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Postings

Trump rages against China

Bloomberg reported today that the SEC is rushing a new regulation that will ban Chinese companies from being listed on US exchanges.  

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.   

Antitrust and VIE

China has proposed new legislation on how the antitrust laws apply to the platform economy. Many of China’s internet companies provide platforms for other companies (like restaurants and retailers) to push their wares. Some of these platforms are alleged to have engaged in monopolistic behavior, such as requiring that companies list only on their platforms. I think the legislation is focused on protecting consumers and the behaviors being banned would also be banned in most any Western country. If this proposed law is implemented, it may reduce the profitability of many overseas listed Chinese companies, and consequentially the share values of these companies have been hammered in recent days. 

There is a provision that deals with variable interest entities (VIEs). VIEs are extensively used by overseas listed Chinese companies to circumvent Chinese restrictions on foreign investment in certain sectors, including internet related companies. The draft legislation (Article 18) states that VIE arrangements fall within the scope of the proposed provisions and require advanced reporting to the Anti-monopoly Law Enforcement Agency of the State Council. It appears VIE arrangements cannot be implemented if not declared in advance. How this applies to existing VIE structures is unclear. 

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