Asia Pacific Business Review

ISSN: (Print) (Online) Journal homepage: https://www.tandfonline.com/loi/fapb20

The economy of the Sino–US conflict: its impact on

Chinese firms listed in the US and Hong Kong as a
financial hub

T. K. P. Leung & Lawrence H. W. Lei

To cite this article: T. K. P. Leung & Lawrence H. W. Lei (2022) The economy of the Sino–US
conflict: its impact on Chinese firms listed in the US and Hong Kong as a financial hub, Asia
Pacific Business Review, 28:5, 680-700, DOI: 10.1080/13602381.2022.2116875

To link to this article: https://doi.org/10.1080/13602381.2022.2116875

Published online: 05 Sep 2022.

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ASIA PACIFIC BUSINESS REVIEW
2022, VOL. 28, NO. 5, 680–700
https://doi.org/10.1080/13602381.2022.2116875

The economy of the Sino–US conflict: its impact on Chinese

firms listed in the US and Hong Kong as a financial hub
T. K. P. Leunga and Lawrence H. W. Leib
a
Department of Marketing, School of Business, The Hang Seng University of Hong Kong, Hong Kong, China;
b
Department of Accountancy, School of Business, The Hang Seng University of Hong Kong, Hong Kong,
China

ABSTRACT ARTICLE HISTORY

The US is currently pursuing a cold war strategy against China, Received 6 March 2022
having initiated a trade war and delisted Chinese companies to Accepted 22 August 2022
restrict China’s development. Although China interacts with other KEYWORDS
countries through foreign direct investment, it prevents the circula­ Hong kong; offensive
tion of speculative monies from the international market by enclos­ realism; Sino–US relation;
ing its national capital account. As many Chinese companies have stock delisting; structural
a variable interest entity structure, their delisting from the US will realism; variable interest
motivate relisting in Hong Kong. The US and China need to con­ entity
ceive a coevolution strategy to generate a better world.

Introduction
Hofstadter (1996, 3) uses the term ‘paranoid style’ to describe the ‘heated exaggeration’,
‘suspiciousness’ and ‘conspiratorial fantasy’ of American politics. The US perceived China
as a new partner following Deng Xiaoping’s trip to southern China in 1992 (Zaidi and Saud
2020). After the former Soviet Union disintegrated in 1991, however, the US viewed China
as a new cold war opponent. This hypothetical threat, fuelled by Mearsheimer’s (2021, 48)
theory of offensive realism, provoked US politicians to perceive conflicts with China as
being ‘inevitable’. China also struggles in a US-dominated global system that undermines
its influences (Edel and Brands 2019). Moreover, China doubts the intentions of the US
due to the frequent power exchanges between the Democratic and Republican parties
(Nathan and Scobell 2012).
A country’s political power is derived from its economic musicality (Neumann 1950).
China’s gross domestic product (GDP) was roughly 6% of that of the US when its market
opened in 1978, but increased dramatically to 70% in 2020 (World Bank, n.d.); in contrast,
the former Soviet Union’s GDP, at its peak, was only 40% (Mahbubani 2020). Predicted to
overtake the US and become the world’s largest economy by 2028, China’s imminent
threats exert immense pressure on the county’s economy (Reuters 2020).
Political and economic conflicts create considerable tension for both countries, push­
ing them towards a ‘Thucydides trap’, which portrays an apparent tendency for war,
wherein an emerging power threatens to displace an existing superpower as the inter­
national hegemony (Allison 2015, 1). Will the US and China go to war as theory predicts? If

CONTACT T. K. P. Leung thomasleung@hsu.edu.hk

© 2022 Informa UK Limited, trading as Taylor & Francis Group
 ASIA PACIFIC BUSINESS REVIEW 681

the US could not win against the Chinese in the Korean War (Hao and Zhai 1990) in the
1950s and thereafter in the Vietnam War (Chen 1995) in the 1970s, when China’s
economic influence was insignificant, then the US certainly is not likely to start
a dubious war given China’s growing economic power.
The political schema of the US against China has been antagonistic. For instance,
former US President Donald Trump claimed that many American jobs had shifted to
China and his administration called for decoupling from and isolating China through
a new cold war (Alper and Shalal 2020). The Trump administration had already delisted
three US-listed Chinese telecommunications companies citing suspicious political con­
nections with military forces (HKTDC Research 2021). The US also mobilized major allies
such as Europe, Canada, Japan and India to ban Chinese technology giant Huawei from
supplying communications equipment, despite lacking concrete proof of its threat to US
national security (Williams 2019).
Accounting firms that audit US-listed Chinese companies have long refused the
inspection of their audit papers by the Public Company Accounting Oversight Board
(PCAOB) because the surrender of audit papers to overseas regulators is prohibited
by Chinese law. However, the US Senate approved the Holding Foreign Companies
Accountable Act (Cohen and Davison 2020), which enforces the submission of audit
papers to the US Security and Exchange Commission (SEC). If Chinese companies fail
to submit their audit papers by the end of 2023, they may be forcibly delisted from
the US; this implies that, to stay afloat, these companies must be relisted in other top
regional stock market operators. Appendix A lists the world’s top 10 stock markets,
which hold approximately 82% of the global equity market (Research Department
2022). Huawei’s example signals to Chinese companies that relisting in other major
stock markets in Europe, Japan, India and Canada may be risky as they are all US
allies. The stock markets in Shanghai, Shenzhen or Hong Kong offer potential new
homes for these companies.
This article constructs a Sino–US conflict scenario and predicts how it will affect
international business and capital flows in the US, China and Hong Kong. We make
recommendations for how the US and China can resolve conflicts from the perspective
of structural realism and provide future research directions.

Objectives
We investigate international conflicts between the US and China, with Hong Kong as
a focus of attention.

