How the US is getting closer to delisting Chinese companies - New Style Motorsport

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Some big-name Chinese stocks, such as Alibaba Group Holding Ltd. and Baidu Inc., face the possibility of being banned from the New York Stock Exchange and the Nasdaq if they refuse to let US regulators see their financial audits. The US Securities and Exchange Commission has started the process, bound by a 2020 law, and investors have started paying attention. So has China, which has moved to potentially remove a major hurdle that has stymied US regulators for years.

1. Why does the US 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 U.S. Public Company Accounting Oversight Board. According to the SEC, more than 50 jurisdictions work with the board to allow required inspections, while two historically have not: China and Hong Kong. The longstanding issue has morphed into a political one as tensions between Washington and Beijing escalated during the administration of President Donald Trump. Nasdaq-listed Chinese chain Luckin Coffee Inc. was found to have intentionally manufactured a portion of its 2019 revenue. The following year, in a rare bipartisan move, Congress took forced action.

As required by the Foreign Corporations Liability Act, or HFCAA, the SEC began publishing its “provisional list” of companies identified as non-compliant in March. By May, the list had grown to more than 100 companies, including Inc., Pinduoduo Inc. and China Petroleum & Chemical Corp. In all, the PCAOB has said it cannot review audits of more than 200 companies, each one of them that will face a three-year clock once added to the list. The companies say Chinese national security law prohibits them from handing over audit documents to US regulators. SEC Chairman Gary Gensler said in late March that Chinese authorities faced “a difficult set of choices.” Days later, China announced it would amend a 2009 rule that restricted the sharing of financial data by foreign-listed companies, potentially removing a hurdle.

3. What is China changing?

The China Securities Regulatory Commission said it would remove the requirement that on-site inspections must be carried out primarily by Chinese regulatory agencies or rely on the results of their inspections. He said he would provide cooperation assistance with foreign regulators. Negotiations on logistics for on-site inspections in China were said to be underway at the end of April. The CSRC said it is rare in practice for companies to need to provide documents containing confidential and sensitive information. However, if required during the audit process, they must obtain approvals in accordance with related laws and regulations.

4. What is the larger problem?

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

5. How soon could Chinese companies be delisted?

Nothing is going to happen this year or even in 2023, which explains why markets initially took the possibility in stride. Under the HFCAA, a business would be delisted only after three consecutive years of failing audit inspections. You could return by certifying that you had retained an SEC-approved registered public accounting firm.

6. How many companies will be affected?

There is not much discretion. If a company from China or Hong Kong does business in the US and files an annual report, it will soon find itself listed by the SEC simply because they have been identified as non-compliant jurisdictions. In the March interview, Gensler noted 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 US also has shares traded in Hong Kong, shareholders have the option to convert their American Depositary Shares (ADSs) into Hong Kong shares. Some are doing just that by handing over the US shares to the custodian bank and ordering it to cancel them. The bank then directs the custodian to deliver Hong Kong ordinary shares 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?

Major private companies like Alibaba could probably argue that they are not, though others with substantial state ownership may have a harder time. In May 2021, the US-China Economic and Security Review Commission, which reports to Congress, counted eight “national Chinese state-owned companies” listed on major US exchanges.

9. Why are Chinese companies listed in the US?

They are attracted by the liquidity and broad investor base of the US capital markets, which offer access to a much larger and less volatile pool of capital, in a potentially faster time frame. China’s own markets, while gigantic, remain relatively underdeveloped. Fundraising, even for quality businesses, can take months in a financial system constrained by state lenders. Dozens of companies withdrew planned IPOs last year after Chinese regulators tightened listing requirements to protect retail investors who dominate stock trading, as opposed to institutional investors and the active mutual fund base in the US. And until recently, the Hong Kong stock market had a ban. in dual-class stocks, which tech entrepreneurs often use to keep control of their startups after going public in the US, was relaxed in 2018, prompting big listings from Alibaba, Meituan and Xiaomi Corp.

(updates section 2 with more companies added)

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