Home System list How the United States is getting closer to delisting Chinese companies

How the United States is getting closer to delisting Chinese companies

0
Placeholder while loading article actions

Some big-name Chinese stocks, including Alibaba Group Holding Ltd. and Baidu Inc. face expulsion from the New York Stock Exchange and Nasdaq if they refuse to let US regulators see their financial audits. The U.S. Securities and Exchange Commission kicked off the process, constrained by a 2020 law, and investors started paying attention. The same goes for China, which has been scrambling to potentially remove a big hurdle that has stymied U.S. regulators for years.

1. Why does the United States want access to audits?

The Sarbanes-Oxley Act of 2002, enacted in the wake of the Enron Corp. accounting scandal, required all public companies to have their audits inspected by the US Public Company Accounting Oversight Board. According to the SEC, more than 50 jurisdictions are working with the board to authorize the required inspections, while two have not historically done so: China and Hong Kong. The long-simmering issue has turned into a political one as tensions between Washington and Beijing have escalated under President Donald Trump’s administration. Nasdaq-listed Chinese chain Luckin Coffee Inc. was discovered to have intentionally fabricated part of its 2019 revenue. The following year, in a rare bipartisan move, Congress moved to force action. .

As required by the Holding Foreign Companies Accountable Act, or HFCAA, the SEC in March began publishing its “provisional list” of companies identified as non-compliant. As of May, the list had more than 100 companies, including JD.com Inc., Pinduoduo Inc. and China Petroleum & Chemical Corp. In total, the PCAOB said it was barred from reviewing the audits of more than 200 companies, each of which will face a three-year clock once added to the list. The companies say China’s national security law prohibits them from handing over audit documents to US regulators. SEC Chairman Gary Gensler said in March that Chinese authorities faced “a series of difficult choices.”

3. What is China changing?

In April, the China Securities Regulatory Commission announced it would change a 2009 rule that restricted the sharing of financial data by overseas-listed companies, potentially removing a hurdle. He also said he would provide assistance for cooperation with foreign regulators. Negotiations on the logistics of on-site inspections in China are said to be underway at the end of April. A month later, senior SEC official YJ Fischer spoke of “ongoing and productive discussions” but said “significant issues remain and time is running out quickly.” 4. What is the larger problem?

Critics say Chinese companies enjoy the trading privileges of a market economy – including access to US stock exchanges – while receiving government support and operating in an opaque system. In addition to inspecting audits, the HFCAA requires foreign companies to disclose whether they are controlled by a government. The SEC is also demanding that investors receive more information about the structure and risks associated with the shell companies — known as variable interest entities, or VIEs — that Chinese companies use to list their shares on the New York. Since July 2021, the SEC has refused to green light new listings. Gensler said more than 250 companies already in operation will face similar requirements.

5. How soon can Chinese companies be removed from the list?

Nothing will happen this year or even in 2023, which is why the markets first seized on this possibility in their stride. Under the HFCAA, a company would only be delisted after three consecutive years of non-compliance with audit inspections. He could come back by certifying that he had retained the services of an SEC-certified accounting firm.

6. How many companies will be affected?

There is not much discretion. If a company from China or Hong Kong trades in the United States and files an annual report, it will soon find itself on the SEC’s list simply because those have been identified as non-compliant jurisdictions. In the March interview, Gensler pointed out that the law focuses on non-compliant countries, rather than specific companies.

7. What are investors doing in response?

If a Chinese company listed in the United States also has shares traded in Hong Kong, shareholders have the option of converting their American Depositary Shares (ADS) into Hong Kong shares. Some do just that by handing over the US shares to the custodian bank and asking them to cancel them. The bank then instructs the depository to deliver the Hong Kong common stock to a broker account in the Hong Kong central clearing and settlement system. The process usually takes two business days.

8. Are some Chinese companies really controlled by the government?

Large private companies like Alibaba could probably argue that they are not, although others with substantial public ownership may have a harder time. As of May 2021, the US-China Economic and Security Review Commission, which reports to Congress, had eight “national-level Chinese state-owned enterprises” listed on major US stock exchanges. .

9. Why are Chinese companies listed in the United States?

They are attracted by the liquidity and depth of the investor base of US financial markets, which provide access to a much larger and less volatile pool of capital, in a potentially faster time frame. China’s own markets, though huge, remain relatively underdeveloped. Fundraising for even quality businesses can take months in a financial system constrained by public lenders. Dozens of companies canceled planned IPOs last year after Chinese regulators tightened listing requirements to protect retail investors who dominate stock trading, as opposed to institutional and grassroots investors. of active mutual funds in the United States. And until recently, the Hong Kong stock exchange had a ban on dual-class shares, which are often used by tech entrepreneurs to keep control of their startups after they go public in the United States. It was relaxed in 2018, leading to big listings from Alibaba, Meituan and Xiaomi Corp.

(updates Section 3 with SEC comment)

More stories like this are available at bloomberg.com