As the trade war with China continues to simmer, a new law under consideration in Congress could reduce foreign capital flowing into China by way of investment in Chinese ADRs listed in US markets. The Kennedy Act which was passed by the Senate and is awaiting action in the House could put a crimp on investment going into China. It would require Chinese companies to provide the same level and quality of financial information to US investors as US companies and most other ADRs do. What is going on is more than the Kennedy Act and investing in China. It is a new phase of the competition for global supremacy between China and the USA as we noted in our article about a permanent trade war.
Kennedy Act and Investing in China
Forbes presents a good overview of what the Kennedy Act is all about and how it fits into the scheme of both individual investments and USA-China relations. Their article refers to The China Hustle.
There are two issues that Forbes points out. The first for individual investors is that many Chinese companies are “black boxes” which provide insufficient (or no) financial data. As such investors get sucked into investing in story stocks and lose their money.
The second issue which is at the heart of much of today’s thinking about China is that American investors are investing billions of US dollars to help Chinese companies. Some of that money is lost to bad investments. But, worse than that, much of that money goes to improve the competitive advantages of Chinese companies that take business away from American companies in Asian markets as well as in the USA.
In a perfect world, the Chinese would be doing the same in reverse. But, they aren’t.
Chinese investors are not returning the favor. They are not permitted to invest in Apple AAPL or Disney DIS or the latest 5G tower REIT.
American money goes to China. China money doesn’t come to America. Not because the U.S. doesn’t want it, but because China doesn’t allow it.
The official name of the proposed Kennedy Act is the Holding Foreign Companies Accountable Act. The goal is to demand that companies provide adequate financial information or not be listed on the NASDAQ or New York Stock Exchange. If the law goes into effect, Chinese ADRs will have to submit to third party audits to be listed on US exchanges.
What Else Is Affecting Investing in China?
As Forbes notes, the move to go after Chinese companies that do not comply with SOX is being further stoked by the ongoing trade war and anger over the lack of information coming out of China in the pandemic. There is a high level of disbelief in China’s reports of a relatively low number of infections and deaths from covid-19 when countries with advanced health systems such as in Europe have reported greater numbers.
This adds to the long-standing doubts about the validity of information coming out of China and the risks not only of investing in China but of doing business with a nation controlled by its Communist Party aristocracy. Investing in China has always been driven by the wish to get into a 1.2 billion-person market. Unfortunately for investors outside of China, China has blocked many companies from competing there, stolen business and technical secrets, and made “sharing” of technical knowhow a prerequisite to doing business in the land of controlled capitalism.
Thus we see movements on multiple levels to “decouple” from the current business relationships with China from the USA, the EU, Great Britain, and the democratic nations of Asia. China’s crackdown on legitimate protests in Hong Kong is simply adding fuel to the fire.
Forbes notes the likelihood of more investments into the Korean, Taiwanese, Japanese, Indian, Vietnamese, and Indian economies in Asia as well as greater investment in countries like Mexico and Brazil in the Western Hemisphere.
Effects of the Kennedy and Investing in China on Your Investments
Companies like Alibaba are already getting listed on the Hong Kong exchange to allow western investors access to their shares. We can see a lot more of that if the Kennedy Act takes hold. China’s economic miracle is cooling off but the country is not going to fall into an economic abyss. If you want to stay invested there that may still be possible if you are willing to work through other stock exchanges. But, foreign direct investment in China is likely to steadily decrease as the “anywhere but China” movement takes hold.