(1) Conceive the root cause of the Sino–US conflict and discuss whether they will go to
war.
(2) Envisage the impacts of the conflict on Chinese firms listed in the US.
(3) Define the role of Hong Kong as a financial hub during this conflict.
(4) Recommend guidelines for international businesses that attempt to capture oppor­
tunities in this volatile political environment.
682 T. K. P. LEUNG AND L. H. W. LEI

Root cause of the Sino–US conflict

Figure 1 shows the size of China’s GDP relative to that of the US from 1978 to 2020, and
Table 1 lists all corresponding economic activities.1 In 1978, when it opened its door to the
global economy, China’s GDP was valued at US$150 billion, which was 6% of that of the
US. At the time, foreign investors were cynical about open-door policies and foreign direct
investment (FDI) was stagnant, especially after the 1989 Tiananmen Square incident. FDI
dramatically recuperated after the prominent retired leader Deng Xiaoping visited south­
ern China in 1992 to endorse his economic liberalization programme (Roy 1996). His visit
triggered a massive inflow of FDI and converted China’s resources into huge economic
drivers (Kobayashi, Baobo, and Sano 1999). As a result, the Chinese economy experienced
huge GDP growth of at least 10% for 4 consecutive years, ending in 1995. China’s GDP per
capita also increased from US$156 to US$610.
Nevertheless, labels such as ‘China Threat’ (Storey and Yee 2004, 1) and ‘Unpeaceful
Rise’ (Mearsheimer 2006, 160) started emerging in the US. US politicians were visualizing
a ‘new world order’ (Wang and Lin 1992, 911) wherein ‘an increasing powerful China is
likely to destabilize regional security in the near future’ (Roy 1996, 758).
China’s accession to the World Trade Organization (WTO) in 2001, along with its
economic reforms, helped launch numerous FDIs (Jin, Qian, and Weingast 2005). Its
‘deep integration’ with the global economy through manufacturing and exporting was
also accelerated (Hui 2017, 6), followed by the establishment of numerous business
ecosystems and China’s image as a ‘world factory’ (Wang and Li 2017, 175).
During this time, the US government eliminated the tariff increase on Chinese imports
as the WTO granted China permanent most favoured nation (MFN) status (Pierce and
Schott 2016). As a result, Chinese exports to the US increased, US inflation was capped and
consumer welfare increased (Handley and Limão 2017). However, the US trade deficit
against China widened and US manufacturing employment declined (Yu and Zhang
2019). Over a 12-year period ending in 2006, the Chinese economy expanded from 10%
to 20% of that of the US, making China the world’s fourth largest economy (Liu 2009).
However, rising costs reduced China’s competitiveness, due to which multinational

80.00%
China used another 8
70.00% years to achieve 60%
of the US economy.
60.00%
China’s GDP relative to the US economy

50.00%
China used another
6 years to achieve
40.00% 70% of the US
China used another 11 years to economy.
30.00% achieve 20% of the US economy.

20.00% China used 18 years to reach 10% of the US economy.

10.00%

0.00%

China’s economic development time frame from 1978 to 2020

Figure 1. China’s GDP relative to that of the US economy.

 ASIA PACIFIC BUSINESS REVIEW 683

Table 1. China’s major economic developments.

From 1978 to 1995 From 1996 to 2006 From 2007 to 2014 From 2015 to 2020
● China took 18 years to ● China took another 11 ● China took another 8 ● China took another 6
achieve an economic years to reach 20% of years to reach 60% of years to reach 70% of
size equal to 10% of the the US economy. the US economy. the US economy.
US economy.
MAJOR DEVELOPMENTS MAJOR DEVELOPMENTS MAJOR DEVELOPMENTS MAJOR DEVELOPMENTS
● China deployed an ● China had an average ● The subprime mortgage ● China became
open-door policy to GDP growth rate of crisis badly hurt the US the second largest
attract foreign direct 9.45%. economy. economy.
investment (FDI) into the ● China’s accession to the ● The US had a 2-year ● China intended to use
country World Trade recession ending in its Made in China 2025
● Its average gross domes­ Organization (WTO) in 2009 and lost 8 million plan to bypass the
tic product (GDP) 2001 initiated its ‘deep jobs. ‘middle income trap’
growth rate was 10.74%. integration’ with the ● China attempted to con­ and activate long-term
● The disintegration of the globe and made China nect to other countries growth.
former Soviet Union a world factory. in the Eurasian conti­ ● The US perceived that
allowed US politicians ● The elimination by the nent, promote financial its dominant world
more time to address US of potential tariff integration and use RMB position was being
thematic issues such as increases accelerated through the Belt and challenged by China
the ‘China Threat’ and imports from China but Road Initiative (BRI). and initiated a trade
‘China’s Unpeaceful also reduced US manu­ ● China’s internal growth war with punitive tariffs
Rise’. facturing employment. strategy generated an against China.
● China became the average GDP growth of ● The US economy lost
fourth largest economy 9.57%. nearly 300,000 jobs and
in the world. ● China fell into the ‘mid­ an estimated 0.3% of
● US conceived ‘a new dle income trap’. real GDP due to the
world order’. trade war.
● The US punitive tariffs
imposed on Chinese
exporters were comple­
tely borne by US firms
and consumers.

