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China’s Legal Manipulations – Totalitarian takes Advantage of Free and Fair

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While the financial world, including the SEC and Federal prosecutors, fixate on individual actions like Elon Musk’s, a larger and far more insidious play is unfolding: the strategic use of the law by China as a weapon against the West. Despite the U.S.’s long history of myopic financial regulation, our regulators’ failure to see Beijing’s covert manipulation of information that impacts both domestic and global capital markets is astonishing.

Under the banner of “Xi Jinping Thought,” China has rapidly rolled out a comprehensive program to weaponize law in their favor, both within and outside their borders. Coined as “lawfare,” this initiative is an audacious attempt to reframe global economic relations under a distinctively Chinese paradigm. For instance, China’s foreign minister, Wang Yi, has openly emphasized the intent to leverage the rule of law as a tool against any entity or individual that doesn’t toe Beijing’s line.

Recent legal changes in China are alarming. The amended Counter-Espionage Law of 2023 has expanded from merely identifying spies to broadly targeting standard business practices. Gathering data on local markets, scoping out potential partners, or researching competitors now fall under the purview of this law. Any negative information about China, including its economic state, is essentially radioactive. It’s no exaggeration: insiders from prestigious universities and think tanks have reported directives against voicing negative opinions on certain topics.

This manipulation doesn’t stop at China’s borders. Their new Foreign Relations Law of 2023 has set a broad net, targeting both foreigners and Chinese nationals. The message is unambiguous: conform to Chinese law and don’t disrupt national security or public order.

The real-world impact of these laws is a stifling environment where open disclosure to global investors and regulators becomes, in essence, illegal under Chinese law.

Many are unaware of China’s aggressive stance against foreign information and consulting firms. Giants like Mintz, Bain, and Capvision have already faced the wrath of Chinese authorities. Other major players, such as Deloitte, Franklin Templeton, and BlackRock, have been fined or forced into CCP indoctrination sessions. Furthermore, new regulations have been imposed on IPOs, stifling negative information about China.

The Hong Kong Stock Exchange’s recent moves have erased requirements discussing risks related to political structures, foreign controls, and government intervention. In a further twist, the China Securities Regulatory Commission has introduced a “valuation with Chinese characteristics,” potentially favoring companies that align with CCP policies.

All of these maneuvers point to a glaring reality: China is fostering an information vacuum that it aims to fill with a version of the market that serves the Party’s objectives. This distorted representation, an “airbrushed economy,” rests on a combination of stringent regulations, politically driven investment marketing, and coercive legal tactics.

The SEC, while not entirely oblivious, has offered a weak response, merely advising Chinese firms about disclosure requirements. But with the fundamental conflict between PRC and US regulations, it’s a near impossibility for entities to comply with both simultaneously.

The dire implications for Western businesses are clear. Companies face a dilemma: conform to Chinese rules and risk penalties at home, or stand by Western principles and risk crippling sanctions in China. This is a high-stakes game, with potentially catastrophic economic consequences.

The ball is now in the SEC’s court. They must either uphold rigorous standards for transparency or yield to China’s demand for opacity. As one expert aptly put it, if the SEC remains passive, they might catch minor infractions but miss the ticking time bombs that could devastate our financial system.

This is yet another advantage, another way that a totalitarian government can manipulate free democracies. Our laws are designed to level the playing field, China’s laws and goals are designed for the opposite.

https://www.ft.com/content/b410e920-ecaf-44ab-b4c8-602f2c42bfd8

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