The Silicon Curtain

President Trump opens a new offensive in the trade war:

President Donald Trump has issued executive orders effectively banning Chinese video sharing app TikTok and messaging service WeChat in a dramatic escalation of tensions with Beijing that sent stocks tumbling worldwide overnight.

Using national emergency powers, Trump on Thursday night signed the orders, which give TikTok parent ByteDance 45 days to sell the app, and bar WeChat from the U.S. after the same time period.

The orders also banned any U.S. transactions with WeChat owner Tencent, a major Chinese company that owns significant shares in Tesla, Snap Inc, and Reddit. Tencent shares fell as much as 10 percent in Asian markets overnight, and it was not immediately clear whether the company would be forced to divest its U.S. holdings.

Coming days after the United States ordered China to vacate its consulate in Houston, the move looks set to trigger retaliatory action by Beijing, stoking fears that a ‘Silicon Curtain’ is descending between the two superpowers. It raised the possibility that Beijing could retaliate by banning major U.S. tech companies from China, a major market for some of the top American firms.

‘China could block Apple or Microsoft from China. The information sector growingly looks divided into two camps. We could be seeing just the beginning of an information technology war,’ said Nana Otsuki, chief analyst at Monex Securities.

‘Investors in the West would have to hesitate to invest in China, missing growth opportunities there when there are not many investment opportunities except perhaps except for Nasdaq.’

Although this will tend to help the God-Emperor’s enemies in Silicon Valley fend off what would likely be a successful foray into the US market by Chinese technology companies, it’s the right thing to do in the long term. China has successfully defended and developed its technology sector, now it is time for Americans to free the US technology sector from the grip of the bad and mostly foreign actors who presently control it.

But this isn’t even the big news on the trade war front, as the report released yesterday by the President’s Working Group on Financial Markets appears likely to drive even more significant changes:

In response to President Trump’s June 4 Memorandum on Protecting United States Investors from Significant Risks from Chinese Companies, the President’s Working Group on Financial Markets (PWG) today released a report making five recommendations.  These recommendations are designed to address risks to investors in U.S. financial markets posed by the Chinese government’s failure to allow audit firms that are registered with the Public Company Accounting Oversight Board (PCAOB) to comply with U.S. securities laws and investor protection requirements.

“The PWG examined the risks to investors posed by the Chinese government’s failure to allow access.  The PWG unanimously recommends that the Securities and Exchange Commission take steps to enhance the listing standards on U.S. exchanges for access to audit work papers, among other recommendations,” said Secretary Steven T. Mnuchin, Chairman of the PWG.  “The recommendations outlined in the report will increase investor protection and level the playing field for all companies listed on U.S. exchanges.  The United States is the premier jurisdiction in the world for raising capital, and we will not compromise on the core principles that underpin investor confidence in our capital markets.”

The PWG recommends that the SEC take steps to implement the five recommendations outlined in the report.  In particular, to address companies from jurisdictions, such as China, that do not provide the PCAOB with sufficient access to fulfill its statutory mandate (“Non-Cooperating Jurisdictions,” or “NCJs”), the PWG recommends enhanced listing standards on U.S. exchanges.  This would require, as a condition to initial and continued exchange listing, PCAOB access to work papers of the principal audit firm for the audit of the listed company.

Translation: Chinese companies are not providing the US financial authorities the ability to audit their books.  The US government is now making it clear that any companies using auditors who are not subject to PCAOB oversight will not be permitted the ability to list or remain listed on US exchanges. So, this could lead to a mass exodus of US-listed Chinese companies from the US markets.