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Explained: The Bill passed by the US Senate that could delist some Chinese companies

Incidentally, 11 per cent of all securities class action lawsuits in 2011 were brought against Chinese-owned companies that misrepresented themselves in financial documents.

By: Explained Desk | New Delhi |
May 22, 2020 2:08:32 pm
Explained: The Bill passed by the US Senate that could delist some Chinese companies Traders work on the floor of the New York Stock Exchange near the end of the trading day. (AP File Photo: Craig Ruttle)

The US Senate Wednesday passed a Bill by a unanimous vote that could delist some Chinese companies from selling shares on American stock exchanges, amid rising tensions between the two countries over the pandemic.

The Bill, titled ‘Holding Foreign Companies Accountable Act’, was introduced to protect American investors and their retirement savings “from foreign companies that have been operating on US stock exchanges while flouting Securities and Exchange Commission (SEC) oversight”.

The Bill must be passed by the House of Representatives and signed by US President Donald Trump before it becomes law.

What is the Bill?

The Bill prohibits securities of a company from being listed on any of the US securities exchanges if the company fails to comply with the Public Company Accounting Oversight Board’s (PCAOB) audits for three years in a row. It also requires public companies to disclose whether they are owned or controlled by a foreign government, including China’s Communist government.

“Many Americans invest in US stock exchange as part of their retirement savings, and dishonest companies operating on the exchanges put Americans at risk. This legislation protects the interest of hardworking American investors by ensuring that foreign companies traded in America are subject to the same independent audit requirements that apply to American companies,” the US government said.

The PCAOB was set up to inspect audits of public companies to ensure the information companies provide to the public is accurate and trustworthy. Significantly, as things stand now, the Chinese government refuses to allow the PCAOB to inspect audits of companies that are registered in China and Hong Kong. This poses a substantial risk to Americans who want to invest in such companies.

According to the SEC, over 224 US-listed companies are located in countries where there are obstacles to PCAOB carrying out audits. These companies have a combined capitalisation of over $1.8 trillion. Moreover, in the last 10 years an increasing number of Chinese companies are listing themselves on US stock exchanges.

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Incidentally, 11 per cent of all securities class action lawsuits in 2011 were brought against Chinese-owned companies that misrepresented themselves in financial documents. Most recently, the shares of the Chinese company Luckin Coffee plummeted after an accounting fraud came to light.

What happened with Luckin Coffee?

Earlier this month, China’s Luckin Coffee, considered to be a competitor of the American coffee chain Starbucks, sacked two of its top officials after evidence of an accounting fraud came to light. Six other employees who had knowledge of the fraud or were involved, were suspended or sent on leave. In April, the company’s shares plummeted by over 80 per cent after fake transactions to the tune of $310 million were revealed, which made it look like the firm was experiencing rapid growth.

In a statement, American Securities Association (ASA) CEO Chris Lacovella said, “Chinese companies traded in the US have routinely avoided the SEC’s rigorous company-specific disclosure and audit regulations, leaving American investors in the dark and at risk, and now we know why.”

What does this mean for Chinese companies?

While the Bill applies to all foreign companies, it is targeted specifically at China. Republican Senator John Kennedy, who sponsored the Bill, said, “It is asinine that we are giving Chinese companies the opportunity to exploit hardworking Americans — people who put their retirement and college savings in our exchanges — because we don’t insist on examining their books.”

“For too long, Chinese companies have disregarded US reporting standards, misleading our investors. Publicly listed companies should all be held to the same standards, and this bill makes common sense changes to level the playing field and give investors the transparency they need to make informed decisions,” co-sponsor of the Bill Senator Van Hollen said.

A report in The South China Morning Post said that in order to comply with the requirements of the Bill, Chinese companies may have to break state secret laws in China. Therefore, the Bill might be a way to encourage the Chinese government to take a re-look at its laws.

Other China-related bills in the US

This is not the first time the US has passed a Bill targeting China. In November 2019, the House of Representatives approved the Senate’s version of the Bill titled, ‘Hong Kong Human Rights and Democracy Act’, which required the US Secretary of State to annually certify if Hong Kong retains enough autonomy to be eligible for special treatment by the US.

As per the Bill, the US can also impose sanctions on individuals responsible for human rights violations in Hong Kong.

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As of November 2019, over 150 China-related legislation were pending in the US with the aim to counter Beijing. The subjects of these legislation include the mass internment of Uygurs, cyber-security and Taiwan and the South China sea among others.

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