Canadian provincial authorities are waging a long battle to get Chinese companies to play by capital markets rules. Progress south of the border to ensure regulatory and accounting compliance by Chinese companies is an indication of the grind ahead.
A potential complicating factor is that, unlike how it works in the United States, financial securities regulation in Canada is a provincial responsibility and therefore not necessarily on the federal radar.
The trustworthiness concerns for investors apply to both foreign companies listed on North American stock exchanges and companies with significant operations in places like China.
“China is an example of a country that has laws that can result in restricting access to audit working papers. It’s not the only country that has such laws,” John Hinze, director of corporate finance for the British Columbia Securities Commission, told The Epoch Times.
The United States has started to make decisive moves to protect investors. Its senate passed the Holding Foreign Companies Accountable Act by unanimous consent on May 20. The legislation still has to clear the House and be signed into law by the president, but it has bipartisan support.
The legislation requires companies to disclose whether they are owned or controlled by a foreign government and also to comply with Public Company Accounting Oversight Board (PCAOB) audits for three straight years.
In addition, a May 17 open letter signed by 51 former U.S. government officials, influential financial sector figures, and China experts is calling on the Securities and Exchange Commission (SEC) and PCAOB to ensure Chinese companies comply with U.S. laws and regulations.
Justin Danhof, general counsel for the National Center for Public Policy Research and director of the Center’s Free Enterprise Project, is a signatory of the letter spearheaded by the Committee on the Present Danger: China.
“If our SEC and our PCAOB gained some teeth and say, ‘You must comply,’ I think they’re going to almost certainly have to be delisted,” Danhof told The Epoch Times about Chinese companies listed on U.S. stock exchanges.
The open letter quotes two senior U.S. officials—National Economic Council director Larry Kudlow and national security adviser Robert O’Brien—writing to Labour Secretary Eugene Scalia stating concerns that “Chinese authorities have impeded the PCAOB’s ability to oversee PCAOB-registered audit firms in mainland China and Hong Kong who serve mainland Chinese companies.”
“This has prevented the PCAOB from conducting inspections of those firms’ audits of Chinese companies in violation of U.S. law,” they wrote. “Recently, a Chinese law came into effect that prevents the PCAOB from directly conducting its oversight function inside Chinese territory.”
Kudlow and O’Brien say the Chinese government’s “intentional thwarting of U.S. investor protections should raise serious concerns about the reliability of financial information from Chinese companies and demonstrate significant risks to investors.”
The Canadian entity equivalent to the U.S. PCAOB is the Canadian Public Accountability Board (CPAB), which has been saying since 2012 that it has been denied access to audit files in China and has warned about it on its website.
Hinze says that Canadian securities legislators are working on a rule to empower the CPAB to be able to inspect audit work done by audit firms in foreign jurisdictions. The rule would require those companies and audit firms to enter into an access agreement with the CPAB.
“I think if the proposed changes that we just reviewed are implemented, I think it will be a significant support to CPAB,” he said.
The Canadian Securities Administrators (CSA), an umbrella organization of Canada’s provincial and territorial securities regulators, is currently reviewing feedback on the proposal.
There were 25 Asian-headquartered companies—16 from China and Hong Kong—listed on the Toronto Stock Exchange (TSX) and the TSX Venture Exchange in May, worth a total of $3.36 billion, the TMX Group confirmed for The Epoch Times.
The Asian presence in the Canadian stock market is a fraction of what it was from its high in 2010, when there were 53 Asian companies for a total market value of $12.8 billion.
Chinese companies trading on domestic exchanges is potentially a significantly bigger problem in the United States than in Canada, as the amount of capital that can be raised is significantly more there.
As of September 2019, there were 172 Chinese companies listed on major U.S. stock exchanges, with a total value exceeding US$1 trillion, according to the U.S.-China Economic Security and Review Commission. In February 2019, at least 11 of the Chinese companies listed were state-owned enterprises.
U.S. securities regulators must rein in small Chinese companies with a lack of both disclosures and earnings, such as Luckin Coffee, that get listed on exchanges like NASDAQ, Harbinger Capital Markets Research president David Prince told BNN Bloomberg.
“That should have the eye of the SEC. I can’t believe that it hasn’t happened,” he said regarding the hype surrounding those companies’ stocks and their high amount of trading.
U.S. President Donald Trump has already intervened to prevent the Thrift Savings Plan, the retirement savings of federal government employees and military personnel, from investing about US$4.5 billion in Chinese companies.
“What Trump did with the Thrift Savings Plans should open dialogues at the state levels where a lot of these pensions are held to invest in ways that reflect American values,” Danhof said.
The roots of the COVID-19 pandemic and incidents like faulty personal protective equipment coming from China have awakened a lot of people about the Chinese Communist Party, Danhof said. There has also been building skepticism about China’s economic growth, especially when considering the doubts many have about its reporting of economic data.
But large money managers continue to send money to China despite mounting risks.
BlackRock is the world’s largest fund manager and its CEO Larry Fink is one of the most powerful and influential figures in the financial world, so the firm’s initiatives don’t go unnoticed. With its avowed support for environmental, social, and governance (ESG) investing, Danhof calls it hypocritical that BlackRock would be investing heavily in China.
“We want to open up folks eyes to what other people are doing with their money, because most patriotic Americans [and Canadians] would be wildly offended and are offended by the actions of BlackRock and other asset managers, but most, frankly, don’t dig into these issues and realize what other people are doing with their money,” Danhof said.
His organization’s Free Enterprise Project submitted 10 questions to BlackRock on May 19, around the time of its annual shareholder meeting, regarding its investments in China, but they remain unanswered.
BlackRock is an external manager contracted to manage a portion of the funds for the Canada Pension Plan Investment Board (CPPIB), whose CEO Mark Machin seeks Fink’s insights.
The CPPIB, one of the largest pension plans in the world, with assets of $409.6 billion on March 31, plans on ramping up investments in China to 20 percent by 2025 from about 4 percent currently.