US Stock Markets No Longer Home to Chinese Companies

As per a recent media report, the US has so far imposed tariffs on more than US$360 billion worth of Chinese goods and the latter has imposed tariffs on US products worth more than US$110 billion in response. The countries are keen on taking the battle further by issuing threats regarding imposition of new tariffs and increase in existing duties in near future. As the tariffs are being imposed, one can see a slowing down in global growth and earnings. A significant slowdown in the US economy is also on the anvil if we take a look at the inverted US bond-yield curve, posing a threat of recession. China has been hit badly with the manufacturing sector witnessing contracted activity for a prolonged period, decline in exports and weakening of the Chinese Yuan against the US dollar.

How is China Reacting:

As per recent media reports, China has been taking initiatives to control the damage caused by the trade war and to bring its slowing economy back on track. The Chinese economy has been a victim of major challenges in the form of high tariffs on over half of its exports to the US and is looking forward to negotiations with the US at the trade talks due in October 2019. Recently, the US issued a plan to prevent Chinese companies from listing on the US stock market. As per media reports, the above announcement pulled the shares of Chinese e-commerce major, Alibaba Group, down by 5% on 27 September 2019 This has been an alarming move that can bring a major distress to the investors, businesses and the Chinese economy as a whole.

China has now opened doors of more sectors to foreign investors by reducing the market access restrictions on items in the negative list for foreign investment. Moreover, it is planning to eliminate all the restrictions on the negative list before the end of the year as few media reports have stated. The ease of investment will be visible in greater opening-up of transport, telecommunications and infrastructure sectors. Several restrictions including those on the domestic shipping agencies & cinemas and brokerage institutions would now be scrapped. This would provide greater market access to foreign investors through relaxations of domestic control, giving a new shape to the Chinese economy.

Steps to Curb US Investments in China:

The US has recently been considering the delisting of Chinese companies from the US stock exchanges, a move which can further escalate the trade tensions between the two countries. The decision came on the back of US planning to limit its investments in China. A formal mechanism to execute the above plan is yet to be devised. The move to delist the companies came on account of Trump administration?s consideration for growing security concerns over the activities by Chinese companies. Lawmakers in the US have introduced a bill directed at Chinese companies, to either conform to the regulatory requirements or face delisting from the American stock exchanges. The regulatory requirements included that Chinese companies provide access to corporate audits. The reluctance to comply with the Public Company Accounting Oversight Board (PCAOB) regulations has compelled the US to choose the above-mentioned path for the best interests of its investors.

Disturbance in Stock Markets:

The already embattled stock markets further reacted to the above announcement on 27 September 2019, with shares of Chinese companies listed on NASDAQ slipping to a large extent. As per media reports, Alibaba?s shares went down by more than 5%. Shares of Baidu and JD.com went down by 3.6% and 6%, respectively. The deliberations also weakened the Chinese currency against the US dollar, with further consequences expected on Chinese stocks in major indexes.

Although the two economies are looking forward to a path of recovery after the upcoming negotiations regarding retaliatory tariffs, the threat of higher tariffs being imposed still lingers. Demand from the US has come in the form of commitment to purchase of more US agricultural products by Beijing, reduction of US trade deficit with China and to restrict the export of opioid drugs like Fentanyl, which is a deadly drug causing numerous deaths in the US. The US has been issuing mixed signals on the matter. While on one hand, the country signed a trade agreement with Japan to cut tariffs on farm and industrial products, Trump was seen criticising China and its economic policies on the other hand. The President still seems doubtful on having a settlement deal with his counterpart in the trade war to put an end to the tensions.

Despite the above factors, one can sense some optimism flowing into the matter with the US president delaying an increase in tariffs until mid-October and China increasing its purchase of agricultural produce from the US. However, the threat cannot be eliminated amidst the discussions regarding delisting of Chinese companies from the American stock exchanges and prevention of investments by US government pension funds in the Chinese market, which can cause further disturbance in the already shaken economies.

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