As the U.S.–China trade war intensifies, the chances of a trade agreement between the two countries continue to diminish. At this highly acrimonious stage, a deal may not even be possible, and would seem to leave us with an escalating trade war through the 2020 election.
In addition to applying high tariffs on every product that China exports to the United States, President Donald Trump has banned Huawei and its subsidiaries from doing business with U.S. firms and telecom carriers because of suspected large scale data theft capabilities built into the equipment.
While carrying out that ban has proved much more difficult than issuing it, the United States also is encouraging its allies in Europe, Asia, and Oceania to also bar the Chinese telecom equipment and network provider.
The effort has gained traction—Huawei has lost more than a billion dollars in business in 2019 alone. More bans on Chinese tech companies will likely follow. What more can or will Washington do to punish Beijing for its economic warfare against the United States?
Quite a lot, actually.
China’s Stock Market Fraud Is Well Known
Manipulating stock markets is nothing new to China. In fact, it’s standard operating procedure. For years after the Great Recession in 2008, Chinese companies became listed on U.S. stock markets via reverse-takeovers. That’s a clever process in which a Chinese company takes over a failing or idle listed company, and in doing so, suddenly becomes a listed company.How could such a massive amount of corporate fraud occur under the noses of regulators?
But it’s not just U.S. stock markets that China’s abuses. Multiple versions of pump-and-dump schemes have been ongoing in the Shanghai and Hong Kong stock markets for years. The cycle is the same. Valuations are rapidly inflated, which attracts millions of Chinese investors, who then leverage themselves to the hilt to participate in those gains.
Banning China From US Capital Gains Support
For these reasons, U.S. lawmakers such as Sen. Marco Rubio (R-Fla.) are proposing banning $49.5 billion of U.S. pension fund money, known as the iFund, from being invested in Chinese companies. That would send a clear message to China by halting a considerable amount of investment cash from going into mainland companies.Complications Abound
But there are, however, complications to this strategy. For one, Chinese companies are deeply embedded in major indexes that are found in almost every retirement and investment portfolio in the United States. Removing Chinese companies could be costly to investors in the form of falling values and to the health of the capital markets themselves.Worsening US–China Relations
Kicking China out of U.S. capital markets won’t be easy or without consequences. U.S. capital markets may suffer some reputational damage, at least in the short term. Excluding China and otherwise limiting or controlling capital investment may change the world’s perception of U.S. capital markets.Such a policy would also have several immediate geopolitical consequences. U.S.–China relations would worsen, and might push the trade war further into the future than expected. That, however, may be the price that needs to be paid.
The argument for barring China from U.S. capital markets is simple but compelling:
The answer may be easy to understand, but it will be hard to put into practice.