companies shifted their labour-intensive manufacturing facilities to other low-cost coun­

tries such as Vietnam, Kampuchea and Laos (Overholt 2010).
At this time, China’s economic expansion raised concerns among US politicians. Gilpin
(1981), in his theory of classical realism, argues that long-term variations in economic
growth redistribute relative political influences. Such changes foster divergences between
power and privilege in world politics over time, which in turn encourage emerging states
to challenge the status quo. Historically, shifts in the balance of power have been resolved
through war. Mearsheimer (2006, 2014), in his theory of offensive realism, claims that if
China continues to grow and the power gap between the US and China continues to
narrow, then China will attempt to dominate Asia as the US does the western hemisphere.
He proposes that the US take an offensive stand to ‘contain’ China and ensure that no rival
power dominates another region and jeopardizes US national security (Mearsheimer
2014, 3). Mearsheimer (2010, 2) further declares that a new cold war has begun and
that ‘competition’ and ‘conflict’ between the US and China are ‘inescapable’.
In contrast, Kirshner’s (2010, 3) structural realism theory posits that ‘a study of history and
political history provides greater analytical purchase and wiser policy prescription’ to engage
China and build a better world. A highly antagonistic US stance towards China may hurt the
latter, but will also prompt a strong response from China. These arguments, however, lapsed
when the 2007 subprime mortgage crisis emerged (Davis and Karim 2008). The massive
bubbles generated by cheap credit facilities eventually exploded and exerted huge liquidity
684 T. K. P. LEUNG AND L. H. W. LEI

pressures on the US capital market, which could not be resolved by actions from the Federal
Reserve. The financial crisis upturned the US economy from a positive GDP growth of 1.88%
in 2007 to a 2-year recession with a negative GPD growth of 2.54% in 2009, resulting in the
loss of >8 million jobs in the country (Russo and Katzel 2011).
The impact of the crisis on China was much smaller than that on the US (Whalley et al.
2009). China’s economy was supported by a large foreign reserve and sound financial
institutions with clear restrictions on the use of derivatives and other sophisticated
financial instruments. Nevertheless, China’s exports to the US decreased substantially by
15–18% in a 3-year period ending in 2009. China decisively launched a fiscal stimulus
package of US$586 billion in 2008 to boost its economy (Kamrany 2011). Overholt (2010)
notes that China had more shovel-ready projects and that its economic system presented
fewer legal or regulatory obstacles to the rapid implementation of these projects,
enabling swift economic recovery.
Soon after, in 2013, China’s President Xi Jinping launched his Belt and Road Initiative
(BRI) (Nordin and Weissmann 2018, 231), which deployed China’s resources to connect all
countries in the Eurasian continent through the construction of mega-infrastructure
projects by Chinese firms (Le Corre 2018). The BRI showcases China’s ambition as
a major global power with ‘political and strategic underpinnings’ (Yu 2017, 367) and
presents the emphasis of China’s development model on the internationalization of
Chinese firms for the first time (Chaisse and Matsushita 2018).
China’s economic growth has propelled part of its domestic sector to a leading posi­
tion. For instance, automobile market sales grew by 46% year-on-year (YOY) to
13.6 million vehicles in 2009, surpassing the US and making China the world’s largest
automobile market (BBC News Author 2010). In the US, General Motors’ sales went up by
38%, making a substantial contribution to both worldwide operations and the US domes­
tic economy (Overholt 2010).
Over an 8-year period ending in 2014, the Chinese economy experienced an impressive
9.6% growth in average GDP. China’s GDP per capita increased to US$7,679, which was
identical to that of other upper-middle-income countries.2 The size of the Chinese
economy continued to expand to 60% of that of the US economy. China’s economic
achievement was, once again, considered a challenge to US global economic power.
A cold war strategy to contain China was proposed, which centred on balancing the rise of
China by limiting its political and economic expansion in a dynamic globalization context
(Blackwill and Tellis 2015, 4).
China is liable to fall into a middle-income trap and require a rebalancing of its
economic structure (Glawe and Wagner 2020). It may soon be unable to compete with
other economies in terms of low-cost manufacturing and with advanced economies in
terms of high-skilled innovation and productivity growth (Kharas and Kohli 2011). Brown
(2017) notes that China must adapt, absorb and develop advanced manufacturing tech­
nologies to sustain its growth.
To avoid falling into the middle-income trap, China implemented a 10-year strategic
plan, Made in China 2025 (MIC 2025), in 2015, which explicitly expressed its aspiration to
reposition itself as a world-class innovative and industrialized powerhouse (Li 2018).
China’s ambition of raising the domestic production of core components and materials
by key manufacturing industries to 70% by 2025 implies that its key manufacturing
ecosystems will no longer rely on foreign supplies and its indigenized research and
 ASIA PACIFIC BUSINESS REVIEW 685

development units may dominate global supply chains. These developments were
viewed as additional threats to US global technological leadership (Glaser 2019).
Keeping China from achieving its MIC 2025 goals and blocking the BRI became key
goals of the Trump administration (Yu and Zhang 2019). The cold war perspective inspired
the Trump administration to consider China a deliberately ‘hostile power’ and view an
antagonistic trade war as an appropriate action to maintain US leadership in the high
value-added sector while forcing China to remain at a middle-tier position in global
supply chains (Sachs 2019, 105).
However, the slow response of the Trump administration to the COVID-19 pandemic
and the Sino–US trade war initiated at the beginning of 2018 slowed down the US
economy, whose GDP declined by 3.49% in 2020. In contrast, the Chinese government’s
effective containment of the pandemic helped generate a positive GDP growth of 2.3%,
attaining a GDP per capita of US$8,067 in 2020. The size of its economy was also 70% that
of the US in 2020.
The punitive tariffs of the trade war have proved more costly than beneficial to the US.
The tariffs imposed on Chinese imports have been completely borne by Americans (Amiti,
Redding, and Weinstein 2020). The trade war resulted in the loss of 300,000 jobs, lowered
US GDP by 0.3%, diminished market capitalization in the stock market by US$1.7 trillion
and generated a negative investment growth of 1.9% for all listed firms in 2019 (Zandi,
Rogers, and Cosma 2019). Twenty Standard & Poor 500 companies that generated 18.9%–
82.7% of their global sales revenue in 2019, amounting to US$845 billion, were from China
(Amiti, Redding, and Weinstein 2020). A Sino–US trade war may make it difficult for them
to conduct business in the US if the Biden administration were to continue the previous
administration’s actions.
In summary, recommencing the Sino–US trade war may result in significant losses for
the US. Pempel (2019) reports that international trade is constructed on a globally inter­
dependent, organized network of complex corporate supply chains, with numerous
instances of economic win–win interactions between countries and the multinational
firms within. Archana (2020) advises the Biden administration not to resort to a trade war
to contain China because this will also affect US supplies.
The Biden administration must perceive China’s rise differently from the way the US
perceived the former Soviet Union, primarily because the disintegration of the former
Soviet Union resulted not only from the actions of the US, but from a systemic flaw of
stagnation. At the time, the Soviet Union focused on the planned development of heavy
and military industries while neglecting domestic consumption to create the capital
required for economic development (Sakwa 1999). China’s leaders learnt from this by
actively connecting with the outside world to sustain economic growth through FDI while
preventing the disturbance of foreign speculative monies by isolating its national capital
account from the rest of the world. This unique socialistic market model has now
integrated into the global economy to support economic growth, rendering the US
containment strategy ineffective. The US strategy may also force China to develop its
own technological ecosystems and compete directly with the US in the high-tech sector.
The above discussion indicates that the two countries need not fall into a Thucydides
trap, thereby avoiding a full-blown trade war. However, it is unclear whether the Biden
administration will continue its cold war strategy to contain China’s economic growth by
delisting Chinese companies listed in the US.
686 T. K. P. LEUNG AND L. H. W. LEI

