This isn’t decoupling?

After last week’s newsletter had been sent, more than one analyst came out to pronounce that Beijing’s decision to review Chinese companies’ IPOs on the New York Stock Exchange over cyber-security concerns was not about financial decoupling. Rather, it was a natural progression of China’s systematic tightening of controls over the rambunctious tech sector, they said.

Today, it emerged that Beijing plans to exempt companies wanting to list on the Hong Kong Stock Exchange (HKEX) from any such data-security reviews.

As had previously been argued, bureaucrats such as those at the Cyber Administration of China have been having a well-deserved run in the limelight recently. But make no mistake, their new-found powers are resting on their interests being aligned with loftier political goals, particularly those laid out by President Xi Jinping on July 1 speech atop Tiananmen Gate, which are aimed primarily at establishing China’s position in the world, primarily against the United States.

It would be hard to find a better example to illustrate this point than the decision to exclude HKEX from the CAC’s reach. Investors certainly got it, as 0388.hk surged soon after the news broke, closing the day up 3.27%. What other way is there to see it, other than Beijing would like to hasten the removal of its best companies from New York to Hong Kong by applying its rules differently against companies in the two jurisdictions?

It is not hard to understand why they are doing this. It offers an alternative to enduring humiliation at the hands of the Public Companies Accounting Oversight Board, which this week wrapped up its consultation period on planned mechanisms for removing Chinese companies from the NYSE that do not submit audit reports meeting the PCAOB’s standards. If the PCAOB has its way, delistings will likely follow in 2025. But this is already becoming an issue for Republicans in Congress, who want to see more urgent action.

That the announcement came hours after US President Joe Biden confirmed his administration would issue a business risk advisory against Hong Kong is probably coincidence. It might not be seen as an out-loud declaration that the Hong Kong bourse has no independence from the central government. And perhaps Beijing wasn’t lifting a middle finger to Biden and his friends in Congress who had been calling for Chinese companies to be kicked faster off the NYSE. But gee whiz, it sure looks like it.

Investors who piled into 0388.hk today might want to spend some time reading the latest weekly newsletter from Foreign Policy’s China editor, James Palmer. With an understated headline, “Didi’s problems aren’t being priced properly,” Palmer makes the case that investors aren’t spending enough waking hours understanding the politics of what’s going on with these US listings. Highlight of the article is a quote from Dominick Donald, a United Kingdom-based geopolitical risk analyst and director at Autolycus Advisory: “The canary has died. Get out of the f—ing mine shaft and tell your mates to leg it too.”

That might be a touch melodramatic. But his football team had just lost the European Championship to Italy, so perhaps Donald should be given a pass. His point, expressed more subtly, however, is closer to the mark than many heads of the world’s biggest financial conglomerates might like to admit. As Donald explains, “ The huge snag with risk analysis writ large is that China fees underpin the corporate market, one way or another – whether it’s the due diligence commissioned for IPOs, or the (indirect) effect of firms buying political risk analysis not wanting to hear bad things.”

Palmer himself hits the nail more squarely on the head: “The long-term appeal of China continues to enthral Western businesses – even as the doors close. That’s a dream going back to the 19th century, when American missionaries and salesmen alike imagined hundreds of millions of untapped consumers eager for their products. In the 2000s and early 2010s, that vision seemed to be paying off, but many firms seem to be too eager to ignore the growing decoupling.”

In any case, how Biden responds to any perceived middle finger will be for deeper analysis next week. For now, it is worth considering the scenarios.

The easiest is that Dimon, Solomon, Gorman, and countless other Masters of the Universe will ring up the White House to urge caution. The United States has too much invested in the stability of the Hang Seng Index – or at least the Hang Seng Tech Index – to consider the necessary response, they might say.

The mid-case scenario is that Biden asks his team to consider the response. Which is probably to, first, sanction companies that delist from the NYSE and move to the HKSE, meaning US financial institutions may no longer invest in them; second, to consider sanctioning the entire HKSE; and, third, to consider cutting Hong Kong off from the US dollar. And then someone leaks the discussion.

The most realistic scenario is that Biden listens to both former Vice President Mike Pence, who might well replace him in 2024, as well as his political advisors, who tell him that the CAC is but a tool of the Marxists running the CCP. He then, wisely, decides to start gradually escalating the confrontation by moving to the next level of disengagement: He merely threatens to sanction companies that have decided to up stakes from the NYSE because they don’t want to submit to auditing standards set by the PCAOB.

How hard could that be? Issue a shot across the bow, and see what happens?

It will be known soon enough.

In the meantime, it is probably worth considering the longer term. For how many years, if not months, will Hong Kong be able to straddle the divide between the international financial system, denominated in US dollars, and Xi Jinping Thought?

This question might have been on the minds of those at the US State Department who tried this week, in vain, to arrange a meeting between their No. 2 and her Chinese counterpart. It might also have flitted across the thoughts of Chinese Vice President Wang Qishan, who this week appeared at a ceremony to honor the 50th anniversary of Henry Kissinger’s “secret trip”, but could only tell his hosts that China was not their problem; they themselves were. It would almost certainly be getting serious consideration at the Department of Defense, if this interview with their former top analyst on Chinese affairs is to be understood (China is a threat to the US on every level: economic, social, cultural and political.)

It is hard to avoid the feeling that if a bust-up is going to happen, Hong Kong is likely where the hardest punches will be thrown.

Similarly, look at the smoke signals coming from Zhongnanhai. There must be a good reason why “Asia Czar” Kurt Campbell believes Beijing doesn’t want anyone “nowhere near, within a hundred miles” of President Xi meeting with their US counterparts right now. The Wolf Warriors are only upping their game. And the glee with which the SCMP has been reporting “Hong Kong to benefit from China’s Didi crackdown” must have registered in Washington. On the ground in Hong Kong, meanwhile, local officials are too busy exonerating their own for having attended expensive hot-pot meals with, among others, China’s biggest property developer, to worry about the gyrations of the stock exchange.

None of this suggests US-China relations are about to go to Defcon-5. But it should be cause for pause. And anyone with a dollar in Hong Hong should be more than thinking about it.

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