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A China Reset?

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It’s already happening—mostly to the advantage of Beijing.
This article appears in the June 2023 issue of The American Prospect magazine. Subscribe here.
U.S.-China relations are sour, with President Xi Jinping escalating military threats against Taiwan, walling off basic economic data on the Chinese economy, and doubling down on predatory development strategies. China views U.S. export controls as a deliberate scheme to maintain U.S. “technological hegemony.” The Xi-Biden summit in Bali last November was quickly overtaken by the spy balloon fiasco, which led to a cancellation of a long-planned fence-mending visit by Secretary of State Antony Blinken.
Innumerable commentators have called for a reset, to break the cycle of escalation and counter-escalation, reduce military tensions, and achieve an economic truce. As Treasury Secretary Janet Yellen put it in a somewhat wishful speech April 20, “We believe that the world is big enough for both of us.” That, of course, is axiomatic. The difficult question is who defines the terms.
A reset is the plea of the U.S. business and financial elite that profits from trading with China, outsourcing production to China, and investing in China. That sanguine view is shared by free-market economists who are appalled by the Biden administration’s turn to industrial policy, yet think that China’s state-led capitalism is somehow consistent with free trade.
But given the fundamental differences in national interests and strategies, is a symmetrical reset even possible? Under Xi’s increasingly authoritarian regime, China’s determination to displace the U.S. has only intensified. Would gestures to reduce conflict and seek a peaceful economic coexistence be reciprocated—or just treated as a sign of weakness?
While Biden is going full speed ahead with domestic industrial policy, the U.S. has already pulled back on policies to contain China. In many ways, the get-tough approach to China’s predatory mercantilism peaked last year.
TWO EMBLEMATIC CASES ARE CHINA’S ACCESS to U.S. capital markets, and the long-pending revision of strategic export controls. In 2020, Congress passed by voice vote the Holding Foreign Companies Accountable Act. The law required Chinese companies to comply with SEC disclosure and audit requirements, or they would be delisted from U.S. exchanges. The bipartisan lead sponsors included Republican John Kennedy of Louisiana in the Senate and Democrat Brad Sherman of California in the House.
Biden’s SEC, under Gary Gensler, was strongly supportive. In 2021, Gensler went after shell companies of China-based corporations, incorporated in offshore regulatory havens such as the Cayman Islands. Their affiliates are listed on U.S. stock exchanges with little if any accurate financial information.
Gensler directed SEC staff to “take a pause” from listing Chinese shell companies and warned investors about the risks. “I’ve asked the SEC staff to ensure that the companies provide full and fair disclosure that what [shareholders are] investing in is actually a shell company in the Caymans,” Gensler said in a video posted at the SEC YouTube channel.
In August 2022, the Public Company Accounting Oversight Board, a self-governing nonprofit created by Congress to oversee accounting standards, made a deal with Chinese financial authorities that gives PCAOB access to the audits of Chinese companies performed by Chinese accounting firms. In return, a China-based company can use a Chinese accountant to satisfy the requirements of U.S. law. In December 2022, based on field work in China and Hong Kong reviewing audits by two large accounting firms, the PCAOB retracted its earlier finding that Chinese authorities were blocking audits. This then freed Chinese companies to list on U.S. stock exchanges.
Given the fundamental differences in national interests and strategies, is a symmetrical reset even possible?
Given the fundamental differences in national interests and strategies, is a symmetrical reset even possible?
Gensler noted that PCAOB inspectors had found “numerous deficiencies at audit firms in China and Hong Kong,” and warned that if the Chinese do not deliver full access, the SEC would prohibit trading in these companies’ securities.

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