Chinese companies listed in the US

The China Securities Regulatory Commission (CSRC) was founded in 1992 to supervise the
Shanghai and Shenzhen stock exchanges, which were re-established and in operation by
1990. Initially, the CSRC’s role was to regulate comparatively large and powerful national
state-owned enterprises (SOEs) (Lin 2010). The Chinese government then realized that
overseas listing was an important channel for SOEs, helping not only to attract foreign
capital but also to further economic reforms and foster credible corporate governance
practices (Pan and Brooker 2014).
Although the Chinese government has been keen to build the domestic stock
market, it realized that privately listed firms could not be fully monitored and that
their controlling owners could expropriate assets from these firms (Chen, Firth, and Xu
2009). To address this issue, the CSRC precipitously established a set of bureaucratic
listing procedures, determined a quota limiting the number of listing applications and
temporarily suspended listing applications based on economic adjustments (Chen, Lee,
and Li 2008) to discourage the public listing of private firms (Pan and Brooker 2014). By
the end of the 1990s, more than 90% of the companies listed were SOEs. The rapid
development of China’s stock market showed that a stock market could exist with
majority state ownership and a minor presence of private enterprises, exhibiting
a perfect marriage between ‘capitalism and socialism’ (Wong 2006, 389). While enga­
ging Chinese investors to support SOEs and become ‘national champions’, the Chinese
government also attempted to convince the market that maintaining party authority
was necessary (Lin 2010, 92).
The global financial crisis in the mid-1990s caused major global stock markets to crash
(Kindleberger et al. 2005). Because China had not opened its national capital account and
foreign speculative monies could not freely enter the country (Prasad and Rajan 2008), its
economy remained intact and robust. Although ‘China concept’ firms (Luo, Fang, and
Esqueda 2012, 193) substantially contributed to economic growth (Allen, Qian, and Qian
2005), the bureaucratic listing impediments persisted. The urgent need to procure capital
remained, prompting the move towards overseas listing.
Chinese concept firms mainly comprise those in the high-tech sector, large firms with
high profitability potential (Zhang and King 2010). Major regional stock exchanges
actively promote listing services for these firms.3 Vortelinos and Saha (2016) prefer US
listings because they have higher stock valuations, carry less risk and have better geo­
graphical stability than other listings.
Direct overseas listings require CSRC approval. Chinese firms normally redefine them­
selves as overseas enterprises to avoid having to obtain this approval. The Ministry of
Commerce (MOFCOM) also prohibits overseas listing if firms belong to strategic sectors,
such as Internet platforms, financial services, telecommunications, energy, agriculture,
transportation and education (Whitehill 2017). To circumvent these restrictions, the
variable interest entity (VIE) structure was developed (Shi 2014).
The VIE structure has its roots in the US Financial Accounting Standards Board (Lin and
Mehaffy 2016). The structure consists of a VIE firm with legitimate operations in China,
a wholly foreign-owned enterprise (WFOE) in China and an overseas shell company that
owns the WFOE. To secure a MOFCOM business licence, a VIE must be owned by a founder
of Chinese nationality. The WFOE contracts consultancy arrangements with the VIE as its
 ASIA PACIFIC BUSINESS REVIEW 687

