. When he was asked about U.S.-China economic relations, he had this great answer. He said, if we have two views of the world, one view is that only the U.S. prospers, China not; the other view is that both countries prosper. Which world is better? And it's obvious that both countries prospering, that the world is much better. And I think that's a great answer. Business and trade, they have this amazing ability to make both countries better.
Now there's always this issue of who benefits from the trade. That's not something that you can solve by closing your door. You have to open the door, and at the same time, you try to solve the domestic income distribution issue. If you have complains about market access as well as, let's say, intellectual property, China is fully ready to talk about these things. And we can open up our markets more. We can work together to solve intellectual property issues.
CGTN: Speaking of cooperation, what about the China-EU bilateral investment deal? How is that going to affect financial cooperation between the two sides?
Fang: The BIT (Bilateral Investment Treaty) between the EU and China would open up investment markets in Europe and China to each other's investors much wider, which means that China can attract a lot more EU investors into not only a portfolio market, but also direct investment markets, and vice versa.
The China-EU BIT, whatever terms that will be settled in that agreement, we will apply to other countries as well. So, countries like the U.S. and Japan, they also stand to gain from the BIT between China and Europe, much like the phase one trade agreement between China and the United States. The terms settled in that agreement, apply to Europe as well. So European companies have benefited from these terms. And so in today's world, any improvement in terms of capital flows between China and another country is beneficial for these other countries.
CGTN: The Shanghai-London Stock Connect program was launched in 2019. This is not just about increasing financial ties between China and the UK but with Europe overall. How do you see this Stock Connect program developing?
Fang: It's actually developing quite nicely. We have had four Chinese companies list in London, raising all together about $5 billion already. We are now in the process of working to allow UK companies to list in Shanghai as well. And I believe the Shanghai market is also very attractive to UK companies. Because many of the UK companies have huge operations in China. When they list in Shanghai, they can raise RMB directly. And secondly, the valuation in the Shanghai market is much higher actually than in London. So, if you talk about world class pharmaceutical companies like AstraZeneca, in London they can get 20 times PE (price-to-earnings ratio) or the most 30 times. In Shanghai they can get 40 times 50 times PE. So, it's very attractive for them to raise funds as well.
CGTN: So do you expect the pace, though, of GDRs (global depositary receipts) issued by Chinese companies on the London Stock Exchange to pick up perhaps?
Fang: We have quite a number of companies inquiring at this point. So I expect that pace to pick up once this COVID-19 is over. And once the tension between China and the U.S subsides a little bit.
CGTN: What about Brexit? With the UK now out of the European Union, how do you think London is affected in terms of an attractive destination for Chinese companies to raise capital?
Fang: Before the UK exited the EU, London was almost the only place that Chinese companies thought about, because all the EU institutional money, they invest into London as well. So once you have access to London, there's almost no need to access another stock exchange in the continent. But once London is out, and there may be some kind of boundaries between the EU and the UK in their two capital markets, it will make sense for Chinese companies to seek access to either Paris or Frankfurt. So in that sense, London will face some competition.
CGTN: Why did China choose not to slow down the pace of its reforms and its financial market opening up in a year of a pandemic?
Fang: The capital market is considered as a key channel for capital to be formed and channeled into the real economy. So it's too important to be slowed down. So, when the pandemic was raging in China, right after the Chinese New Year, we decided to open the capital markets and resume trading as well as IPO. We did not even stop reforms, which are a registration system for IPOs. So in Shenzhen, for example, this year we implemented this registration system in what they call the original Nasdaq of the Chinese market.
As a result of all these reforms as well as the continued opening up of the capital markets in China, we have had a bumper year in our capital markets this year; 396 companies listed in China this year and they raised a total of 470 billion yuan ($72 billion) in capital. That would put China at No.2 in the world, only after the United States. And both the number as well as the capital raised in China is one of the highest in the last 10 years in China. And so capital markets have contributed quite significantly to this year's good performance of China's economy.