US bill to delist Chinese companies from stock exchanges passes in House of Representatives
- The Holding Foreign Companies Accountable Act would punish firms that do not comply with auditing oversight rules
- The legislation now moves to US President Donald Trump’s desk for his signature, though he has not indicated whether he will sign it into law
US legislation aimed at removing Chinese companies from US stock exchanges for not complying with auditing oversight rules passed with a voice vote in the House of Representatives on Wednesday. It now moves to President Donald Trump, who has not indicated whether he will sign it into law.
The bill could lead to Chinese companies including Alibaba Group being forced off US exchanges if the companies fail to hand over their audits for inspection. Alibaba owns the South China Morning Post.
The Holding Foreign Companies Accountable Act was introduced in 2019 by Senator John Kennedy, Republican of Louisiana, to protect American investors from Chinese companies that lacked transparency.
The United States’ auditing supervisor, the Public Company Accounting Oversight Board (PCAOB), has been battling China for decades over its resistance to supply publicly traded companies’ audits for inspection. Beijing has cited state-secret laws as its reason for not complying.
“Enforcing disclosure laws here would be a welcome and overdue step,” said Derek Scissors, a researcher focusing on US economic relations with Asia at the American Enterprise Institute.
“Transparency is more important than the profits its critics are shielding,” said Scissors, referring to the resistance the legislation has gotten, including arguments that it would harm investors and capital markets in the US. “It is not a good-faith argument to say transparency in our investment in the People’s Republic of China is bad for the country.”
The outgoing Trump administration is still waging a concerted effort to get tough on China, both as part of its legacy and to try to put in place policies that may be difficult for President-elect Joe Biden’s administration to unwind.
US bill to delist Chinese stocks could backfire on American firms
“Today, the House joined the Senate in rejecting a toxic status quo,” Kennedy said on Wednesday. “Communist China is right now using US stock exchanges to exploit American workers and families – people who put their retirement and college savings in public companies.”
Moments before the bill passed, its House sponsor, California Democrat Brad Sherman, said: “This bill is not anti-China, and it is not designed to prohibit the trading of Chinese companies. Rather it provides a three-year window during which we expect China will enter into a reasonable agreement with the SEC and the PCAOB, so that we have the additional level of protection for investors that we expect and have demanded since we passed the Sarbanes-Oxley bill in 2002.”
The lawmakers’ support for the regulation showed the strong bipartisan agreement in cracking down on US-listed Chinese companies, and it was a blow to these firms, which have sought the capital as well as the prestige from US markets.
It is not a good-faith argument to say transparency in our investment in the People’s Republic of China is bad for the country
More than 210 Chinese firms with a combined market capitalisation of about US$2.2 trillion were listed on major US stock exchanges as of October, according to the most recent congressional report by the US-China Economic and Security Review Commission.
Separately, the US Securities and Exchange Commission (SEC) is pushing ahead with a similar but less stringent proposal that would require the Chinese companies to use auditors overseen by the United States. Noncompliant companies, however, would still be allowed to trade over the counter. The SEC is aiming to introduce the regulation for public comment this month.
Officials have been drafting the proposal since August, urged by the President’s Working Group on Financial Markets – a group that includes SEC Chairman Jay Clayton and Treasury Secretary Steven Mnuchin.
Chinese firms face 2022 comply-or-delist deadline in new US audit proposals
But pushing the regulation forward just weeks before the administration leaves office is unusual because agencies typically stop issuing major new policies during a presidential transition period.
Making the deadline even more difficult, Clayton has announced plans to step down by the end of the year and will be gone before any regulation is finalised. That would leave completing the work to an SEC chief chosen by Biden.
“The SEC has had six months since Senate passage to propose an alternative; their time has passed,” said Scissors.
It is unclear whether the passage of the bill will end the SEC’s effort to introduce its regulations. But it does mean Chinese companies will likely face a harsher law, if signed, that could suspend their stocks from trading on American exchanges, giving them little manoeuvrability.
The legislation requires Chinese companies to be in compliance with the US audit rules within three years.
It is likely “for another bilateral deal to be made long before the three-year deadline” is reached, said Scissors.
The SEC and the stock exchanges have acknowledged the long-standing problems with publicly traded Chinese companies, but they cautioned that cracking down on the listings could lead to an exodus of firms that account for hefty listing fees and revenue.
They have been advocating for a market-driven approach instead that could include more stringent oversight of US arms of auditing firms such as Deloitte, PwC, Ernst & Young and KPMG.