only client (Guo 2014). These contracts designate a level of control and flow of capital
without issuing any direct equity ownership to the WFOE (Latham and Waltkins LLP 2019).
Because a WFOE neither owns the VIE nor maintains any restricted foreign investment
assets, it does not require a MOFCOM licence, which implies that it can receive foreign
investment. An overseas shell company with a name identical to the VIE is incorporated in
a management-friendly jurisdiction such as the Cayman Islands or British Virgin Islands
(BVI); this shell company then owns the WFOE. Upon finalizing all of the settings, the shell
company initiates an initial public offering (IPO) of America Depository Receipt (ADR)4 on
the New York Stock Exchange (NYSE) or National Association of Securities Dealers
Automated Quotations (NASDAQ). The shell company then funnels capital from the US
to its WFOE and subsequently to the Chinese VIE for market development.
The VIE structure represents an attempt to enable foreign investors to indirectly invest
in all highly regulated sectors in China (Kong Lawyer 2020). Nevertheless, Lin and Mehaffy
(2016) warn that there may be incentives for a VIE owner to renege on their contracts with
the WFOE and expose investors to corporate governance risks. A VIE structure may release
sensitive operational data outside China (Rosier 2014). Importantly, the VIE structure is
illegal under the Contract Law of China.5
The VIE structure solves many technical problems, but whether overseas regulators
accept its legitimate status remains a matter of debate. For instance, China’s Alibaba could
not convince the Hong Kong Securities and Futures Commission’s to accept its VIE
structure, causing its listing application to be terminated in 2014 (Reuters 2014).
Nevertheless, Alibaba’s listing was buoyant when its ADR was listed on the NYSE due to
flexible treatment by the US SEC and NYSE (Cochrane 1993). Strong demand from
institutional investors made Alibaba the biggest-ever IPO in global history (Timms
2014). Guo (2014, 576) explains that the VIE arrangement is essentially based on ‘sub­
stance’ over ‘form’; by searching for a primary beneficiary, it overcomes oversimplified
shareholder criteria. Following the incident with Alibaba, almost all ADR programmes of
Chinese Internet companies in the US have adopted a VIE structure (Shi 2014).
As of 11 December 2021, the two American stock exchange operators, i.e. NYSE and
NASDAQ, host 6,100 firms (https://wwwadvfn.com/), with a combined market capitaliza­
tion of US$50.69 trillion (Statista 2022). Of these 6,100 firms, 453 are foreign (https://
stockmarketmba.com/listofadrs.php). All foreign firms have a combined market capitali­
zation of US$4.082 trillion; 217 or 48% of them are Chinese firms with a VIE structure,
collectively valued at US$2.2 trillion.
The accounting firms that audit Chinese companies listed in the US have long refused
to submit their audit papers to the PCAOB. In fact, the SEC in the US has completed all of
the necessary procedures to begin delisting Chinese stocks in accordance with the
Holding Foreign Companies Accountable Act, in preparation for the event that account­
ing firms do not submit audit papers to the PCAOB by the end of 2023 (Cheng 2021a).
However, the SEC’s actions cannot change the fundamental legal constraints on
Chinese companies listed in the US. As they are shell companies registered outside
China, their auditors do not have the legal authority to instruct the VIEs in China to
release their audit papers to the SEC. The Chinese government has also implemented
more stringent restrictions on cross-border data transfer. On 6 July 2021, the State Council
issued Opinions on Strictly Cracking Down to strengthen the regulatory supervision of
688 T. K. P. LEUNG AND L. H. W. LEI

securities related to data security protection (Ross, Zhou, and Liu 2021). Therefore, the
delisting of Chinese companies appears to be incontestable.
The delisting of Chinese companies from the US does not mean that they can relist in
either the Shanghai or Shenzhen Stock Exchange. First, the illegality of Chinese shell
companies makes their relisting on either stock exchange impossible. Second, the antag­
onistic containment of Chinese technology giant Huawei by the US government and its
allies in Europe, Japan, India and Canada indicates that the relisting of Chinese companies
on regional stock markets in these countries will be politically risky. Finally, the stringent
restrictions on cross-border data transfer imposed by the Chinese government make
relisting in Hong Kong, given its unique status as a Special Administrative Region (SAR),
logical (Yang and Lau 2006). Recently, the Chinese ride-sharing service Didi Global
announced its withdrawal from the NYSE under the guidance of Chinese regulators; it
may shift its listing to the Hong Kong Exchanges and Clearing (HKEX). The incident has
already sent a strong message to the US, emphasizing that data privacy protection is of
utmost concern and that the return of these Chinese companies to Hong Kong is a natural
solution that releases regulators on both sides from geopolitical tensions (Cheng 2021).

The role of Hong Kong in listing Chinese companies that are currently listed
in the US
Hong Kong only contributed 2.35% to China’s GDP in 2020 (World Bank n.d.). Comparing
Hong Kong’s economic contribution to China’s spectacular rise prompts the spatial
redistribution of financial activities between mainland China and Hong Kong. However,
the September 2021 Z/Yen Global Financial Center Index Report, which charts Hong Kong
as the third leading world financial centre after New York and London, strongly indicates
that the top financial status of Hong Kong in Asia persists (Park 2021).
In addition to economic size, a top financial centre must have other important
characteristics. Efficient international market systems such as the NYSE, NASDAQ or
HKEX integrate three important functions within a single unit: 1) listing approval and
monitoring, 2) stock trading/transactions and 3) a central registry of stocks (Zhao 2003).
The Shanghai and Shenzhen stock exchanges, however, only carry out the second func­
tion as the first and third are conducted by the CSRC in Beijing.
Other geopolitical factors make Hong Kong attractive. The Hong Kong rule-based
common law legal framework is very similar to that of many Western countries such as
the US and UK, providing familiar environments for multinational enterprises and foreign
institutional investors. In contrast, mainland China’s civil law administrative system
remains under development, with control of capital and information held by Beijing
(Zhang 1986). Li (2020, 261) confidently claims that Hong Kong is an ‘irreplaceable out­
post’ of China and will remain a ‘window’ connecting China to the outside world (Sung
1991, 4).
The renminbi (RMB) will be unable challenge the dominant position of the US dollar as
the international trading currency as long as the socialist character of the Chinese
economy remains intact. This makes Shanghai, Beijing or Shenzhen unsuitable as inter­
national financial centres (Chey 2013). Hong Kong can facilitate the free convertibility and
monetary exchange of RMB to other currencies, helping it develop as an international
currency (Fung and Yau 2012). Hong Kong also has no control over international capital
 ASIA PACIFIC BUSINESS REVIEW 689

