It seems like all it took for the United States to gain the upper hand on China was a no-nonsense president, an international event, and a little bit of luck. In the post-Coronavirus world, the federal government and the private sector are beginning to sever ties with Beijing. Or, at the very least, the U.S. is starting to show that it is no longer beholden to the Chinese Communists like the rest of the world is during these chaotic times. From trillion-dollar century-old bonds to stock market restrictions, the paper tiger might not roar anymore due to America's desire for freedom from the Made in China shackles that have enslaved the U.S. to the dragon for far too long.
Big Trouble in Little China
Liberty Nation recently reported on speculation that the White House is ostensibly considering defaulting on some or all of its $1.1 trillion debt owed to China. The purpose behind this unlikely move is to punish Beijing and make President Xi Jinping and his administration pay for mishandling the Coronavirus pandemic. Local media reports suggested the central government was looking at retaliatory measures, including unwinding more of its holdings of Treasury debt.
But it now may be a case of turning the tables, according to the Fox Business Network.
The cable news channel discovered that American Bondholder Foundation possesses $1.6 trillion of Chinese debt, including interest. FBN reported the bonds were issued by the Republic of China (RoC) in 1912 and backed by gold but were defaulted on in 1938. The RoC government fled to Taiwan after Mao Zedong and his communist regime took over the country in 1949 and formed the People’s Republic of China. Beijing contends that Taiwan is a part of China. Under international law, successor governments are responsible for the debts of their predecessors.
In 1973, U.S.-China diplomatic cables revealed that the State Department informed Chinese officials the debt would not need to be repaid at the time, but it would not be forgiven either.
The legal viewpoint, say the experts interviewed by FBN, is that it would be difficult to make a case that forces China to be responsible for century-old obligations. Still, there is a global precedent. In 1987, Prime Minister Margaret Thatcher mandated China to repay British bondholders or lose access to Great Britain’s capital markets. Both sides reached an agreement. That said, should Beijing choose to make good on some bonds and not others, the government would be in selective default. If this is the case, it cannot sell debt in international markets.
In either situation, President Donald Trump and his administration might use the bonds as leverage in negotiations pertaining to trade or its $1.1 trillion debt. Beijing and Washington may come to some type of arrangement that offsets each other’s red ink.
The news comes after it was announced that the White House is divesting $4 billion in equity stakes in Chinese companies held by the Federal Retirement Thrift Investment Board. President Trump is also considering options that would incentivize companies to shift their supply chains out of China to ensure the U.S. is not so dependent on the world’s second-largest economy in the future. Overall, Republican senators have introduced the COVID-19 Accountability Act that extends the president the authority to penalize China through sanctions, loan restrictions, and bans on foreign firms.
Out of Luckin
The Nasdaq will soon announce new limitations on initial public offerings (IPOs) that will make it more difficult for foreign companies to debut on its stock exchange. But the measures will likely affect Chinese businesses the most as the Nasdaq is responding to concerns about the growing number of Chinese IPO prospects not being accountable or transparent, and maintaining close relationships with insiders.
For the first time in its history, the Nasdaq will place a minimum value on the size of IPOs. Reportedly, the soon-to-be-unveiled measures will mandate companies from other countries to raise $25 million in their IPO or at least one-quarter of their post-listing market capitalization. Refinitiv data show that of the 155 Chinese enterprises that have been listed since 2000, one-quarter were below that threshold.
The rules would be in addition to last year’s restrictions that targeted low liquidity and insiders holding large portions of shares.
The new tightening comes as Luckin Coffee was discovered to have falsified its sales figures. The coffee company, which filed an IPO early last year, conducted an internal investigation and found that the chief operating officer and several employees cooked the books to make its revenues appear bigger than they really were. Shares cratered on the news, and Nasdaq delisted the stock.
It is unclear if the decision will impact U.S.-China diplomatic relations, but it is one more ingredient to add to the toxic recipe that might trigger a second trade war.
Escape from China
Interestingly enough, the Senate approved a new bill that would delist some of the largest Chinese companies in the world, like Alibaba and Baidu, from U.S. stock exchanges. The bipartisan legislation would mandate these businesses to certify that they are controlled by a foreign government. Legislators were encouraged to tackle the problem after seeing billions of dollars transferred from pension funds and college endowments into Chinese corporations. As expected, these companies' shares tumbled. Senator John Kennedy (R-LA) said on the Senate floor that he does "not want to get into a new Cold War," noting that he only wishes "China to play by the rules."
The world’s relationship with China may never be the same again. COVID-19 may have been the catalyst to accelerate this trend, or it could have been the straw that broke the camel’s back. Contrarians would contend that the U.S. has a lot more to lose by severing ties, but China's economy is a fake one that is built like a house of cards. It is a Ponzi scheme market comprised of money-printing, bailouts, and zombie companies. If the U.S.-China partnership ends, American businesses may not be able to import as much cheap stuff from Beijing as it used to. But the supply chain data point to other jurisdictions that may be the next best thing, such as Taiwan, Thailand, the Philippines, or Bangladesh.
It looks like Washington has called in Snake Plissken to escape from China. “Got a smoke?”
~
Read more from Andrew Moran.
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