The Senate passed legislation on Wednesday that would require Chinese companies to comply with U.S. auditing and reporting standards or face exclusion from U.S. stock exchanges. It would apply to those listed on American exchanges or raising capital in the country.
The Chinese regime currently blocks overseas regulators, including the Securities Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB), from inspecting full audit reports of publicly traded companies headquartered in mainland China and Hong Kong, citing national security and state secrecy.
The Holding Foreign Companies Accountable Act, sponsored by Sens. John Kennedy (R-La.) and Chris Van Hollen (D-Md.), would bar securities from Chinese companies from being traded on national exchanges if the PCAOB is unable to inspect their audit books for three consecutive years.
Companies whose audits cannot be inspected by the board would also have to establish that they are not owned or controlled by a foreign government.
“I do not want to get into a new Cold War,” Kennedy said on the Senate floor. “All I want—and I think all the rest of us want—is for China to play by the rules.”
The bill’s passage comes as President Donald Trump’s administration steps up scrutiny of Chinese firms listed on American stock exchanges. Trump on May 14 told Fox Business that his administration is looking “very strongly” into this issue. But he noted a drawback to increasing oversight would be that these companies would simply say, “Okay, we’ll move to London or we’ll go to Hong Kong.”
White House economic adviser Larry Kudlow indicated that the administration is pushing for greater transparency and accountability from U.S.-listed Chinese companies.
“We have to for investor protection, and we have to for national security,” Kudlow told Fox Business on May 19. “A lot of these companies, by the way, have already had scandals and cost investors a lot of money, because of their failure to be transparent in their reporting. The Chinese government forbids that kind of transparency.”
Nasdaq on Tuesday informed Luckin Coffee it plans to delist the company, a month after the Chinese beverage brand said an internal investigation found that its chief operating officer had falsified 2019 sales by about $310 million. In January, short-seller Muddy Waters Research said it would bet against the stock, based on a report that the company was committing fraud.
Chinese video streaming site iQiyi was also accused in April by Wolfpack Research, an activist financial research firm, of overstating its revenue in 2019 by as much as $1.9 billion.
There were 172 Chinese companies listed on U.S. exchanges that were valued at more than $1 trillion as of September last year, according to the U.S.-China Economic and Security Review Commission annual report. These include Alibaba Group, Baidu, and JD.com.
According to Reuters, Nasdaq is set to unveil new restrictions on initial public offerings to make it harder for some Chinese companies to debut on its stock exchange.
A similar bill has been introduced in the House but has not made it out of the House Committee on Financial Service.