The U.S.-China Economic and Security Review Commission (USCC) has recently submitted the annual report on strategic competition towards China for the year 2019 to Congress. This report has proposed an overview towards the competition on economy and trade, security, politics and diplomacy between China and the United States in 2019, in addition to carrying out an analysis and evaluation on the development of China and potential effect to the U.S. based on the economy and safety relationship between China and the U.S., internal and external challenges of China, China's global action, the issues on Hong Kong and Taiwan, the development of high technology and many more. This report has brought up a total of 38 political suggestions to Congress. Under the background of China joining the World Trade Organization (WTO), USCC is founded as an advisory body by the United States Congress in order to monitor the economy and security impacts of China - U.S. trade on the United States. USCC is highly influential in formulating policy towards China in the U.S. In terms of propensity, the relevant report has strongly rendered the safety threaten of Chinese development to the U.S., at the same time, it proposes the decoupling between the U.S. and China. Thus, the related arguments of the report are rather noteworthy.

ANBOUND pointed out that the content of USCC's report is rather extensive. However, USCC is positioned as an advisory body, hence this is not a policy or applicable regulations that shall be implemented in general. But it is worth noting that it represents a trend that provides a reference point. In the days to come, conflicts and cooperation between China and the U.S. will be carried out by referring to this report, especially when this report has mentioned the competitive relationship and the possible direction of financial and investment sector between China and the U.S. This is the frame of reference for the U.S.-China trade and financial wars that deserves to receive more attention and consideration.

USCC's report has referred to the contents on the stock market, which includes the suggestion to the Congress on enacting a law to prohibit the below China companies to be listed on the U.S stock market. Firstly, companies that do not promptly offer their audit working papers for their operations in China to the Public Company Accounting Oversight Board (PCAOB). Secondly, companies having procedures of information disclosure that violate the best standard of the U.S. and the European Union. Thirdly, companies that adopt variable interest entities (VIE). Fourthly, companies that do not abide by the Regulation Fair Disclosure, where they do not announce important information to all investors at the same time.

With regards to IPO and Chinese concept-stock enterprises, the report has suggested that the Congress should legislate a law to request Chinese enterprises to be listed on the U.S stock market to provide the below information in their Initial Public Offering (IPO) and annual report. These encompass financial supports provided by the Chinese government, including direct subsidies, government loan, grants, loan with interest lower than the market price, guarantee, tax preference, government procurement, and other direct or indirect support. In addition, there should be conditions for government support, including meeting the export performance indicator, product purchasing from a designated local supplier or using local intellectual property, the arrangement of company position to government personnel and many more. Other information includes committee members and their position of the company, and current or former Chinese officers in the companies (Including Chinese subsidiary corporations, U.S. subsidiary corporations, and joint ventures).

Besides that, contents and suggestions of the report related to the capital market and the financial sector includes the Congress should request the Department of Treasury, Department of Commerce, Securities and Exchange Commission (SEC) and other departments to submit a report on U.S investors holding on Chinese bonds and other debt instruments, which entails direct and indirect holdings of derivatives. The United States Department of Treasury should also submit a report to Congress with regards to the operation of the cross-border payment system of China, together with the explanation of the possibility of utilizing cross-border payment systems to bypass the international sanctions mechanism.

These suggestions will bring huge impacts to Chinese enterprises to be listed abroad, Chinese venture capital, and Chinese enterprises. Now, Chinese enterprises that have already been listed in the U.S. stock market generally have VIE structure issues. Historically, the main objective of Chinese entities adopting the VIE method in order to be listed abroad is to avoid the limitations in the Chinese regulations on foreign investment within specific industries. The VIE structure is a method proposed mainly by the overseas investors, Chinese business owners and financial intermediaries so that they are able to get an overseas listing for the Chinese enterprises that accept overseas investment and operations. This was to ease the Chinese enterprises that placed their assets overseas when the foreign investors have exited. However, if the U.S. makes an adjustment to this procedure, everything will be changed. This means that the Chinese enterprises that adopt the VIE structure will need to re-construct their company structure in order to stay in the U.S. stock market. On the Chinese side, as China has eased the rules on foreign investment, the requirements on the proportion of foreign equity in e-commerce will be canceled. Therefore, for Chinese e-commerce enterprises that have been listed abroad, they might not remove the VIE structure in order to be listed in China. Thus, it is estimated that more Chinese enterprises will follow the footsteps of Alibaba to exit from the U.S. stock market.

Concerning the issue of audit paper, this involves national sovereignty matter, which is also a contradicting point that has been disputed by both China and the U.S. for a long time, and this is a contradiction that is unavoidable by the Chinese enterprises. For the enterprises that have been listed or getting ready to be listed in the U.S. stock market, this would be a huge obstacle. If the suggestions on audit paper are to be implemented, it means that Chinese enterprises will be totally withdrawn from the U.S capital market, and unable to be listed and financed in the U.S in the future. When this happens, the changing on the exit path of the venture capital fund will also bring a fundamental impact on the venture capital model on the current mature Chinese internet sector.

In addition, the report has also proposed some issues on limiting the U.S. investors in the Chinese market and also in the Chinese mobile payment system. This will affect the investment of the overseas financial capital from the U.S. capital towards the Chinese market, the foreign investment of China and the trade settlement, and also the effort to promote the Chinese currency globally. Therefore, this will bring a fundamental impact to the Chinese financial sector and capital market, and the main objective is to force China to break away from the international capital market and financial system led by the U.S., which in turn would isolate China in the financial war. This situation is unfavorable to China.

Final analysis conclusion:

All indications show that the suggestions mentioned in the USCC report are to decouple the U.S. and Chinese financial sector. This report will also serve as a reference point for the future financial war between the U.S. and China.