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a growing conflict between the United States and China:
ReplyDeleteChina and the United States are on a collision course — over accounting. Last week, the U.S. Securities and Exchange Commission (SEC) charged the Chinese affiliates of the world’s top five accounting firms with violating securities laws for refusing to hand over information on suspect Chinese companies to investigators. The move is the latest, most dramatic step in an escalating standoff that could easily lead to a financial version of Armageddon: the forcible (and unprecedented) delisting of all Chinese shares currently traded on U.S. exchanges, including big-name stocks like Baidu, Sinopec, and China Mobile — causing losses of billions of dollars and damaging the perception that the United States is friendly to Chinese businesses.
How serious could this get? Pretty serious:
Chinese companies won’t be the only ones affected if SEC-qualified Chinese auditors go the way of the dodo. Plenty of multinationals listed on U.S. markets, many of them headquartered in the United States, have substantial parts of their business in China. Yum Brands takes in 44 percent of its revenues from the KFC and Pizza Hut outlets it has in China. Car sales in China account for 34 percent of General Motors’ profits. These numbers matter to their global bottom lines, and to sign off on their SEC filings, their lead auditors in the United States need a PBAOC-registered Chinese auditor to vouch for them. If no such auditors exist, these companies have a problem. (There may be clever workarounds, such as dividing up the work among so many auditors that none of them is vouching for a “substantial” part of the business, but it’s a costly and cumbersome solution. Nor is it clear if easy loopholes can be created for multinationals with substantial China operations without tearing a big hole in the fabric of U.S. securities regulation).
If there’s one lesson we should have learned over the last half dozen years it’s that the international financial system has grown beyond the capacity of national and international institutions to control. The bailout of AIG, the largest bailout of a private company in U. S. history, was instigated because of actions taken by its financial products division, headquartered in London. Many of the counterparties with claims against AIG were foreign banks—Société Générale, Calyon (now Crédit Agricole Corporate and Investment Bank), Deutsche Bank, and Barclays, just to name a few—and the company’s failure could have taken down the entire international banking system.
Real shootin’ wars have been fought over seemingly trivial things. The War of Jenkins’ Ear between the United Kingdom and Spain in which 25,000 were killed, was not just about Robert Jenkins’s ear. It was about trade in the Caribbean and Spanish America. The War of the Oaken Bucket, in which 2,000 people may have lost their lives, wasn’t just over the theft of a bucket. It was based on the trade rivalry between Bologna and Modena.
An argument over accounting rules may seem trivial but the underlying issue is the oversight of international finance. Trillions of dollars are involved. That’s a lot more than an oaken bucket.