WASHINGTON—The U.S. House of Representatives unanimously passed legislation on Dec. 2 that requires foreign companies trading on American exchanges to meet U.S. accounting standards, a move that would end preferential treatment given to Chinese companies. The bill will now head to President Donald Trump’s desk to be signed into law.
The measure called the Holding Foreign Companies Accountable Act will block Chinese companies from the U.S. stock market if they refuse to be transparent and play by the same rules that U.S. businesses are held to.
Under the bill, foreign companies that fail to comply with the Public Company Accounting Oversight Board’s (PCAOB) audits for three consecutive years will be subject to delisting from U.S. exchanges. The rule also applies to companies whose shares are traded over-the-counter.
The measure impacts Chinese companies such as Alibaba Group Holding Ltd. (NYSE: Baba), JD.com Inc. (Nasdaq:JD), and China Mobile Ltd. (NYSE: CHL).
The bill also requires companies to disclose whether they’re owned or subject to control by a foreign government, including China’s communist regime.
The bipartisan bill, introduced by Sens. John Kennedy (R-La.) and Chris Van Hollen (D-Md.), passed the U.S. Senate by unanimous consent on May 20. The bill had awaited a vote in the House since then.
Kennedy applauded the House for joining the Senate in passing the bill with strong support.
“The current policy that allows Chinese firms to flout the rules that American companies follow is toxic,” Kennedy told The Epoch Times in an email.
“It puts American families and workers at risk by jeopardizing their college and retirement savings. My colleagues on both sides of the aisle recognize that fact.”
The PCAOB has been unable to inspect audit firms based in China for more than a decade. Beijing has refused to allow audit inspections of China-based companies, citing local Communist Party laws related to data protection, privacy, confidentiality, or national security as reasons for noncompliance.
The bill will prevent dishonest companies such as Luckin Coffee from taking advantage of U.S. capital markets. The shares of the Chinese coffeehouse chain crashed and were subsequently delisted from Nasdaq this year after the company’s long history of financial crimes was exposed in a report.
The scandal was a wake-up call for lawmakers, regulators, and investors about the risks Chinese companies pose to U.S. capital markets.
“Millions of American families rely on modest investments to retire, send their kids to college, and weather financial emergencies,” Van Hollen said in a statement. “But many have been cheated out of their money after investing in seemingly-legitimate Chinese companies that are not held to the same standards as other publicly listed companies. This bill rights that wrong, ensuring that all companies on the U.S. exchanges abide by the same rules.”
The PCAOB is unable to conduct audit inspections in China, Hong Kong, France, and Belgium. According to a PCAOB report published this summer, U.S. regulators were expecting to finalize cooperation agreements with France and Belgium that would permit inspections in these countries. However, in the case of China and Hong Kong, discussions with Chinese regulators have not led to any firm or final agreement.
On its website, the PCAOB shows a list of 262 companies in countries where it is unable to conduct inspections, and 236 of these companies are based in China and Hong Kong.
“This may be the most significant piece of investor protection legislation passed in several years,” Rep. Brad Sherman (D-Calif.), chair of the House investor protection and capital markets subcommittee, said in a statement.
“The purpose is not to de-list any company but to persuade China to allow the audit oversight that U.S. investors need.”
This year, more than a dozen U.S.-listed Chinese companies were taken private, according to a Wall Street Journal article. And more companies announced their plans to delist as Washington has increased its crackdown on Chinese companies.
Roger W. Robinson Jr., chairman of the Prague Security Studies Institute, a nonprofit public policy organization, welcomed the bill but raised concerns about the long implementation period.
“Although the unanimous congressional action on this bill is of true historic importance, the three-year implementation period represents a breathtaking, ill-advised concession to Wall Street and Beijing,” he told The Epoch Times.
“One can be reasonably assured that ‘workarounds’ are already being formulated by detractors to dilute, if not eviscerate, this otherwise valuable investor protection measure.”
Robinson is also former chairman of the Congressional US–China Economic and Security Review Commission.
The bill also doesn’t cover hundreds of Chinese companies that aren’t listed on American exchanges but are embedded in Exchange-Traded Funds (ETFs) and other passive investment funds benchmarked against indexes, which is a loophole, according to Robinson.
Many of these companies are involved in the Chinese communist regime’s military and espionage apparatuses and implicated in its human rights abuses.
This article was updated on Dec. 3, 2020.