Chinese fashion portal MOGU is listed during the IPO at the opening bell of the Dow Industrial Average at the New York Stock Exchange on Dec. 6, 2018 in New York. (Bryan R. Smith/AFP via Getty Images)
Once upon a time, Chinese stocks enjoyed a certain privilege in the United States, a getaway from the scrutiny of the Public Company Accounting Oversight Board (PCAOB), which all foreign companies listed in the United States need to undergo.
Now, the chair of the U.S. Securities and Exchange Commission (SEC) is adamant that Chinese companies will only be allowed to continue trading in the U.S. market if they fully comply with U.S. audit inspections.
This 180-degree change is attributed to the United State’s implementation of the Holding Foreign Companies Accountable Act (HFCAA).
As of May 28, at least 128 Chinese stocks have been incorporated into the SEC’s conclusive list, including Weibo, a Twitter-like social media platform, Baidu, a Google-like search engine, Jingdong, an e-commerce platform, Pinduoduo, an agriculture-centric platform, Bilibili, a video-sharing website, NetEase, an internet service provider, Ctrip.com, online travel agency, Sinovac, a biopharmaceutical company, Huaneng Power, an electric power company, Chalco, a multinational aluminum company, and many other Chinese leading sectors.
According to the HFCAA, if a company is named on the conclusive list for three consecutive years, it will be formally delisted after the third year (as early as 2024). Moreover, the three-year period will probably be shortened to two years as indicated in a Wall Street Journal report on May 24.
Gearing toward a crackdown on any fraudulent listing, the HFCAA was first introduced on March 28, 2019, by U.S. Senator John Kennedy, R-La., and granted unanimous approval by the Senate and House of Representatives. Then President Donald Trump signed the bill on Dec. 18. 2020.
In the past, the United States patiently urged Chinese companies to comply with the requirement to file audit briefs.
Since the bill took effect as part of the U.S. determination to defend American investors’ interests, the situation has changed dramatically with China rushing to intercede, fearing a massive delisting of Chinese stocks.
Changyou CEO Tao Wang stands outside the NASDAQ Market site after presiding over the opening bell, in New York, on April 2, 2009. (Mario Tama/Getty Images)
Big Loss for China If the US Cuts Off Foreign Funds to Chinese Stocks
With the time of Chinese stocks being formally delisted approaching, the Chinese authorities are becoming more anxious. In April, China Securities Regulatory Commission (CSRC) announced that it is about to amend the relevant confidentiality and file management regulations for domestic enterprises listed abroad.
On May 24, CSRC issued another statement expressing its wish to communicate with the United States to “meet the legal and regulatory requirements of both sides.”
However, the U.S. side is not so optimistic about a concord pact, PCAOB said it’s still too early to speculate on a final deal with China.
The PCAOB further said that even if an agreement is reached, it will not satisfy the requirements of U.S. law if it is not successfully implemented.
Former Trump administration trade negotiator Clete Willems told the Wall Street Journal on May 26, “unless China shows more flexibility than it has shown today, the delisting of some or all of its companies is inevitable.”
Deng Zhidong, a senior economist and director of China CFO Forum, told a Chinese news media that most of the Chinese companies listed in the United States are outstanding technology innovation enterprises that cannot meet the conditions for listing in China due to huge investment and financial losses, so they need to collect investments in the global securities market.
Therefore, such a company’s failure to list in the United States will severely impact its ability to raise funds, which in turn will hold back its sustainable growth, Deng said., according to Sina news media on May 8.
For the Chinese Communist regime, the massive delisting of Chinese stocks from the United States would be a significant loss.
Xu Yuan, a senior researcher at the Institute of Digital Finance at Peking University, said in a March 30 blog post on Caixin, a Chinese financial media, that Chinese stocks are “the link that keeps Sino-US relations fighting but not breaking” and is “a key ballast in China’s relations with the outside world.”
Xu admits that in the current pattern of Sino-Western economic relations, the Western middle and lower classes are the victims, while the elites on Wall Street and Silicon Valley are the beneficiaries. That is why those investment banks and lawyers serving Chinese stocks, as well as technology companies working closely with Chinese stocks, have become a reliable “extra-institutional force” to maintain the relationship between China and the United States.
