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Why Trump’s attempt to delist China from US will backfire

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The writer is the Dane professor at Harvard Law School

The China delistings have begun. This week, the New York Stock Exchange expelled three Chinese telecom companies to implement President Donald Trump’s November order that bars Americans from buying shares in “communist Chinese military companies”.

Others might also be booted. Separately, the Holding Foreign Companies Accountable Act — signed into law by Mr Trump in December — will delist all China-based companies in three years if China does not co-operate with audit-oversight inspections. 

Such moves grab headlines and allow politicians to express pique at China. Hence their appeal. But they are poor policy tools. Their main effect is to enrich Chinese insiders and investors at Americans’ expense. Here is why.

Mr Trump’s order aims to slow the modernisation of China’s armed forces by depriving military-linked companies of US capital. But it is risible to think these companies need US equity investment. They have substantial assets and revenues, financial backing by China, and access to large pools of Asian capital. 

Consider the three telecom companies — China Mobile, China Telecom, and China Unicom. Their assets total about $400bn, with annual revenues adding up to around $200bn. China owns about 70 per cent of each. They went public with dual listings in Hong Kong and New York around 2000, raising most of the money in Asia. If they ever need to raise equity capital again, non-US investors in Hong Kong can easily supply it.

The idea that barring purchases of these telecom companies’ stock will affect China’s military is laughable, but their US investors are not laughing. The purchase bans and delistings have temporarily depressed prices as American stockholders run for the exits. Hong Kong and other foreign traders are buying up these shares on the cheap. American investors lose; China’s investors win — and its military continues to grow unimpeded.

The audit-oversight act’s goal is to force China to allow the US accounting regulator, the Public Company Accounting Oversight Board, to inspect audits of China-based US-traded companies. China bars such inspections, claiming they violate state-secrecy laws. The act requires a ban on trading in the shares of any company that goes three consecutive years without a PCAOB inspection of their audits.

I hope the act succeeds. Periodic PCAOB inspections would make it somewhat harder for Chinese insiders to engage in fraud, by checking the work of local auditors. But the likely benefits are exaggerated, as American investors still face risks. For example, unscrupulous China-based insiders who steal assets are largely legally unreachable from America.

But I’m afraid China won’t blink. It objects to foreigners probing domestic commercial transactions. Moreover, China might see some benefit in US delistings of its large overseas-traded tech companies. Beijing has unsuccessfully tried to lure these to list on the mainland. China can now force all these companies to exit New York simply by continuing to bar PCAOB access.

If China does not flinch, the ensuing delistings will harm American investors. Large enterprises are likely to give US investors shares tradable in Hong Kong. Investors who receive these shares will bear the costs of overseas stock ownership and lose any protection provided by US securities law. Those who sell their shares will probably exit at a temporarily depressed price.

Meanwhile, smaller Chinese companies will use the impending delisting to go private at rock-bottom prices. Over the past decade, controlling shareholders of dozens of China-based US-traded firms have arranged lowball “take private” transactions, often later relisting them in Hong Kong or on the mainland at much higher valuations. While cheap take-privates can happen now, the act will make things worse.

Going forward, Trump’s no-buy order should be applied only when it actually stands a chance of affecting China’s military capabilities — which may well be never. And as for audit inspections, America could ban new listings of China-based companies as long as China blocks the PCAOB. Any currently listed companies could remain, but they and their insiders could be barred from selling additional equity to American investors. American investors could continue to trade shares. But no new money would flow to China, where it could be diverted.

This more nuanced approach does not send as strong a message to China, making it less politically attractive. But it is likely to better advance US interests, which are currently being sacrificed for anti-China grandstanding.



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Rocket Lab/Spire Global: Spacs, the final frontier

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Life sometimes imitates emojis. Social media stock tipsters are fond of littering posts with rocket symbols. Rocket Lab, which is floating at a $4.1bn enterprise value, makes the real thing. It was one of two space-related businesses to join the market via special purpose acquisition companies (Spac) on Monday, as the surge in these listings continued.

Just two months into the new year and Wall Street has raised a staggering $58bn through 188 blank cheque vehicles, according to Refinitiv. With hot money appearing to outweigh the supply of merger candidates, sponsors are howling to the moon for deals.

Rocket Lab launches smaller satellites into space. Its celestial twin was Spire Global, a satellite data group that is combining with a Spac at a $1.6bn equity valuation.

Like many recent Spac companies, Rocket Lab and Spire are justifying their valuations with lofty sales and earnings growth projections. Rocket Lab, which generated $35m in revenues last year, said it expected to pull in more than $1.1bn in 2026 and become cash flow positive in 2024. Spire, with just $28m in sales in 2020, is forecasting $900m in revenue by 2025 and positive cash flow in three years’ time.

Tesla founder Elon Musk and his SpaceX rocket company have reignited investor interest in US space companies. Annual revenues from space-related business — at present worth $350bn — could almost triple in size by 2040, according to Morgan Stanley.

