Chinese stocks face massive delisting as US beefs up investor protections
News analysis
Once upon a time, Chinese stocks enjoyed a certain privilege in the United States, an escape from the scrutiny of the Public Company Accounting Oversight Board (PCAOB), which all foreign companies listed in the United States must undergo.
Now, the chairman of the U.S. Securities and Exchange Commission (SEC) is adamant that Chinese companies will only be allowed to continue trading in the U.S. market if they fully comply with U.S. audit inspections.
This 180-degree change is attributed to the United States’ implementation of the Holding Foreign Companies Accountable Act (HFCAA).
As of May 28, at least 128 Chinese stocks have made it to the SEC’s final list, including Weibo, a Twitter-like social media platform, Baidu, a Google-like search engine, Jingdong, an e-commerce platform, Pinduoduo, an agriculture-centric platform, Bilibili, a video-sharing website, NetEase, an Internet service provider, Ctrip.com, an online travel agency, Sinovac, a biopharmaceutical company, Huaneng Power, an electricity company, Chalco, a multinational aluminum company, and many other high-tech Chinese sectors.
According to the HFCAA, if a company is named to the final list for three consecutive years, it will be officially delisted after the third year (from 2024). Additionally, the three-year period will likely be shortened to two years as indicated in a May 24 Wall Street Journal report.
In an effort to combat registration fraud, the HFCAA was first introduced on March 28, 2019, by U.S. Senator John Kennedy, R-La., and was unanimously approved by the Senate and House of representatives. Then President Donald Trump signed the bill on December 18, 2020.
In the past, the United States has patiently urged Chinese companies to comply with the requirement to file audit briefs.
Since the bill took effect as part of the United States’ resolve to defend the interests of American investors, the situation has changed dramatically, with China rushing to intervene, fearing a mass delisting of Chinese stocks.
Big loss for China if the United States cuts foreign funds to Chinese stocks
As the time approaches when Chinese stocks will be officially delisted, the Chinese authorities are growing increasingly anxious. In April, the China Securities Regulatory Commission (CSRC) announced that it was set to amend relevant privacy and file management regulations for domestic companies listed overseas.
On May 24, the CSRC issued another statement expressing its desire to communicate with the United States to “satisfy the legal and regulatory requirements of both parties.”
However, the US side is not so optimistic about a peace pact, the PCAOB said it was still too early to speculate on a final deal with China.
The PCAOB added that even if an agreement is reached, it will not meet the requirements of US law if it is not successfully implemented.
Former Trump administration trade negotiator Clete Willems told the Wall Street Journal on May 26: “Unless China shows more flexibility than it has today, the delisting of some or all of its businesses is unavoidable”.
Deng Zhidong, senior economist and director of the China CFO Forum, told a Chinese media that most Chinese companies listed in the United States are outstanding technology innovation companies that cannot meet the listing requirements in China. because of huge investments and financial losses. , so they need to collect investment from the global securities market.
Therefore, failure of such a company to list in the United States will severely affect its ability to raise funds, which in turn will hamper its sustainable growth, Deng said, according to Sina media on May 8.
For the Chinese communist regime, the mass delisting of Chinese stocks from the United States would be a major loss.
Xu Yuan, a senior research fellow at Peking University’s Institute of Digital Finance, said in a March 30 blog post on Caixin, a Chinese financial media outlet, that Chinese stocks are “the bond that holds China-China relations together.” -Americans in struggle but without rupture” and is “a key ballast in China’s relations with the outside world”.
Xu admits that in the current pattern of China-Western economic relations, the Western middle and lower classes are the victims, while the elites of Wall Street and Silicon Valley are the beneficiaries. This is why investment banks and lawyers serving Chinese equities, as well as technology companies working closely with Chinese equities, have become a reliable “extra-institutional force” to maintain relations between China and China. United States.
But if Chinese stocks were delisted from the United States, then this crucial link between China and the West would be severed and the Chinese economy would plunge into a dangerous position, Xu said.
Chinese listed companies have bypassed US financial scrutiny for decades
Fraudulent listings on US exchanges have cost investors hundreds of billions of dollars over the past decade.
US Senator John Neely Kennedy told FOX Business in December 2020: “The current policy that allows Chinese companies to flout the rules that American companies follow is toxic… It puts American families and workers at risk by jeopardizing their education and retirement savings.
In 2002, the US Congress passed the Sarbanes-Oxley Act, which requires any company issuing government securities in the United States to have its audit firm inspected by the PCAOB.
However, the regime ignored the law and obstructed PCAOB review of Chinese companies, leading some Chinese companies to commit unbridled fraud and deception for their listed stocks.
On March 2, 2011, Muddy Waters Research provided “compelling evidence” accusing China MediaExpress Holdings (NASDAQ: CCME), a southern Chinese television advertising operator, of fabricating false financial data to meet industry standards. IPO and to have inflated the company’s capital by hundreds of millions of dollars.
On April 26, 2011, Citron Research began with a Chinese proverb “Money made through dishonest practices won’t last long,” when interviewing Longtop Financial (NYSE:LFT), a Chinese provider of integrated financial IT services, a fraud extraordinary financial position with its margin far exceeding its peers. Four months later, on August 31, 2011, Longtop Financial announced its dissolution due to the allegation.
In October 2013, Muddy Waters Research detailed “massive fraud” by NQ Mobile (NYSE: NQ), a Chinese internet security company, including falsifying at least 72% of its revenue and exaggerating it of the market, claiming that its share was only 1.5% instead of the 55% announced. In 2018, NQ Mobile (NYSE: NQ) was renamed Link Motion (NYSE: LKM). On January 9, 2019, the NYSE officially delisted Link Motion (NYSE: LKM).
In 2013, the PCAOB signed a memorandum of understanding with the Chinese audit agency. Under the MoU, the PCAOB was granted access to the Chinese authority’s audit information on Chinese companies.
However, a CSRC spokesperson said that based on the MoU, “within certain limits,” China will allow the United States access to the accounting records of Chinese companies listed in the United States.
The so-called certain limits may allow the CCP to use “national security” and “state secrets” as excuses to prohibit the supply of audit records of Chinese companies listed in the United States. That is, the PCAOB is still unable to regulate Chinese companies and the Chinese accounting firms that audit them, according to a commentary published in Taiwan-based United Daily News on December 2, 2020.
In the 2016 trial, the CCP turned over partially redacted audit transcripts and barred the PCAOB from accessing the records of U.S.-listed Chinese giants, including Alibaba. and Chinese officials were present during PCAOB inspections.
In December 2021, the PCAOB found that devoting a lot of time and resources to working with the Chinese side was in vain, stating: “Unfortunately, since the signing of the MoU in 2013, Chinese cooperation has not been sufficient. for the PCAOB to obtain timely access to relevant information. documents and testimony necessary to carry out our mission in accordance with the fundamental principles identified above, and the consultations undertaken within the framework of the memorandum of understanding have not resulted in improvements. »
The United States is thus determined to delist Chinese actions suspected of falsification.
As of June 1, the “final list” of issuers identified under the HFCAA covered nearly half of all Chinese stocks listed in the United States, according to the SEC.
The opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of The Epoch Times.
Follow
Jenny Li has contributed to The Epoch Times since 2010. She has reported on Chinese politics, economics, human rights issues, and US-China relations. She has extensively interviewed Chinese scholars, economists, lawyers and rights activists in China and abroad.