But if the Chinese stocks were delisted from the United States, then this crucial link between China and the West will be severed and the Chinese economy will plunge into a dangerous position, Xu said.
Chinese Listed Companies Circumvented US Financial Scrutiny for Decades
Fraudulent listings on U.S. exchanges have cost investors hundreds of billions of dollars over the past decade.
U.S. Senator John Neely Kennedy told FOX Business in December 2020, “The current policy that allows Chinese firms to flout the rules that American companies follow is toxic … It puts American families and workers at risk by jeopardizing their college and retirement savings.”
Back in 2002, the U.S. Congress passed the Sarbanes-Oxley Act, which requires any company issuing public securities in the United States to have its audit firm inspected by the PCAOB.
However, the regime ignored the Act and impeded the PCAOB’s examination of Chinese companies, which led to some Chinese companies conducting unbridled fraud and deception for their listed stocks.
Richard Qiangdong Liu, founder, chairman, and CEO of JD.com speaks to employees as JD.com makes its initial public offering (IPO) on the Nasdaq exchange in New York on May 22, 2014. (Andrew Burton/Getty Images)
On March 2, 2011, Muddy Waters Research provided “irrefutable evidence” accusing China MediaExpress Holdings (NASDAQ: CCME), a TV advertising operator in Southern China, of fabricating false financial data to meet IPO standards, and inflating the company’s capital by hundreds of millions of dollars.
On April 26, 2011, Citron Research began with a Chinese proverb “Money made through dishonest practices will not last long,” when questioning Longtop Financial’s (NYSE: LFT), a Chinese integrated financial IT service provider, extraordinary financial fraud with its margin far exceeding its peers. Four months later, on Aug. 31, 2011, Longtop Financial announced its dissolution due to the allegation.
In October 2013, Muddy Waters Research detailed a “massive fraud” of NQ Mobile (NYSE: NQ), a Chinese internet security company, including its falsifying at least 72 percent of its revenue and exaggerating its market share, claiming that its share was only 1.5 percent instead of the 55 percent it had reported. In 2018, NQ Mobile (NYSE: NQ) was renamed as Link Motion (NYSE: LKM). On Jan. 9, 2019, the NYSE officially delisted Link Motion (NYSE: LKM).
In 2013, the PCAOB signed a Memorandum of Understanding (MOU) with China’s auditing agency. Under the MOU, the PCAOB was granted access to the Chinese authority’s audit information on Chinese companies.
However, a spokesperson from CSRC said that based on the MOU, “within certain limits” China will authorize the United States to access the accounting filings of Chinese companies listed in the United States.
The so-called certain limits may enable the CCP to use “national security” and “state secrets” as excuses to prohibit the provision of audit records of Chinese companies listed in the United States. That is to say, the PCAOB is actually still unable to regulate Chinese companies and the Chinese accounting firms that audit them, according to a commentary published in Taiwan-based United Daily News on Dec. 2, 2020.
During the 2016 trial, the CCP handed over partially redacted audit transcripts and barred the PCAOB from accessing the records of Chinese giants listed in the United States, including Alibaba. and Chinese officials were present during the PCAOB’s inspections.
In December 2021, the PCAOB found that spending considerable time and resources on working with the China side was in vain, saying, “Unfortunately, since signing the MOU in 2013, Chinese cooperation has not been sufficient for the PCAOB to obtain timely access to relevant documents and testimony necessary to carry out our mission consistent with the core principles identified above, nor have consultations undertaken through the MOU resulted in improvements.”
The United States is thus determined to delist Chinese stocks that are suspected of falsification.
As of June 1, the “conclusive list” of issuers identified under the HFCAA has covered nearly half of all the Chinese stocks listed in the United States, according to SEC.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
Jenny Li has contributed to The Epoch Times since 2010. She has reported on Chinese politics, economics, human rights issues, and U.S.-China relations. She has extensively interviewed Chinese scholars, economists, lawyers, and rights activists in China and overseas.