SpaceX was reportedly valued at $74bn by its latest private funding. Shares in Virgin Galactic, Richard Branson’s space tourism company, have almost doubled since last September to give it a $9bn valuation, even as the group reported a $273m loss in 2020.

Space companies are a moonshot borne aloft by the rocket fuel of cheap money. That momentum trade has more to recommend than some others, such as fledgling electric vehicle companies. Both Rocket Lab and Spire have proven technologies to accomplish highly demanding tasks. This really is rocket science. But like space exploration itself, these investments are only for the brave.

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Coinbase’s offering docs have just dropped [Update]

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Just when you thought you’d seen it all in SEC filings, along comes the Coinbase prospectus. Which is really a direct listing. But who can tell during these days of ICOs and ITOs what a public offering even is.

The cryptocurrency platform which aims to “create an open financial system” is planning to go public via a Direct Listing on the Nasdaq in the near future. The docs dropped an hour ago.

While we dig through the paperwork, we thought we’d just share this gem from the “Definitions” page — the section of an IPO prospectus dedicated to those terms erstwhile investors might not have heard of.

Won’t you look at that:

Hodl: A term used in the crypto community for holding a crypto asset through ups and downs, rather than selling it.

There’s also an excellent use case (with our emphasis):

Borrow & Lend. We allow our U.S. retail users to borrow against and lend their crypto asset portfolios. Our first product is a portfolio-backed loan: a flexible, non-purpose 12-month term loan that allows retail users to borrow U.S. dollars using their crypto assets as collateral. Secured by their investment portfolio, customers can use the line of credit to access U.S. dollars while maintaining a “hodl” investing strategy. Over time, we plan to offer our retail users the ability to opt into lending their crypto assets to earn a passive return on their long term investments.

This is otherwise known in the real financial world as . . . a basis trade.

Meanwhile, Izzy has been pointing out some other curiosities on Twitter:

We’d also add this, which Preston Byrne on Twitter pointed out:

Satoshi as a risk factor, who’d have thought?

More tomorrow, we’ve not even got to the financials yet.





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Coinbase files to become first listed major US cryptocurrency exchange

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Coinbase, the largest US-based cryptocurrency exchange, revealed the scale of its business for the first time in paperwork for a long-awaited public listing that comes during a booming market for bitcoin and other digital coins.

Coinbase generated $1.3bn in revenue last year, up from $534m the year prior, enabling the company to turn a profit of $322m in 2020 after losing $30m in 2019, according to a filing with US securities regulators.

The company’s public debut, the first for a large US cryptocurrency exchange, is likely to rank as one of this year’s largest new tech listings and would mark a milestone for backers of the emerging sector. Coinbase is aiming to list in late March, said one person familiar with the company’s thinking.

Public investors have recently bought up shares in new market entrants such as Airbnb and DoorDash, fuelling a surge in public listings that has drawn comparisons to the 2000 dotcom bubble.

Coinbase filed for a direct listing rather than a traditional initial public offering, meaning it will not raise additional capital when it goes public.

Brian Armstrong, chief executive of Coinbase, warned that prospective investors should expect volatility in the company’s financials.

“We may earn a profit when revenues are high, and we may lose money when revenues are low, but our goal is to roughly operate the company at break even, smoothed out over time, for the time being,” Armstrong wrote in a letter attached to the filing.

Almost all of Coinbase’s revenue came from transaction fees last year, it said in the filing, underlining the company’s dependence on cryptocurrency trading fees.

Shares in the company have recently changed hands in private markets at prices that would give it a roughly $100bn valuation, according to people briefed on the trades, up from $8bn less than three years ago.

Coinbase could use those trades, in addition to input from public investors and its financial advisers, to determine its opening price on public markets.

Coinbase quickly grew into a favoured destination for cryptocurrency traders after it emerged from the Y Combinator start-up programme in 2012. It has recently touted services designed for large institutional investors and a series of acquisitions expanding its reach into software products for cryptocurrency developers.

The company said institutional activity made up almost two-thirds of its total trading volume in the fourth quarter, when transaction revenues jumped more than 70 per cent from the previous quarter to $476m. It said it had 2.8m monthly transacting users in 2020, almost tripling from the year prior.

Coinbase said it oversaw about $90bn in total assets stored on the platform, representing more than 11 per cent of the total market for cryptocurrencies at the end of last year. It has also made venture capital investments in more than 100 companies.

As trading volumes exploded this and last year, the cryptocurrency market has attracted increasing scrutiny from lawmakers and regulators, including over concerns about digital coins being used for money laundering.

In its filing, Coinbase noted the “extensive and highly evolving regulatory landscape” was a risk factor, and that its obligations to comply with various regulations would only increase as the exchange continued to expand internationally.

Among the company’s biggest investors, controlling more than 5 per cent of stock each, are Andreessen Horowitz, Paradigm, Ribbit Capital, Tiger Global Management, and Union Square Ventures.

Goldman Sachs, JPMorgan, Allen & Co and Citigroup are advising Coinbase on the direct listing.



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