With U.S. stocks plunging 767 points on the Dow Jones Industrial Average after China devalued its currency, U.S. Senators Marco Rubio (R-FL), Bob Menendez (D-NJ), Tom Cotton (R-AR) and Kirsten Gillibrand (D-NY) are gaining sponsors for the “Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges Act” (EQUITABLE Act) that would amend the Sarbanes-Oxley Act to increase oversight of Chinese and other foreign companies listed on American exchanges and delist firms for a period of three years that are out of compliance with U.S. regulators.
The legislation would immediately impact the 156 Chinese companies with combined market capitalizations of about $1.5 trillion, including 11 huge state-owned-enterprises, that are already listed on U.S. stock exchanges, plus dozens of Chinese tech firms potentially worth hundreds of billions of dollars that are lined up to list on the NASDAQ.
The scale of the impact from Chinese companies listing on U.S. exchanges grew dramatically after the Morgan Stanley Capital International Index, used as the base for the exchange-traded funds and large pension plans to passively mimic the combined performance of the $34 trillion in U.S. stocks and $10 trillion in foreign company shares, quadrupled its weighting of Chinese company shares in November 2018.
The move set off alarm bells that included the U.S. Securities & Exchange Commission and Public Company Accounting Oversight Board that conduct oversights of U.S.-listed companies to prevent fraud and market manipulation, issued a joint warning on December 7 that Beijing systemically challenges such oversight by arguing that Chinese law requires records remain in China, and the Communist Party routinely restricts accounting information access on the grounds of national security and state secrecy.
Concerns regarding the authenticity of Chinese companies’ financial disclosures was highlighted in The Epoch Times in a late July report that Ruihua Certified Public Accountants—China’s second largest CPA firm and responsible for auditing 1,000 Chinese public traded companies—was accused by China’s-own Securities Regulatory Commission for being complicit in a scheme over a three year period to inflate profits by $1.7 billion for struggling chemical producer Kangde Xin Composite Material.
China’s regulators also suspended completion of 43 initial public offerings that relied on Ruihua CPAs for accounting. A number of the companies had planned to jointly-list for trading on Beijing’s new STAR Market and the New York-based NASDAQ Exchange.
Rubio argued in a Wall Street Journal op-ed that U.S.-listed Chinese companies must complying with American laws and regulations for financial transparency and accountability. He stated: “The EQUITABLE Act makes it clear that there is a price for the Chinese government and Communist Party’s disregard for the rules of responsible economic and financial engagement in international capital markets.”
Menendez said: “This will stop Chinese firms from hiding behind the Communist Party’s efforts to take advantage of our capital markets by withholding accounting information. U.S. investors trust that both foreign and domestic publicly-listed firms are held to the same standard – and the EQUITABLE Act will make it so.”
Cotton added: “The Chinese Communist Party shields its prized companies from financial audits and accountability, yet we still allow those companies to be traded on U.S. stock exchanges.”
Fraser Howie, co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise,” points out that U.S. money manager BlackRock has around $3.3 billion of investor money in Hong Kong-listed exchange traded funds tied to domestic Chinese shares, plus a series of China-focused mutual funds. Under the EQUITABLE’s blacklisting rule, Black Rock would have to dump all the shares.
From a U.S. geopolitical strategy perspective, consultancy Enodo Economics sees the EQUITABLE Act as squeezing China’s capital connections in an effort to “bring elite pressure to bear” on Chinese leader Xi Jinping.
The biggest benefit from overseas stock listings for China’s business elites and their political allies has been putting billions of dollars of assets beyond China’s “Iron Fist” capital controls. Free from Communist Party surveillance, the offshore listings facilitated capital flight and “undoubtedly provided vast opportunities for payoffs and favors,” as a July editorial in the Nikkei Asian Review put it.
This article previously misstated the number of points the Dow Jones fell after China devalued its currency. The Epoch Times regrets the error.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.