US Lawmakers Introduce Bill to Increase Oversight of US-Listed Chinese Firms

Sen. Marco Rubio (R-Fla.) questions U.S. Secretary of State Mike Pompeo during a Senate foreign Relations Committee hearing on the State Department budget request in Washington on April 10, 2019. (Reuters/Erin Scott)

A bipartisan group of U.S. lawmakers introduced a bill on June 5 to force Chinese companies listed on U.S. stock exchanges to open their audit books to U.S. regulators, or face delisting.

The Chinese regime currently blocks overseas regulators from inspecting full audit reports of publicly traded companies headquartered in Hong Kong and mainland China, citing national security and state secrecy.

In spite of a 2013 agreement with Chinese regulators that ended a stalemate over the issue and allowed U.S. regulators to request audit working papers in China, there have been difficulties in actually gaining access.

Dubbed the “Equitable Act,” the bill would increase oversight of Chinese and other foreign companies listed on U.S. exchanges, and delist noncompliant firms for a period of three years, according to a June 5 statement.

“Beijing should no longer be allowed to shield U.S.-listed Chinese companies from complying with American laws and regulations for financial transparency and accountability,” Sen. Marco Rubio (R-Fla.) said in a statement.

Rubio was joined by Sens. Bob Menendez (D-N.J.), Tom Cotton (R-Ark.), and Kirsten Gillibrand (D-N.Y.) in introducing the bill in the Senate. In the House of Representatives, the legislation was sponsored by Reps. Mike Conaway (R-Texas), Tim Ryan (D-Ohio), and Mike Gallagher (R-Wis.).

“The Chinese Communist government consistently manipulates the law and our regulations to protect their companies from being held to basic global accounting standards, creating unfair advantages and further encouraging corrupt behavior,” Conaway said in a statement.

Rubio, in a June 5 opinion article published in the Wall Street Journal advocating for the measure, said the Chinese regime’s practices “raise real risk of fraud,” undermining “fair and transparent financial reporting at the heart of American capital markets.”

The move comes as tensions between the world’s two largest economies rose sharply after a breakdown in trade talks in early May. The U.S. administration accused the Chinese regime of backtracking on pledges made during a month of negotiations, prompting President Donald Trump to raise tariffs on $200 billion worth of Chinese goods.

The Trump administration has since effectively blacklisted Chinese telecom giant Huawei from doing business with U.S. suppliers, on national security grounds.

In 2018, the U.S. Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) issued a joint warning to investors about the difficulties that U.S. regulators faced in inspecting the work and practices of auditing firms in China that examine U.S.-listed Chinese companies.

At least two Hong Kong-based audit firms have been barred from auditing U.S.-listed companies because they couldn’t produce the papers U.S. regulators asked for.

There are currently 156 U.S.-listed Chinese companies with a combined market capitalization of $1.2 trillion, according to the U.S.-China Economic and Security Review Commission. These companies include e-commerce giant Alibaba and state-owned oil company China Petroleum & Chemical Corp. (Sinopec).

Menendez said in a June 5 statement, “It’s time for China’s government to play by the same rules as American companies in our financial markets.”

Paul Gillis, professor of practice at Peking University’s Guanghua School of Management, said in a blog post that he thought the bill had a good chance of passing, and that if passed, it would begin a three-year countdown for Chinese companies to find another place to list.

“I expect most of them will move their listings to Hong Kong. Mainland exchanges are not ready for most of these companies,” he said.

Alibaba is considering a second listing in Hong Kong, which could raise as much as $20 billion, Reuters reported on May 27.

In February, MSCI, one of the world’s largest stock index providers, announced that it would quadruple its weighting of mainland Chinese shares in one of its key index products.

Hedge fund manager Kyle Bass, founder and principal of the Dallas-based Hayman Capital Management, warned that investing in Chinese firms is inherently riskier than investing in U.S. companies.

“All of our money is going into companies that actually don’t have ‘big four’ auditors,” Bass said at an April event held by an advocacy group, the Committee on the Present Danger: China.

He said publicly listed Chinese companies are not under the same disclosure, oversight, and governance obligations as in the United States.

“They just file a glossy financial statement or annual reports. I think it’s important to understand what we take for granted in [corporate] financial reporting,” he added.

Reuters contributed to this report.