flows and has strong financial ties with mainland China for FDI to flow into China (Pauly
2011). The Chinese government will therefore continue to support Hong Kong as
a regional financial centre because of its extraordinary scale, sophistication and contribu­
tion to directing foreign capital to China (Meyer 2020).
Hong Kong has reformulated its rules for the secondary listing of Chinese companies
that are currently listed in the US. The new rules stipulate that any ‘innovative company’
with a VIE structure can apply for a secondary listing (Arps, Slate, and Flom 2021, 2).
Chinese companies with a minimum market capitalization of HK$3 billion6 can apply if
they have been listed on a qualified stock exchange for at least 5 years. Companies with
a minimum listing history of 2 years can apply with a minimum market capitalization of HK
$10 billion.
The HKEX provides a mechanism by which secondary-listed Chinese companies can be
upgraded to a primary listing (Skadden 2021). First, a company may choose to convert its
secondary listing to a dual-primary listing through an application to the HKEX and public
announcements. Second, a company will be automatically treated as primarily listed in
Hong Kong if it is delisted from an overseas exchange. Last, a secondary listed company is
required to convert its listing to primary if 55% or more of its monetary trading volume
occurs in the most recent financial year.
The establishment of the new rules implies that these Chinese companies can be
included in the local benchmark Hang Seng Index (HSI), as are other existing compa­
nies (Yiu 2020). This inclusion is a prerequisite for trading on the Hong Kong –
Shenzhen and Hong Kong – Shanghai stock connect schemes and agreements (HKEX
2021) between cities to allow international and mainland investors to trade in each
other’s market. US-listed Chinese companies with a secondary listing in Hong Kong can
therefore access capital from both Hong Kong and mainland China (Barrett, Xu Elegant,
and Shen 2020).
The introduction of the National Security Law (NSL) in June 2020 by the Chinese
government stabilized Hong Kong from social unrest, but its impact on Hong Kong’s well-
established tradition of rule of law may raise concerns for foreign investment and the
return of Chinese companies. Although the NSL captures criminal offences of sedition,
subversion, collusion and terrorism, it clearly states in Articles 4 and 5 that the ‘principle of
rule of law shall be adhered to’ (Yeung 2021, 2). Scheppele (2010) admits that the NSL
provides a standardized footing from which countries can examine FDI. For instance, the
US Committee on Foreign Investment, the Australian Foreign Investment Review Board
and the European Union’s Foreign Investment Screening Regulation all are given the
opportunity to screen FDI from the perspective of national security (Liu 2020).
Empirical evidence shows that the NSL reinforces a favourable investment environ­
ment for foreign investors (Fidelity International 2022). For instance, the International
Monetary Fund confirms that Hong Kong’s financial system is resilient to financial and
social shocks (The Standard 2021). The number of total banking deposits increased YOY
by 5% in June 2021. The net asset value of fund management increased by 20% YOY in
December 2020 (NSL Legal Forum 2021).
As of 2 October 2020, 217 Chinese firms are listed in the US, with a total market
capitalization of US$2.2 trillion (US-China Economic and Security Review Commission
2020). If the US government insists on delisting all Chinese firms from the US stock market
after the grace period, Chinese companies may return their monies to investors. A better
690 T. K. P. LEUNG AND L. H. W. LEI

strategy, however, is to offer the option of swapping their stocks for equivalent stakes in
Hong Kong. This will transfer more than US$1 trillion (Barrett, Xu Elegant, and Shen 2020)
into the HKEX, which had a total market capitalization of HK$42.2 trillion by the end of
2021 (HKEX). Deloitte (2021) estimates that at least 120 Chinese companies will return to
Hong Kong, raising an aggregated capital of HK$330 billion for the HKEX. As a result, the
HKEX will expand by HK$8.13 trillion. Thus, deep economic integration between
Hong Kong and mainland China remains inevitable, making the establishment of
a common capital market possible (Wang 2009).

Theoretical implications
This paper disproves Mearsheimer’s (2006, 2010, 2014, 2021) defensive realism perspec­
tive, which assumes that states, at a minimum, want to survive and are unsure of the
intentions of others in a system without an overarching power to prevent conflict
(Hamilton and Rathbun 2013). Fuelled by politicians’ projected threats to national secur­
ity, strategic competition and violent encounters, conflicts are often publicized as inevi­
table (Waltz 1988).
Should the US seek to guarantee its long-term national security through a strategy that
weakens China and maximizes the relative power of the US (Taliaferro 2000)? Given the
relative size of the GDPs of the US and China, the chance of widening the relative power
gap is slim. In fact, since 1978, China’s economic power has grown at a faster pace than
that of the US; this implies that the US pursuit of domination over China can be risky and
that balancing power would be a more realistic approach (Hamilton and Rathbun 2013).
He (2009, 134) concurs that the US should develop a structural realism approach empha­
sizing a dynamic balance of the ‘merits’ and ‘threats’ of China’s rise in the international
system before it formulates a comprehensive foreign policy towards China.

Practical implications
Whether China is perceived as a regional hegemony set to compete with the US depends
on the extent to which both countries understand the potential opportunities emerging
from China’s rise for peaceful competition and coevolution (Yuen 2013). Kirshner (2010,
71) notes that a highly antagonistic US stance towards China may hurt China to a certain
extent, but also invite a robust response from a ‘wounded’, ‘hostile’ or ‘dangerous’
adversary. International confrontations are highly unlikely to change the defensive
mechanisms of the Chinese economy, but are highly likely to generate pessimistic con­
sequences and prolong antagonism (Womack 2017). Evans (2011) reports that neither
China nor the US wants to be propelled, by either accident or design, into a scenario of
bleak conflict. Both countries should therefore focus on solving concrete post-hegemonic
problems instead of creating confrontations. They should develop comprehensive multi­
lateral institutional arrangements through structural expectations and cooperation to
facilitate connectivity and establish a framework of rules and regulations.
We show that the capital recruitment process at the firm level clearly follows a distinct
VIE structure. This structure supports the growth of the private sector while isolating its
economic system from the turbulence created by speculative capital flows into China. This
semi-open economic arrangement partly explains why China has not experienced
 ASIA PACIFIC BUSINESS REVIEW 691

negative growth since its adoption of the open-door policy, whereas the US economy
experienced declines in 1991, 2008, 2009 and 2020. International firms should monitor
Sino–US political dynamics, paying special attention to the pivotal role of Hong Kong as
a window into the Chinese market. Increased interactions between Hong Kong and
mainland Chinese regulators regarding the establishment of an international regulatory
framework to channel capital flows into China are expected.
Hong Kong plays a key role in this semi-open system. This paper demonstrates that the
effective use of Hong Kong’s rule-based common law system can contribute to the growth
of the Chinese economy, which operates in an ever-changing civil law judiciary system.

