Start of an economic cold war?

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The Grand Auditorium in the Great Hall of the People
The Grand Auditorium in the Great Hall of the People, Beijing.

During the election campaign, Mitt Romney’s statement that “China is a currency manipulator” resonated throughout his economic plan and he made it a talking point to drive through this opinion into the public domain. Many feel that China artificially depreciates its currency in order to expand its export base which makes countries like the US worse off. A diametrically opposite view was taken by the Obama administration throughout their first term and in lockstep as soon as their second term started, they got the word out that China was not manipulating the currency.

This in addition to the reaction to Huawei and their security concerns in the last few months and it seems that the two ideologically opposite countries are entering a new phase of their relationship. What makes it interesting is the fact that on one hand China and the US are competing with each other to keep economic supremacy within their grasp while the other tries to steal it away. Meanwhile, the US still owes a large amount of its debt to China which makes them strange bed fellows. China and US have had these kinds of problems throughout their history.

Labour abuse is common with Fox Conn’s example the latest one where China has faced the brunt effect of US’s drive towards aggressive consumption based ideology and China has facilitated this hunger. The battle is now being fought between the nations against each other out in the open rather than private companies being involved. The latest move is by the US regulators who are looking to block the workings of China based companies in order to audit them. This has put into question the listings of many of the US based companies in China.

The saga started on December 3, when the US looked to shun the agreement between itself and China over their auditing procedures and asked for the filings in order to investigate claims of accounting frauds by certain companies. This is seen as a move towards uniformity where all companies comply with the same rules and escape any regulation loopholes. In order to stay listed, SEC wants all companies local or international to follow the same rules. The effect of this would be automatic delisting of many of the Chinese companies in the short term.

There is a lack of cohesion between the accounting laws of the two sides and so any probe has been blocked as there is no standing agreement which supervises both sides equally. The Chinese side sees this as an exercise of excessive power by the SEC which is not governed by any law or agreement. Already the stocks have seen a fall in their values based on the allegations of faulty accounting and embezzlement of funds while lying to their customers at the same time. SEC saw this as grounds fit enough to suspend and delist companies in the past and if the auditors do not make the companies come up to par, further delisting of Chinese companies is expected.

The next step in this situation is expected that China would also start delisting of companies if negotiations do not lead to the results that they want. SEC has only signalled with a warning shot till now to see how China responds and a lack of response is unsettling a few people, however, the extreme of delisting of all companies is seen as a little too drastic. The financial link between the two countries and the capital flow to and from China is too essential to abandon and so it is expected that the dependency of one on the other will culminate into a middle ground being reached with SEC, the auditing firms and the Chinese companies agreeing to a deal.

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