I know I said recently that I would limit my comments on the ongoing fight between the U.S. Securities and Exchange Commission (SEC) and its Chinese counterparts over access to audit materials, but an Op/Ed in yesterday’s Financial Times forced my hand (or mouth, as it were).
I’ll just do the lazy man’s cut-paste-comment method instead of trying to summarize the thesis of Ann Lee, the author. Suffice it to say that Lee believes now is not the time for the U.S. to be picking this fight and that the downside of doing so might be significant. I find her arguments to be less than persuasive.
Let’s have a look.
[T]he SEC move will strain a bilateral relationship with China that is already on the rocks.
[ . . . ]
Corporate America would not thank its government for risking access to China’s growing middle-class market.
Fair enough. One could bring this up with just about any bilateral issue. The U.S.-China relationship is important and America should think twice before ratcheting up tensions. That being said, this cannot be a blanket reason for inaction on all fronts. Moreover, there is a need for additional oversight of U.S.-listed Chinese companies, many of which have been caught cooking the books. Surely the SEC, whose primary job is, or at least used to be, to protect investors (particularly non-institutional investors), can justify the need to act here.
If this dispute ends up with numerous Chinese companies de-listing, would Beijing retaliate against American foreign investors? I doubt it. China is big on reciprocity, but on a proportional basis. There is no reason to believe that China would somehow institute broad ranging market access restrictions against U.S. foreign direct investment. Perhaps something narrowly targeted (whatever that might be), but “corporate America” need not worry about this dispute too much.
By creating a situation where Chinese companies will be forced to delist, the SEC risks depriving US citizens of lucrative opportunities to invest in fast-growing companies. The US economy may also suffer in the long term if it earns a reputation for legal hostility to Chinese companies.
Lee, who used to work for a hedge fund, seems very concerned with investment opportunities. That’s fine, but she doesn’t seem too worried about consumer protection. That’s why we have securities law in the first place, and even hedge funds benefit from greater transparency. Yes, it’s possible that this fight might result in some Chinese companies de-listing, but does Lee really prefer that the SEC look the other way and simply trust that these companies and their auditors will cease tolerating fraud?
As to a U.S. reputation of hostility towards Chinese companies, I think that horse left the barn years ago (Huawei? ZTE? CNOOC?) and this dispute will neither be the genesis of such a reputation nor the end of its existence. Besides, in contrast to the treatment of companies like Huawei and ZTE, many of these U.S.-listed Chinese companies have already been found guilty of wrongdoing. Surely some of this “hostility” is warranted?
Obviously the US must honour its laws and treat everyone equally under them. However, two problems arise. First, laws themselves can be flawed. Some US laws have the effect of reducing competition so that large companies, which may have helped influence their passage, can maintain dominant positions on their turf. The Sarbanes-Oxley act, for example, imposed such onerous requirements that many young companies chose not to access public markets.
OK, my first reaction to this is to admit that yes, it is possible that the rules at issue here are flawed. Unfortunately, Ms. Lee never provides any details on what those flaws are or how the law might be rewritten to ameliorate the situation.
Additionally, Ms. Lee is once again showing off her investor mindset here by complaining about Sarbanes-Oxley. Look, I’m no fan of that law either, and I’ve had more than one Chinese company here tell me of how it shelved its U.S. IPO plans after factoring in the time and expense of legal compliance.
Yes, Sarbanes-Oxley may have resulted in fewer Chinese companies listing in the U.S. Ms. Lee sees this as lost investment opportunities. But it’s also possible that some of these companies never belonged on a U.S. exchange to begin with and that Sarbanes-Oxley scared off some bad actors, a victory for consumer protection.
Second, regulators often have their own agendas. For instance, regulators may be tempted to punish small companies so that they can achieve quick recognition for being tough, while leaving larger companies alone. It is curious that the SEC is choosing to go after Chinese companies when the regulator so conspicuously failed to prosecute the Wall Street firms, or their auditors, responsible for the financial crisis. Again, the ones who lose out are the entrepreneurs, investors and society at large, while the privileged few benefit.
Uh, wow. Some real cognitive dissonance here. This whole dispute is about transparency and consumer protection. This benefits smaller investors more than the big boys, who should have sufficient resources to fully vet some of these dodgy Chinese companies. Ms. Lee is absolutely right that the SEC has been asleep on the job when it comes to prosecuting the folks responsible for the Great Recession, but how is that at all related to this dispute? Moreover, if some Chinese companies are forced to de-list as a result of this fight, how does this enrich the “privileged few” and deprive “society at large”? I’m genuinely puzzled by that statement.
Rather than pick fights with everyone, US regulators should learn to see the wood from the trees. As the world gets smaller, we must all make a greater effort to get along with each other. Understanding and respecting each other’s laws would be a good place to start.
It is inevitable that at times the legal principles of two countries will clash. But in these cases a diplomatic solution ought to be the first course of action, rather than naming and shaming.
Blah blah blah. Why can’t we all just get along and sing kumbaya around the campfire? Please.
The U.S. government is not picking fights with everyone, but it is trying to fix an outstanding problem that has already led to significant investor losses, not to mention across-the-board valuation problems for many U.S.-listed Chinese companies that have done nothing wrong (i.e., guilt by association).
And what’s this about respecting one another’s laws? These companies are coming into the U.S. to avail themselves of the American capital market. Shouldn’t they have to follow U.S. law? I’ve represented U.S. companies in China for well over a decade, and believe me, they all have to follow China law when they come here. What’s the difference? Moreover, note that when Ms. Lee says that nations should respect one another’s laws, in this instance she is really suggesting that the U.S. should defer to China’s laws, but she has not explained why.
Yes, there is a conflicting China law here, involving the disclosure of information that may be deemed state secrets. I personally think this state secrets argument is a pretext, but either way, if a compromise cannot be reached, we’re dealing with U.S. listings, and U.S. legal concerns should prevail. Remember that the U.S. law at issue here is not discriminatory; it applies regardless of nationality.
Finally, Ms. Lee talks about a “diplomatic solution” as the first course of action. She must have been busy or something, because the authorities in both countries have been discussing this issue and looking for a solution for a year already. So far, diplomacy hasn’t worked, but it definitely has been tried.
Try as I might, I’m not persuaded by any argument that places all the blame on the SEC and calls for some sort of unilateral disarmament. That might be acceptable to certain large, savvy investors, but not for everyone else.