The US Congress passed a bill on Wednesday that would close US stock and money markets to foreign companies that do not comply with US oversight of financial audits. It came as part of a bipartisan push by lawmakers to put more economic pressure on China.
“The Holding Foreign Companies Accountable Act” (HCAA) was passed unanimously by both the House and Senate and it will now be sent to President Donald Trump, who is expected to sign it into law.
The new rules would mandate that any foreign companies listed on US stock exchanges must comply with accounting requirements stipulated by the US Securities and Exchange Commission (SEC), while barring any foreign company from being listed on US exchanges if its financial audits cannot be inspected an SEC watchdog.
Although the HCAA covers all foreign companies, the language used by US lawmakers drafting the bill clearly targets Chinese companies, as it requires disclosure of any board members as Chinese Communist Party officials.
Trust China to prevent fraud?
Most foreign companies already comply with US auditors. However, Chinese law prevents audit papers from leaving China, meaning US regulators cannot easily verify their quality and identify potential risks for investors.
The SEC, responsible for enforcing US securities law, has long struggled with Beijing over inspecting audits of Chinese companies listed on US markets.
In 2013, an agreement between US and Chinese auditing authorities was intended to streamline a process allowing an SEC auditing watchdog to access audit documents of Chinese companies listed on US markets.
The deal was initially welcomed as a breakthrough for financial transparency. However, US officials say China has not allowed access to audits.
In August, William Duhnke, chairman of the SEC auditing watchdog, known as the Public Company Accounting Oversight Board (PCAOB), said the board has “no prospects” of being able to oversee disclosures and prevent accounting fraud in China.
“We must trust and verify, but we have no ability to verify in China,” said Duhnke.
What could the law change?
If passed into law, it remains to be seen whether the HCAA will force China to be more transparent with PCAOB’s audit requests, or if it will result in mass delisting and further destabilize the business environment between the world’s two largest economies.
Some Chinese companies will be already be forced to delist from US stock exchanges within three years unless US and Chinese authorities can iron out current difficulties in audit inspections, according to the China Business Review.
The bill’s sponsors, Democratic Senator Chris Van Hollen, and Republican Senator John Kennedy, said in a statement that US investors have been “cheated out of their money” after investing in “seemingly-legitimate Chinese companies that are not held to the same standards as other publicly listed companies.”
One case involved a Chinese coffee company, Luckin Coffee, which built up massive investment capital in the US toted as the future “Starbucks of China,” before it admitted to fabricating $300 million in revenue in 2019, and was subsequently delisted from NASDAQ at a heavy loss to investors.
There are 217 Chinese companies listed on NASDAQ, the New York Stock Exchange (NYSE), and NYSE American, with a total market capitalization of $2.2 trillion, according to a congressional commission on US-China economic relations.
A small number of these firms are also listed on Asian stock exchanges. Several US-listed Chinese firms, such as the e-commerce behemoth Alibaba and KFC China operator Yum China, have recently carried out secondary listings on the Hong Kong Stock Exchange.
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