LONDON: By nature, I am an optimist and believe that the current global economic depression, the impending tsunami of defaults, and the currency and credit crises will provide a once in a lifetime opportunity for India. Recent developments mean there is an unprecedented opening for India to align itself with the United States investors by delivering transparency in the US securities markets, which China forbids its corporations to provide.
US CONGRESS PASSES HFCAA
This week US Senator John Kennedy submitted the Holding Foreign Companies Accountable Act (HFCAA) for unanimous consent. Kennedy’s bill was approved without objection. This legislation will attempt to level the playing field between US corporations and Chinese corporations.
The HFCAA mandates financial transparency by all foreign companies that issue stock and are either currently listed or intend to list on US regulated exchanges or seek to raise capital from any US investors. The bill requires that all Chinese companies submit to an audit that can be reviewed by the Public Company Accounting Oversight Board. Also, foreign corporations must disclose ownership stakes by any foreign government.
Currently, laws in China prohibit auditors’ work from leaving China, and China does not allow corporations to abide by US securities laws. China’s absence of financial “disclosure” laws and its willingness to grant exemptions from complete financial transparency to any foreign firm is insane. This HFCCA bill is a game-changer.
The HFCAA authorises regulators to deregister and/or delist any foreign company from all US exchanges if they fail to abide by US financial disclosure laws. It also prohibits non-compliant foreign corporations from borrowing any money from US investors. Expect many Chinese companies to be delisted, deregistered and deemed inappropriate investments for retirement accounts.
In recent years, regulators have allowed US retirement funds to flow into high-risk MSCI emerging markets index funds that track hundreds of mainland shares for Chinese companies—some of which are majority-owned by the Chinese government. These corporations are largely unrateable. It’s a safe bet that at least a few of these Chinese companies are Ponzi schemes that practise accounting fraud. US policymakers and the public at large want transparency, full disclosure and the ability to move away from China. Members of Trump’s White House team wrote a letter to Labour Secretary Eugene Scalia, instructing him that the $557 billion federal retirement program for government employees and military members known as the Thrift Savings Plan, should not have any money invested in Chinese equities; and what country can expeditiously provide alternatives? India.
India has a population of 1.3 billion people and is one of the only countries that has not instituted “monetary madness” by attempting to “print its way to prosperity”—which is precisely what happened in Zimbabwe and the Weimer Republic. In my view, India, with a debt-to-GDP ratio below 65%, may provide an optimal growth path towards prosperity, if India takes immediate action.
Who wants to end up like Zimbabwe or the Weimer Republic?
As anti-China sentiment flourishes throughout the US, the existing call for a closer India-US partnership only resonates more. It has the potential to be a tremendous growth story that will be mutually beneficial by opening new possibilities for commercial trade as well as providing a strategic partnership that can protect the national security interests of both countries.
What are the essential drivers of growth that can make India and the United States gross domestic product powerhouses? Two words: capital markets. Any country that wishes to grow successfully has to have fully functioning, open, fully transparent capital markets. Capital markets provide the lifeblood that determines if corporations survive and thrive or crash and burn.
An essential step in achieving transparency that levels the playing field is for all participants to allow independent financial audits that ensure each participant is playing by the same rules. Forensic financial audits are the most effective tool for identifying early warning signs of corporate malfeasance, fraud, and corruption.
Audit tools are the first line of legal protection for investors. The second is a fair, balanced, efficient and independent judicial system. China has neither, which will eventually disqualify it from listing shares of companies on US exchanges or soliciting funds from US investors.
India needs to strengthen its oversight and regulatory practices so it may leverage its position with the US. The creation of a regulatory authority run transparently by an international panel of independent financial experts will create the oversight India lacks. The individuals on the panel will need to be seasoned, bold problem solvers who think outside the box and have the necessary expertise to remedy India’s legacy obstacles.
Emerging markets have a reputation for being “rife with serious corruption”. This presents a colossal hurdle that needs to be overcome. Only a truly independent panel of international experts with integrity can restore confidence through the implementation and enforcement of uniform rules, similar to those in the US, that instil confidence in the capital markets and will make India a much more attractive investable market than China.
Do not bother shopping at the typical US investment banks for these new regulators, as US investment bankers will only seek to extract the lifeblood from India’s economy and should not be considered for such a role.
DEMOCRACY LOSES TO COMMUNISM, EXPANSIONISM NEXT
The ideological war between democracy and tyrannical Chinese Communism has ended, and it’s not even 2047 yet. Hong Kong no longer operates autonomously—it is ruled by China. During congressional testimony, Secretary of State Pompeo declared: “Hong Kong is no longer autonomous from China. The United States stands with the people of Hong Kong.” Pompeo’s declaration that China now controls Hong Kong will invalidate any tariff exemptions Hong Kong had with the United States. The editor of the Global Times, the official mouthpiece of the Chinese Communist Party commenting on Pompeo’s statement, responded: “Whether China’s Hong Kong is autonomous, how could it possibly be up to the US to define? Plus, it has a habitually lying Secretary of State who can tell the US Congress what Hong Kong national security law is before it’s even enacted.”
We have seen a currency war and a trade war—what’s next?
India, it’s your move.
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of The Duran.