Hong Hao, a prominent Chinese market analyst and former managing director for BOCOM International, may have been caught in Beijing’s censorship crosshairs for betting against China’s economy. He was removed from Chinese social media over critical remarks about the Chinese Communist Party’s (CCP) policies and warned against the full delisting of China concept stocks from U.S. stock markets.
Hong was head of research at BOCOM International, a subsidiary of China’s state-owned Bank of Communications. On May 3, a spokesman for the company announced that Hong had resigned for personal reasons.
In recent months, Hong’s research reports and social media posts touched on politically sensitive issues, such as the delisting of Chinese companies from U.S. exchanges, the risk of capital flight, and the economic impact of Beijing’s “zero-COVID” policy. Two of his research reports—“What Should China Concept Stocks Really Worry About?” and ”Be Wary of Capital Flight"—address the issues facing China concept stocks.
In “Be Wary of Capital Flight,” Hong wrote: “There are certain underlying, irreconcilable, long-term differences between the two parties [the United States and China]. While the Holding Foreign Companies Accountable Act (HFCAA) requires these listed companies to disclose state ownership and certain sensitive information and data, the Chinese state continues to exert greater control over a number of important industry leaders, reflecting the will of the state.”
While it is rare for U.S. legislation to take direct aim at Beijing, the HFCAA was passed because the United States has seen that, for a long time, the CCP has been using its power to control Chinese companies and use them as tools to enforce its will.
For example, in June 2020, the U.S. government determined that Huawei, Hikvision, China Mobile, China Telecom, China Aviation Industry, China Railway Construction, CRRC, China Aerospace Science and Technology, China Aviation Science and Industry, China Southern Industry, and China Shipbuilding Industry were all owned and controlled by the Chinese military. These enterprises include not only “state-owned” enterprises (SEOs) but also “private” enterprises.
Huawei, for example, is supposedly a private firm. Huawei is the world’s largest telecom equipment vendor, undertaking telecom equipment construction worldwide. But the U.S. government has warned that Huawei equipment can be used for espionage by the CCP. Since then, Australia, Canada, Europe, and the Czech Republic have refused to use Huawei.
The CCP dominates China’s state-owned enterprises. In 2015, the CCP issued “Guidance on Deepening the Reform of State-owned Enterprises,” which called for “strengthening and improving” the Party’s leadership of SEOs. The guidance generally includes the CCP’s so-called Party-building work in company charters and asserts a legal status for the CCP in corporate governance.
Even for private companies, the CCP’s laws require establishing a Party organization at the company. Article 19 of company law in China stipulates that according to the CCP’s constitution provisions, CCP organizations shall be set up within the company to carry out Party activities.
In September 2020, the Office of the Central Committee of the CCP issued its “Opinions on Strengthening the United Front Work of the Private Economy in the New Era,” in which it claimed that private economic businessmen should “maintain a high degree of consistency” with the CCP “in terms of political stance, political direction, political principles, and political path,” and “further strengthen” the CCP’s infiltration and control of private enterprises.
The CCP’s demands on companies are precisely what the provisions in the HFCAA target in order to ensure the exclusion of the CCP’s political control of China-based companies. Because of this, Hong stated bluntly in his analysis report that the full delisting of China concepts stocks from U.S. markets is inevitable.
“The only difference between the best and worst scenarios for U.S.-listed China concept stocks may be the timing of delisting from the United States rather than the avoidance of delisting,” he wrote.
However, the CCP does not want China concept stocks kicked out of the United States, given their special significance for the regime.
Xu Yuan, a senior researcher at the Digital Finance Research Center of Peking University and an associate professor of finance at the National School of Development of Peking University, wrote in his blog in March that China concept stocks are “the bond that keeps the U.S. and China fighting but not breaking” and “an important anchor stone for China’s relations with the outside world.”
Therefore, if China’s concept stocks were to be delisted by the United States, “this important link between China and the West would be severed,” Xu added. The Chinese economy would also be put at risk.
The article also claimed the low and middle classes in the West are the victims of the current economic relationship between China and the West, with the elites of Wall Street and Silicon Valley being the beneficiaries. Thus, the investment bankers and lawyers who work for China concept stocks, as well as the technology companies who work closely with them, are a sympathetic outside voice for China in Sino-U.S. relations.
On May 6, the U.S. Securities and Exchange Commission (SEC) announced that 88 China concept stocks, including JINGDONG, Bilibili, and Pinduoduo, will be added to a “pre-delisting” list. This is the sixth batch of “pre-delisting” of China concept stocks released by the SEC since March, with 128 China concept stocks affected.
With the deadline for the complete delisting of China concept stocks approaching, the CCP has frequently raised its hand to seek “peace.”
On April 2, China’s Securities Regulatory Commission issued a revised version of the “Regulations on Enhancing Confidentiality and File Management in relation to the Overseas Issuance and Listing of Domestic Enterprises (Draft for Comments).” The document removed the statement, “on-site inspections should be conducted primarily by Chinese regulators,” and instead specified that investigations and evidence collection by foreign securities regulators on Chinese enterprises be conducted through cross-border regulatory cooperation mechanisms.
Bloomberg quoted sources familiar with the matter, saying the move would give U.S. regulators full access to the audit reports of most of the more than 200 Chinese companies listed on the New York Stock Exchange to prevent further decoupling from the United States.
However, the stance of the U.S. side is firm.
SEC Chairman Gary Gensler said on March 29 that Chinese companies would only be allowed to continue trading in the U.S. market if they fully complied with U.S. audit inspections. He stressed that American law gave him little room for compromise.
Unless the CCP complies with American auditing rules, Chinese companies will be removed from the New York Stock Exchange and Nasdaq stock markets by 2024.
