The Chinese Communist Party has tightened its grip over its political and economic system in a number of high-profile moves. From silencing those who mention Taiwan’s independence to quashing Hong Kong’s independence, the CCP is aggressively targeting people and institutions that it deems a threat. A new Bloomberg report finds that the Communist Party will be closing a legal loophole that benefitted Chinese tech companies. This change has worried U.S. investors and politicians who are rightly concerned about whether China is stable enough to invest in.
The China Securities Regulatory Commission is amending a rule that mandates companies get approval from the Chinese government to list their companies in the U.S. or Hong Kong. Before, tech companies were able to maneuver around this rule by setting up companies offshore. This loophole has been quite lucrative for Chinese firms, which have raised over $75 billion in first-time share offerings in the United States. Despite the financial success of companies that have used this loophole, Bloomberg reports,
The proposed change is the first indication of how Beijing plans to implement a crackdown on overseas listings flagged by the country’s State Council on Tuesday. Closer oversight would plug a gap that’s been used for two decades by technology giants from Alibaba Group Holding Ltd. to Tencent Holdings Ltd. to attract foreign capital and list offshore, potentially thwarting the ambitions of firms like ByteDance Ltd. contemplating going public outside the mainland.
Since the American and Chinese economies are increasingly intertwined, this is not only a problem for Chinese consumers. CNBC reported that the $2 trillion Chinese tech market has been a major object of American investment. This means that any volatility in the Chinese market can deeply affect our own economy. Politicians are becoming more aware of this issue. The Financial Times reported that Marco Rubio said,
“American investors still have no insight into the company’s [DiDi, a Chinese ride-sharing app] financial strength because the Chinese Communist party blocks US regulators from reviewing the books,” Rubio said. “That puts the investments of American retirees at risk and funnels desperately needed US dollars into Beijing.”
All of this volatility is projected to have a negative effect on the Chinese economy because regulating companies hurts growth and stifles innovation. Xi Jinping’s attacks on his own country’s firms show the dangers of a socialized economy. More important, it should serve as a warning to American investors who heavily invest in foreign, state-run economies. America can’t stop the Chinese Communist Party’s authoritarianism from hurting its own economy, and American investors should be careful tying their financial success to China’s benevolence.