Future research directions

Future research on Sino–US relations should recognize that China’s rise may provide oppor­
tunities for coevolution between the two countries. Studies should emphasize cooperation
and healthy competition between China and the US to benefit international businesses.
China’s development follows a specific pattern. When absorbing FDI, the Chinese
economy exhibits resilience and isolates speculative capital from international markets.
The emergence of a massive Chinese domestic market is extremely attractive for interna­
tional businesses. Future studies should focus on this resilience, determine how foreign
firms can contribute to China’s economic growth and consider how they can contribute to
the growth of China’s domestic market while benefiting their home countries.
Chinese firms acquiring funds from the US market to support internal growth exhibit
a specific type of VIE structure. Future research should aim to understand its implications
and impact on foreign markets and provide implications for regulators, thereby helping
them formulate policies to guide the listing process.

Conclusion
The US initially deployed a cooperation strategy but then changed course to contain
China’s growth when the size of the Chinese economy threatened the US status of
international hegemony. The former US President Donald Trump implemented
a containment strategy by blocking China’s BRI, thereby preventing it from becoming
a world-class innovative and industrialized powerhouse, and subsequently initiated
a trade war on Chinese imports. The first two approaches yielded limited success, but
Americans have ended up bearing the brunt of almost all of the tariffs as a result.
The temporary fallout of the trade war did not ameliorate US hostility towards China.
The US has extended its containment strategy by attempting to delist Chinese firms from
the US. However, almost all of such Chinese companies are shell companies with a VIE
structure. Such a structure allows US investors to share dividends or stock premiums, but
they cannot own any equity of the physical VIE entities, which are stored safely, along with
operational data, in China. Delisting Chinese firms will likely only hurt the interests of US
investors and force Chinese firms to withdraw from the US and return to China.
The VIE structure is not legally recognized in China, which implies that Chinese firms
cannot directly list their shares in China. Hong Kong, however, offers a safe haven for
these firms. First, it is an SAR with an independent common law framework that is familiar
to foreign investors. Second, it has very little political influence from the US, reducing the
692 T. K. P. LEUNG AND L. H. W. LEI

risk of relisting. Finally, Hong Kong provides opportunities for Chinese firms to enter the
Chinese capital market through the Hong Kong–Shenzhen and Hong Kong–Shanghai
stock connect schemes and agreements when these firms become constituent stocks of
the HSI. The value of Hong Kong is not only limited to its role as a regional financial centre,
but also arises from its function as a window into the Chinese market.
The Chinese socialist market economy has stimulated growth through a defensive
mechanism. China allows foreign capital to enter its economy through arrangements such
as FDI, which facilitate growth while isolating the economy from external turbulence such
as the inflow of speculative foreign capital. The internationalization of Chinese firms also
carries a defensive characteristic. Chinese firms have raised capital from the US capital
market using a VIE structure while keeping information in China for national security
reasons. Therefore, the threat of delisting Chinese companies from the US market by the
US government may be ineffective in limiting China’s rise, but may force Chinese firms to
enter the Hong Kong capital market.

Notes
1. The GDPs of China and the US are tabulated in Appendix B.
2. Felipe, Kumar, and Galope (2017) define four income-tied systems in terms of GDP per capita
in 1990 PPP dollars: low-income (below US$2,000), lower-middle-income (between US$2,000
and US$7,250), upper-middle-income (between US$7,250 and US$11,750) and high-income
(above US$11,750).
3. See the press release on 11 December 2017, for Henry Paulson’s opening statement at the
meeting of the US China Strategic Economic Dialogue at http://www.ustreas.gov/press/
releases/hp727.htm. NYSE, Nasdaq and London AIM have conducted many promotional
tours to China over the past few years.
4. ADRs are negotiable certificates issued by a US bank or trust company. They represent an
ownership interest in a foreign private issuer’s securities deposited, usually outside the US,
with a financial institution as the depositary. The underlying securities represented by ADRs
may be either debt or, more commonly, equity instruments (Saunders 1993). ADRs carry
corporate and economic rights such as dividend and voting rights of its underlying share
(Boubakri, Cosset, and Samet 2010).
5. ‘A contract is invalid under any of the following circumstances . . . (3) there is an attempt to
conceal illegal goals under the disguise of legitimate forms; or . . . (5) mandatory provisions of
laws and administrative regulations are violated’. Zhonghua Renmin Gongheguo Hetongfa
(中华人民共和国合同法) [Contract Law of the People’s Republic of China] (promulgated by
the Standing Comm. National People’s Congress, 15 March 1999, effective 1 October 1999),
Article 52(3), (5) (1999), http://www.npc.gov.cn/englishnpc/Law/2007-12/11/content_
1383564.htm [hereafter Contract Law of China].
6. As of 27 March 2022, US$1= HK$7.83.

Disclosure statement
No potential conflict of interest was reported by the author(s).

Notes on contributors
T.K.P. Leung is Associate Dean of the School of Business and Associate Professor at the Hang Seng
University of Hong Kong. He had more than 11 years of executive experience in international
 ASIA PACIFIC BUSINESS REVIEW 693

companies specializing in industrial and consumer products before becoming an academic in 1991.
His primary research interests are Sino–US trade negotiations and conflict management, business-to
-business marketing, cultural and ethics marketing and brand management. He has published two
research books in addition to over 100 journal articles and book chapters. His work is widely cited
and has appeared in Industrial Marketing Management, Decision Support Systems, International
Journal of Production Economics, Journal of Business Ethics, European Journal of Marketing and Asia
Pacific Business Review, among others.
Lawrence H.W. Lei is currently an Assistant Professor at the Hang Seng University of Hong Kong. He
was an auditor at PricewaterhouseCoopers and internal auditor and gaming analyst at two major
casino resorts in Macau SAR, where he developed a strong interest in corporate governance before
becoming an academic in 2014. He is Director of the Start-Up and SME Resource Center, Chief Editor
of the HSUHK Business Review and an executive member of the Junzi (a Chinese gentleman)
Ceremony Organising Committee, which annually presents awards to organizations with good
ethical practices. His work has appeared in the Asian Journal of Business Ethics, Journal of
International Banking Law and Regulation, UNLV’s Gaming Research and Review Journal and
International Journal of Law and Management.

