Tuesday, November 4, 2014

China's first economic power in the world. Part Two: Aiming at the financial domination

In this second article on the financial consequences of China’s advancement to the world's economic center, it should be noted that the main point is the growing rivalry between the US Securities and Exchange Commission, the SEC and its famous Chinese counterpart, The China Securities Regulatory Commission (CSRC).

The goal of this financial war is to capture the huge amount of capital, transiting through the financial markets, to fund the multinational corporations.

The weapons of this war are necessarily validity checks and credit and financial compliance market organizations. In the United States, the financial crisis of 1905 and that of 1929 have led to the ruin of many small shareholders. As a result, the State of Kansas in 1911 was the first to create the Blue Sky Laws, and then most states in the U.S. followed, including New York.

Federal laws have since taken over and created a strong set of rules with the Securities Act of 1933 to protect investors in the financial markets. The Securities Exchange Act of 1934 created the SEC itself.

Then followed a series of laws like the Trust Indenture Act of 1939, the Investment Company Act of 1940, and the Investment Advisers Act of 1940.

Following the Enron scandal which again threatened the stability of markets, the Sarbanes-Oxley Act of 2002 was passed to create accounting and management standards specific enough to prevent such future incidents. This complex and poorly drafted law added some useful guidelines but also a lot of confusion.

The last major step of regulation in the United States was the famous Dodd Frank Act and Volker Rule, named after the former head of the Fed. This 2010 law signed by President Obama aims to prevent owners of big U.S. and international investment banks and trading companies from proprietary trading.

This arsenal of regulation is not the result of a particularly disinterested kindness of Americans. This protection of investors against massive fraud in the financial markets aims to capture the gigantic flow of U.S. and international capital into US financial markets. The more secure the markets, the more investors of all nations from around the world will have an interest and a willingness to put their money in U.S. financial markets.

Whether they are commercial banks, savings banks, businesses, sovereign wealth funds, hedge funds, insurance companies, savings banks, Chinese Trusts, REITS, investment funds, trusts, classic and conservative financial or exotic vehicle, in addition to small holders by their brokers and intermediaries banks, funds provided to the US financial markets are the financial and economic life of the United States of America. The wealthier the markets are, the wealthier America.

The Securities and Exchange Commission is the supreme authority of the U.S. financial markets and by repercussion of all the companies that are listed on the New York Stock Exchanges, or who invest in the NYSE, specifically all banks and insurances on the planet as well as all multinational companies worldwide. In other words, the SEC controls everything, everywhere, all the time.

The Big Five are the giants of the accounting, auditing and certification of the balances sheets of all the large companies in the world. The Big Five validate and certify the financial statements of the corporations listed on the New York Stock Exchange, the NYSE companies.
The Big Five are the guarantors of the regular financial health reports of the listed companies.
These health bulletins determine the price of the shares of these corporations and therefore the course of actions of these companies.

To close the loop, since the SEC controls the BIG Five, this means that the great leading controllers of the SEC control the controllers.

One of the goals of the U.S. financial markets has been to double-list companies on Wall Street and in the stock exchanges in Hong Kong and Shanghai. Originally this was meant to produce more money, more investments, more shareholders, and more money again.
But this double-listing also proved to be the Achilles’ heel of the U.S. financial supremacy.

Between 2011 and 2013, one of the Big Five, a subsidiary of Accenture in China, and then others among the Big Five, have been the target of the SEC regarding the audit of listed Chinese companies in both the financial markets China and in Wall Street.
The SEC required that Accenture deliver secret information on its Chinese corporate clients. If Accenture did not comply, then Accenture leaders could be imprisoned within the United States and Accenture would then be hit with huge fines.

However, for the first time in the SEC history there was a complication of size.

This time, the China Securities Regulatory Commission (CSRC) and the Chinese Government showed their teeth.
The CSRC is the equivalent of the Chinese SEC.

The argument of the CISC and Chinese Government is that the information required by the SEC from Accenture about corporate clients was Chinese about Chinese trade secrets protected by Chinese law on secrecy of business transactions. Their violation would have resulted in the imprisonment of the Accenture leaders in China this time.

In other words Accenture leaders had a choice between obeying the SEC and going to jail in China or disobeying the SEC and going to jail in the United States.

After two years of struggle, the Accenture cases, and other similar cases, have resulted in a negotiated agreement. Chinese financial authorities have authorized that certain information be disclosed to the SEC and the SEC had to be content with only receiving a small portion of the information that the SEC had first requested.

And so, there was a clear and total victory by China who got what it wanted from the beginning: for the world to recognize the supremacy now shared by the United States and China's domination of international finance and international financial law.

China has long observed this phenomenon essential source of US economic and financial superpower. China then duplicated this organization by developing two complementary financial markets: Hong Kong and Shanghai.
China’s financial law is largely inspired by American institutions and American laws. It was widely used to create and develop the stock exchanges in Hong Kong and Shanghai.

Chinese financial law is largely inspired by the US financial law and now in many areas it tends to be superior to it.

In the same way that the European Commission in Brussels and the Court of Justice in Luxembourg took the example of the US anti-trust laws of the late nineteenth century and early twentieth century, and have improved them from the Treaty of Rome 1957 to the development and implementation of  a policy of preserving competition in Europe and making it stronger and more effective than the anti-trust laws developed by the Americans themselves, the same way China has taken the U.S. financial law and made it stronger and more efficient for itself in China and abroad.

Then China has chosen to confront the US financial giant. This confrontation is not purely inspired by national pride. This confrontation is for the supremacy of the financial markets and the largest possible control of the international investments that are then injected into the economy.

The United States wants the money for itself.
China wants the money for itself.

What kind of volumes and amounts are we talking about?
More than$ 500 billion per day in the financial markets.
More than $10,000 billion per day for money and bond debt markets.
And $5-6,000 billion per day on the forex currency market.

This kind of money is at the center of rivalry between China and the United States.

Olivier Chazoule
Professor of Financial Law
Director of Studies New York Institute for Business and Finance