On Friday, President Trump boldly made clear that the United States would no longer be patsy to China. He clearly stated a desire to remove fraudulent Chinese shares from our markets along with Chinese companies that violate human rights, flout our regulations, and threaten our nation's security. And yet, as he was speaking, Blackrock was actively using public money to buy Exchange Traded Funds (ETFs) that appear to contain Chinese investments, essentially (albeit stealthily) undermining his stated policy intentions. This must be addressed!
Here's the Background:
President Trump gave his remarks at a Friday Press Conference, directly endorsed one of the critical things that a few of us have been advocating. In my last blog post, I shared why and how we should deregister and delist potentially fraudulent Chinese shares from our markets.
Why We May Have to Deregister (and Delist) Communist Chinese Shares from US Markets
President Trump echoed those sentiments in his press conference on China:
Here is the full speech on YouTube.
This was bold leadership and likely went against the advice of every Wall-Street-devotee of his administration. Very few wanted to call out China or address their unfair advantages in our stock market until the President began to pay attention. A small group of us along with some patriotic politicians were both pounding the table and knocking our heads against the wall to get this done. But this President must not be thwarted on this important issue. He had the boldness to stop the Thrift Savings Plan (TSP) from investing billions of dollars of the retirement savings from public servants, retirees, active-duty military, and veterans in Chinese shares (something else we had been advocating). That action now seems obviously right to all but Wall Street sycophants.
Now, however, the President has taken the same logic and wants to put a stop to Chinese companies receiving better treatment than our own companies in our markets. He wants to end the string of frauds pushed on American investors. He wants to stop companies that violate our rules, abuse human rights, or threaten national security from taking American investor dollars. Good!
For too long, Chinese companies have been allowed to get away with failing our audit standards. They refused to allow companies to submit to the same oversight. Sadly, during the Obama/Biden years, we actually signed a Memo of Understanding that gave them permission to flout our rules and safeguards. With the exposure of accounting fraud at Luckin Coffee (that some called the "Starbucks of China"), investors saw $12 billion of shareholder value evaporate. NASDAQ pushed for delisting. It's bad enough that happened but it is far from the only example.
You may be asking, "Why?" The answer may be that Joe Biden has been a huge promoter of China. Consider this from a recent article by John Solomon:
China is cheating on Obama-era stock market deal, Trump urged to intervene
May 19, 2020–Feds acknowledge China hasn't lived up to 2013 deal on Sarbanes-Oxley audits, putting investors at risk. Key China adviser urges Trump to act.
Since 2013, Chinese companies have been allowed to participate in U.S. stock and bond exchanges without having to fully comply with the same Sarbanes-Oxley Act accounting practices and risk disclosure required of American companies.
The concession was made in a little-noticed Memorandum of Understanding executed seven years ago by the Public Company Accounting Oversight Board (PCAOB), a nonprofit regulator empowered by the Sarbanes-Oxley law to ensure U.S. investors are protected from making bad investments because of faulty audits or financial information.
The agreement was reached in May 2013 after Chinese leaders pleaded for improved access to American capital markets in multiple meetings with then-Vice President Joe Biden, transcripts from the Obama administration's archives show…
In the end, China never allowed the inspections and mostly failed to comply with the document requests, essentially allowing the country's U.S.-listed firms to enjoy all the benefits of U.S. stock market access without the need to comply with Sarbanes-Oxley. The SEC and PCAOB has been raising red flags since 2018 but its lack of action has drawn significant criticism.
In the period leading up to the MOU, China pleaded its case to Vice President Biden, who was a point man for Obama on many issues related to China and frequently visited with Chinese leaders, according to documents in the Obama administration's archives. Biden himself embraced China's economic emergence as good for the world.
"I've held the view for so many years and continue to hold the view that a rising China is a positive development," Biden declared in 2011 speech.
Biden hosted current Chinese President Xi Jingping, then Beijing's vice president, at an event in August 2011 where the Chinese leader urged that the Obama administration "eliminate the interferences of trade and investment protectionism" in American markets, according to a transcript in the Obama administration archives.
Biden responded with a promise to work toward a solution, the transcript shows.
"You have legitimate concerns about access to America. And I would argue we have legitimate concerns in reverse," Biden said. "But the trajectory of the relationship is nothing but positive, and it's overwhelmingly in the mutual interest of both our countries. And it's presumptuous to say this, but I think it's in the interest of the world. It's in the interest of the world that we increase the interaction between not only our business community, but our economies writ large."
A month later, Biden penned an op-ed rejecting the notion that China posed a threat to U.S. supremacy and urging Americans to invest in Beijing's success.
"Some here and in the region see China's growth as a threat, entertaining visions of a cold-war-style rivalry or great-power confrontation. Some Chinese worry that our aim in the Asia-Pacific is to contain China's rise," Biden wrote. "I reject these views.
"I remain convinced that a successful China can make our country more prosperous, not less," he added.
Within 18 months of that meeting and op-ed, the MOU was signed.
