1. What would the legislation do?
It would force greater disclosure by non-American companies that sell shares on U.S. exchanges. Specifically, public companies with foreign accounting firms would be banned from America’s equity markets unless the U.S. Public Company Accounting Oversight Board is granted access to review their audits. 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, has long been a point of contention. Chinese firms claim they can’t comply because Chinese national security law prohibits them from turning over audit papers to U.S. regulators. “All I want, and I think all the rest of us want, is for China to play by the rules,” including the rule that the PCAOB double-checks company audits, said Senator John Kennedy, a Republican who introduced the bill with a Democratic colleague, Chris Van Hollen. “Everybody has to comply with that rule -- American companies, British companies, Malaysian companies, Turkmenistan companies -- except one: Chinese companies. They just say ‘No.’” The NYSE and Nasdaq had previously pushed back against the idea of threatening delistings, but they’ve come under increasing government pressure amid the growing fervor for action against China.
3. Will this become law?
It will if the House adopts a companion bill introduced by Democrat Brad Sherman and President Donald Trump then signs the measure. House Speaker Nancy Pelosi has said her chamber will review the bill but hasn’t promised to hold a vote. As for Trump, he’s voiced general support for the idea, but it’s unclear how the legislation figures into the White House’s broader China strategy. Should the bill become law, the SEC would have to write rules for how companies could certify they aren’t really run by a foreign government.
4. How swiftly could Chinese companies be de-listed?
It would take a while. Under the bill (S. 945), companies would be de-listed only after three consecutive years of non-compliance. In the event of de-listing, a company could return to the U.S.’s good graces by certifying it retained a registered public accounting firm approved by the U.S. Securities and Exchange Commission. (A subsequent failure to comply with audit inspections could land companies in a five-year ban.)
5. How many Chinese companies could this affect?
The PCAOB says it’s blocked from reviewing the audits of about 200 companies based in China or Hong Kong. They include such well-known companies as Alibaba Group Holding Ltd., PetroChina Co. Ltd., Baidu Inc. and JD.com Inc., which trade on major U.S. exchanges like the New York Stock Exchange and Nasdaq.
6. Are some of them really controlled by China’s government?
As of February 2019, the U.S.-China Economic and Security Review Commission, which reports to Congress, counted 11 Chinese companies listed on major U.S. exchanges that were at least 30% state-owned. Even those companies where the state doesn’t own a stake can be subject to pressure from the central government, such as when it tried to stop Anbang Insurance Group Co.’s acquisition spree before finally taking control of the debt-laden conglomerate in 2018. But when China’s government involvement is behind the scenes, it’s much harder to prove.
7. Why do Chinese companies list in the U.S.?
Companies from around the globe are attracted by the liquidity and deep investor base of U.S. 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. Fund-raising 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 mutual-fund base active in the U.S. And until recently, the Hong Kong exchange had a ban on dual-class shares, which are often used by tech entrepreneurs to keep control of their startups after going public in the U.S. It was relaxed in 2018, prompting big listings from Alibaba, Meituan Dianping and Xiaomi.
8. Why is the U.S. doing this?
It’s another front in the U.S.-China 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 favor of Chinese companies, which enjoy the trading privileges of a market economy -- including access to U.S. stock exchanges -- while receiving government support and operating in an opaque system. The Trump administration also accuses Chinese companies of undermining the intellectual property of their U.S. counterparts. Alarm has grown among U.S. lawmakers that American money is bankrolling efforts by China’s technology giants to develop leading positions in a variety of high-tech fields.
9. Has China responded?
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 U.S. 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 U.S. 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.
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