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Appendix A
The ten largest stock exchange operators in 2021, ranked by total market capitalization of listed
companies

Market
capitalization
Ranking Stock market operators Domiciled country US$ trillion
1 New York Stock Exchange (NYSE) America 27.69
2 National Association of Securities Dealers Automated America 24.56
Quotations (NASDAQ)
3 Shanghai Stock Exchange China 8.15
4 Euronext Europe 7.33
5 Japan Exchange Group Japan 6.54
6 Shenzhen Stock Exchange China 6.22
7 Hong Kong Stock Exchange Hong Kong Special 5.43
Administrative Region
8 LSE Group UK 3.80
9 National Stock Exchange India 3.55
10 TMX Group Canada 3.26
Source: Statista. 1 February 2022. Accessed 22 April 2022. https://www.statista.com/statistics/270126/largest-stock-
exchange-operators-by-market-capitalization-of-listed-companies/.

Appendix B
Comparison of the US and Chinese economies in terms of gross domestic product (GDP)

China
US GDP US GDP US GDP per China GDP GDP China GDP per
US$ Growth Capita US$ Growth Capita Relative Economic size
B Current $ % Current $ B Current $ % Current $ China/US GDP%
1978 2,352 +5.54% 10,565 150 +11.33% 156 6.4%
1979 2,627 +3.17% 11,674 178 +7.59% 184 6.8%
1980 2,857 −0.26% 12,575 191 +7.83% 195 6.7%
1981 3,207 +2.54% 13,976 196 +5.11% 197 6.1%
1982 3,344 −1.80% 14,434 205 +9.02% 203 6.1%
1983 3,634 +4.58% 15,544 231 +10.77% 225 6.3%
1984 4,038 +7.24% 17,121 260 +15.19% 251 6.4%
1985 4,339 +4.17% 18,237 309 +13.43% 294 7.1%
1986 4,580 +3.46% 19,071 301 +8.95% 282 6.6%
1987 4,855 +3.46% 20,039 273 +11.66% 252 5.6%
1988 5,236 +4.18% 21,417 312 +11.22% 284 6.0%
1989 5,642 +3.68% 22,857 348 +4.21% 311 6.2%
1990 5,963 +1.87% 23,887 361 +3.92% 318 6.1%
1991 6,158 −0.11% 24,342 383 +9.26% 333 6.2%
1992 6,520 +3.52% 25,419 427 +14.23% 366 6.5%
1993 6,859 +2.75% 26,387 445 +13.88% 377 6.5%
1994 7,287 +4.03% 27,695 564 +13.04% 473 7.7%
1995 7,640 +3.68% 28,691 735 +10.95% 610 9.6%
1996 8,073 +3.77% 29,967 864 +9.92% 709 10.7%
1997 8,578 +4.45% 31,459 962 +9.24% 782 11.2%
(Continued)
700 T. K. P. LEUNG AND L. H. W. LEI

(Continued).
China
US GDP US GDP US GDP per China GDP GDP China GDP per
US$ Growth Capita US$ Growth Capita Relative Economic size
B Current $ % Current $ B Current $ % Current $ China/US GDP%
1998 9,063 +4.48% 32,854 1,029 +7.85% 829 11.4%
1999 9,631 +4.75% 34,514 1,094 +7.66% 873 11.4%
2000 10,252 +4.13% 36,335 1,211 +7.49% 959 11.8%
2001 10,582 +1.00% 37,133 1,339 +8.34% 1,053 12.7%
2002 10,936 +1.74% 38,023 1,471 +9.13% 1,149 13.5%
2003 11,458 +2.86% 39,496 1,660 +10.04% 1,289 14.5%
2004 12,214 +3.80% 41,713 1,955 +10.11% 1,509 16.0%
2005 13,037 +2.51% 44,115 2,286 +11.40% 1,753 17.5%
2006 13,815 +2.86% 46,299 2,752 +12.72% 2,099 19.9%
2007 14,452 +1.88% 47,976 3,550 +14.23% 3,694 24.6%
2008 14,713 −0.14% 48,383 4,594 +9.65% 3,468 31.2%
2009 14,449 −2.54% 47,100 5,102 +9.40% 3,832 35.3%
2010 14,992 +2.56% 48,467 6,087 +10.64% 4,550 40.6%
2011 15,543 +1.55% 49,883 7,552 +9.55% 5,618 48.6%
2012 16,197 +2.25% 51,603 8,532 +7.86% 6,317 52.7%
2013 16,785 +1.84% 53,107 9,570 +7.77% 7,050 57.0%
2014 17,527 +2.53% 55,050 10,476 +7.43% 7,679 60.0%
2015 18,238 +3.08% 56,863 11,062 +4.04% 8,067 60.7%
2016 18,745 +1.71% 58,021 11,233 +6.85% 8,148 59.9%
2017 19,543 +2.33% 60,110 12,310 +6.95% 8,879 63.0%
2018 20,612 +3.00% 63,064 13,895 +6.75% 9,977 67.4%
2019 21,433 +2.16% 65,280 14,280 +5.95% 10,216 66.6%
2020 20,937 −3.49% 63,544 14,722 +2.30% 10,500 70.3%
Source: The World Bank.