Biden’s China policy poses greater risk to US financial companies than Trump

BEIJING – As tensions between the United States and China continue to simmer under a new government, the risks to U.S. investors with exposure to China will only increase, according to a Cowen report.

“We believe that President Biden represents a greater risk to financial businesses on the China front than President Trump,” Jaret Seiberg, DC-based analyst at Cowen Washington Research, wrote in a April 7 note. “We believe Team Biden will be more strategic, more lateral and more effective in the way it confronts China than Team Trump.”

The relentless American pressure is likely to make the Trump-era policy with initially long grace periods a reality. That includes removing Chinese companies from U.S. stock exchanges, Seiberg said.

Tensions between the two countries have risen under former President Donald Trump, who initially focused on trade and then switched to technology and finance. The Trump administration wanted to limit U.S. investment in Chinese companies and stocks with new regulations, but the policy had relatively less impact than tariffs and sanctions on Chinese companies.

Since taking office in late January, US President Joe Biden has maintained a firm stance on China. His government called the country a more assertive “competitor” and on Thursday added more Chinese technology companies to a U.S. blacklist, citing national security issues.

“(Exemption) is going to take place. Congress passed legislation last year and we see no likely scenario in which it repeals this law,” Seiberg said, and it is unlikely that Beijing will allow the US to investigate audits. “It will probably force these Chinese companies to trade in Hong Kong.”

In December, Trump signed a law stating that foreign companies could not be listed on a U.S. stock exchange if they did not heed the audits of the U.S. Public Accounting Authority for three consecutive years.

The council’s website contains about 300 cases of denied inspections, with the vast majority of US companies such as Alibaba and Baidu listed in the United States. In the last 15 years, some Chinese companies have been able to raise billions of US dollars by listing shares before their financial fraud came to light, causing huge investor losses.

Despite growing political tensions, 30 China-based companies were announced in the U.S. last year – raising the most capital since Alibaba’s giant stock market launch in 2014 – and many more have held initial public offerings since then. Optimists said the three-year compliance period would give companies and politicians time to act.

Cowen’s Seiberg expects the Biden government to block US investments in Chinese banks and expand a black investment list for US investments to include more Chinese companies, especially companies with alleged ties to the Chinese military.

Chinese companies are likely to face more challenges in acquiring U.S. financial companies, including fintech businesses, as restrictions on Chinese acquiring U.S. consumer data continue, Seiberg said.

Some extreme, but very unlikely, measures that the Biden government could take include banning Hong Kong from invading US dollars, he said. But he does not expect the US to go so far as to cancel China’s possession of US treasuries.

“This will destroy global demand for US Treasury bonds, as foreigners will fear they could become the next target,” Seiberg said. China is the world’s second largest holder of Treasurys.

The Biden government will also have to watch out for Beijing’s retaliation.

China could stop fulfilling earlier commitments and repeal changes that allow foreign companies to acquire majority ownership of their operations in China, including finance, Seiberg said.

CNBC’s Michael Bloom contributed to this report.