Of course, we know about the Biden family and China. We wrote about it exactly one year ago (June 1, 2019):
I greatly appreciate President Trump for his strength on China. No president of my lifetime has been as strong in protecting Americans from the Chinese threat. And I'm grateful to be part of an effort at the Committee on the Present Danger-China, working closely with friends Frank Gaffney, Steve Bannon, and Kyle Bass among many others. Another true leader in this fight is Christopher Iacovella, CEO of the American Securities Association. He wrote a terrific piece over the weekend for Real Clear Politics. Here are excerpts:
Washington Must End China's Fraud on Our Markets
China needs access to Western capital to become a dominant world superpower and it found a willing partner in Wall Street. The partnership works like this: First, Wall Street spins a narrative about emerging market returns and the "can't miss China growth story." Then, it markets and sells Chinese companies to American investors. After the sale, proceeds are sent to China, it continues to support these companies by putting them in stock index funds, promoting them in the financial media, and lobbying Washington on their behalf.
But this arrangement only succeeds if U.S. regulators cannot audit the financials of Chinese companies. So, in 2013, the CCP persuaded high-level American officials to agree to give Chinese companies a "free pass" from the Sarbanes-Oxley rules enacted to protect investors in the wake of the Enron and WorldCom frauds.
Since then, China has used billions of American investor dollars to finance its cyber army, its technology-driven elimination of civil liberties, its human rights abuses, and its destruction of the environment. Wall Street ignores this inconvenient truth in its pursuit of profit.
Now, the partnership is under fire because the reason the CCP didn't want U.S. regulators to audit Chinese companies has finally been exposed….
I was on Steve Bannon's Warroom Pandemic program three times recently to discuss this (here's one example) and he appeared in the Economic War Room with me. We featured Kyle Bass in our Economic War Room program on the TSP and have featured Frank Gaffney several times in the War Room.
The good news is that President Trump is right about China and right about getting Chinese shares out of our markets. The bad news is the extent to which he is already being undermined.
My first concern is the President's Working Group on Financial Markets (aka the "Plunge Protection Team"). This group is composed of Wall-Street loyalists who are under enormous pressure to make us play nice with China. Most expect they will do everything possible to soften the tone. And, we saw Wall Street fall early Friday when it was known that the President would address Chinese shares in our markets. But the market rebounded after the speech, with Barron's even suggesting the President "pulled his punches on China."
Maybe Wall Street was relieved that the Treasury Secretary, Fed Chairman, SEC Chairman, and CFTC Chairman would be the ones advising the President on removing Chinese shares from our markets. These are all basically Wall Street figures and would be considered among those who would push for a friendlier approach to China. Under normal circumstances, this would be a huge disappointment to anyone who wants China to have to play fair. Given the stubborn resolve and determination of President Trump, however, we may watch him do another miracle and literally bend the Plunge Protection Team to his will. We saw him direct Larry Kudlow to write the key letter on TSP, something that would not normally be in his pro-Wall Street nature. There will be fireworks, for sure. But we know that the Senate backs this idea, voting 100-0 to get rogue Chinese stocks out of our markets.
President Trump will continue to ensure that American investors are protected as well as our national security. He will also work to expose the many human rights violations that have been unwittingly funded by American investors. The question is, "To what degree will his own Administration try to undermine him in service of Wall Street?"
There have long been rumors that the President's Working Group on Financial Market (aka "Plunge Protection Team") would buy shares to prop up stock prices in the event of panic selling. That is certainly done in other countries like Japan. It was done in Hong Kong. But it was always rumor and speculation in the United States, at least until recently. Now, with the passage of the pandemic rescue program, the Fed is actively buying ETFs with $75 billion of public money leveraged 10-to-1. They are working through Blackrock to do it, effectively investing $750 billion. Involving Blackrock may be the most troubling part.
First, Blackrock is notorious for favoring China. While Larry Fink has no qualms calling out American companies over ESG issues, he is more than happy to invest in China. So simply as a matter of principle it seems wrong to entrust American public money to the discretion of a manager who specifically favors Chinese shares while holding American companies to a more difficult standard. This is what the President specifically said we shouldn't do!
Second, we now know the ETFs that the Fed facility has been buying. The Wall Street Journal conveniently provided a list. Brian Kennedy, Chairman of the Committee on the Present Danger-China sent me a spreadsheet. Here's the summary:
When I did a very cursory search through the holdings of these funds, it didn't take long to uncover investments in Bank of China in one of the ETFs. I took a screen shot:
I suspect a thorough review would find quite a few other Chinese companies. Again, when the President is specifically calling for the removal of Chinese shares from our markets, his own Administration is overseeing public investment into Chinese bonds. That is simply ABSURD!
So what is the solution? My strong recommendation is that any group the President is using "to study the differing practices of Chinese companies listed on the U.S. financial markets, with the goal of protecting American investors" MUST include those who truly know how to do precisely that. I am strongly recommending that the President immediately recruit experts such as Chris Iacovella and Roger Robinson for such an effort. Roger is a friend, but he is also perhaps the best expert possible. He was a leader among the key people that President Reagan turned to in order to defund the "evil empire" Soviet Union during the Cold War. We have featured him several times on this in the Economic War Room. You can see a small sample of his team's research capabilities with his Huawei Risk Tracker.
Mr. President, you are instinctively 100% right about China. Now, it's time to get the right people on your team to effectively execute your intentions to protect the American people, preserve our national security, and defend human rights in Hong Kong and China.
You can get a FREE Economic Battle Plan on this issue at EconomicWarRoom.com/Battleplans. Look for Field Order: 051520.