why secondary markets (iii)

throwing away a valuable asset

The depth and strength of the US equity market is unequalled anywhere else in the world. It’s a source of competitive advantage for the companies which can raise new capital here relatively easily and quickly. Wall Street also a big plus for individual and institutional savers (i.e., pension funds), who have access to a broad array of attractive investments, as well as to the professionals involved in investment banking, asset management and trading.

Yes, the fact that a Chinese tech company is able to validate itself to home market investors as well as to raise funds through an ADR listing here is a plus for it. But it’s also a plus for you and me, who can easily buy shares here and who may be able to find brokerage research reports in English that will help us understand the nuts and bolts of a foreign firm’s business. And it’s a negative for China, because corporates have less reason to try to build and cultivate at home the kind of access to capital they can obtain in the US without the same missionary effort. And the threat of a ban has certainly bailed out the Hong Kong market, which is being roiled by Xi’s (crazy, in my view) attempt to accelerate the timeline of the SAR’s full return to mainland rule.

The net result would be, I think, a much stronger stock market in China and a consequent loss of business for Wall Street. American investors would sooner or later find a way around the ban, presumably either by working out a way to shift assets out of the US and into a jurisdiction where investment in China would be permitted. This is Pandora’s box opening.

As a pragmatic realpolitik matter, giving China three years’ warning of this impending move is a headscratcher. Yes, it gives US holders of ADRs time to adjust–and to open brokerage accounts elsewhere–but it also blunts most of the damage from denial of access to US capital by giving China such a long time to react. All in all, a brief moment of emotional satisfaction followed by the long-term pain of having shot yourself in the foot.

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