Quick Take: How China stars like Alibaba may be forced from US
WIDENING tensions between the US and China now include a long-standing, complicated dispute over audits of public companies.
Regulators in Washington are laying groundwork to eventually delist major Chinese companies from the New York Stock Exchange and Nasdaq if their audits remain off-limits to American inspectors.
China’s watchdogs say such a move would hurt both countries.
Chinese companies traded in the US have a cumulative market cap in excess of US$1.8 trillion.
1. What’s being considered?
The US Securities and Exchange Commission is pushing ahead with a plan that would force greater disclosure by non-American companies whose shares trade on American exchanges.
Specifically, public companies with foreign accounting firms would be banned from America’s equity markets unless US Public Company Accounting Oversight Board inspectors are permi ed review their audits.
Separately, under a bill that sailed through the Senate in May, those companies would also have to confirm that they’re not owned or controlled by a foreign government.
2. What’s the point?
China’s refusal to let the PCAOB examine Chinese audits, including those for companies registered in Hong Kong, was long a point of contention even before the implosion early this year of Luckin Coffee Inc., a Chinese chain being delisted a er an accounting scandal.
“All I want, and I think all the rest of us want, is for China to play by the rules,” said Sen. John Neely Kennedy, R-La., who introduced the bill (S. 945) with Sen. Chris Van Hollen, D-Md.
“Everybody has to comply with that rule American companies, British companies, Malaysian companies, Turkmenistan companies – except one: Chinese companies. They just say no.”
Chinese firms say they can’t comply because Chinese national security law prohibits them from turning over audit papers to US regulators.
The NYSE and Nasdaq had previously pushed back against the idea of threatening delistings, but they’ve come under increasing US government pressure.
3. How soon could Chinese companies be delisted?
It would take awhile. When a group of top US financial regulators called for new rules in August, it foresaw them taking effect perhaps not until 2022.
The SEC plans to make a proposal by the end this year, but even if it does, the agency would still need to take public comment and hold a second vote before anything could become final.
Industry and members of the public will also have a chance to suggest changes before anything goes on the books. The process will take months or even longer.
As for the Senate legislation, should it be adopted into law, a company would be delisted only a er three consecutive years of noncompliance with audit inspections.
It could return by certifying it had retained a registered public accounting firm approved by the SEC. (A subsequent failure to comply could result in a fiveyear ban.)
The Senate bill also would require companies to certify they aren’t really run by a foreign government; the SEC would need to dra rules for that as well.
4. Who would be affected?
Alibaba Group Holding Ltd. – by far the largest US-listed Chinese corporation – for one.
On a post-earnings call in May, it said it was monitoring developments but stressed its books are audited under US standards by a major accounting house.
Executives added they were aware of discussions between Chinese and American regulators regarding the types of financial information that can be exchanged without violating Chinese laws, but didn’t elaborate.
In all, the PCAOB says it’s blocked from reviewing the audits of about 200 companies based in China or Hong Kong, including Alibaba, PetroChina, Baidu and JD.com.
5. Are some of them really controlled by China’s government?
Major private firms like Alibaba could probably argue that they are not, although others with substantial state ownership may have a harder time.
As of February 2019, the USChina Economic and Security
Review Commission, which reports to Congress, counted at least 11 Chinese companies listed on major US exchanges that were at least 30 per cent stateowned. Also some companies where the state doesn’t own a stake can be subject to pressure, such as when the central government tried to stop Anbang Insurance Group Co.’s acquisition spree before finally taking control of the debt-laden conglomerate in 2018. But when such involvement is behind the scenes, it’s much harder to prove.
Meanwhile, companies such as China Mobile Ltd. could be more directly in the firing line: Trump signed an order in November barring American investments in Chinese firms deemed to be owned or controlled by the Chinese military.
6. Why do Chinese companies list in the US?
Companies from around the globe are a racted by the liquidity and deep investor base of US capital markets.
They offer access to a much bigger pool of capital, in a potentially speedier time frame.
China’s own markets, while giant-sized, remain relatively underdeveloped.
Fundraising for even quality companies is constrained in a financial system that remains dominated by state-owned lenders.
Trading in China’s domestic stock market is dominated by retail, not the institutional investors and deep mutualfund base active in the US And until recently, the Hong Kong exchange had a ban on dualclass shares, which are o en used by tech entrepreneurs to keep control of their start-ups a er going public in the US. It was relaxed in 2018, prompting big listings from Alibaba, Meituan and Xiaomi.
7. Why is the US doing this?
It’s another front in the USChina economic conflict that had escalated under the Trump administration even before the coronavirus pandemic that Trump blames on China.
Trump and his trade advisers have long sought to level what they see as a playing field tilted in favour of Chinese companies, which enjoy the trading privileges of a market economy – including access to US stock exchanges – while receiving government support and operating in an opaque system.
On Nov 13, Trump barred American investments in Chinese firms owned or controlled by the military. His administration has accused Chinese companies of undermining the intellectual property of their US counterparts.
And alarm has grown among US lawmakers that American money is bankrolling efforts by China’s technology giants to develop leading positions in a variety of high-tech fields.
8. How has China responded?
The China Securities Regulatory Commission called the Senate bill political and said it would undermine global investor confidence in US capital markets.
The Foreign Ministry said all sides benefit from the overseas listings: The companies can raise funds, the markets have more to offer and investors have a chance ‘to share the benefits of China’s economic development’.
Robin Li, chief executive officer of internet search giant Baidu, which listed on the Nasdaq in 2005, told state media China Daily that he was ‘very concerned about the US government’s continuous tightening of controls’ on Chinese companies.
He said Baidu has for some time been considering adding a secondary listing in Hong Kong, as Alibaba did last year, but that it’s ‘not so worried’ about a US crackdown having an ‘irreparable impact’ on the business.
“Our fundamental judgment is that if it is a good company, there are so many options for listing, and it is not limited to the United States,” he said.