Chinese stock listings have attracted Trump’s attention, as he ratchets up his attacks on China over the coronavirus pandemic and other grievances. Last week, he signed an order barring American investments in Chinese firms owned or controlled by the military, a move that could affect 31 companies. The SEC’s work on a proposal was reported earlier by the Wall Street Journal.
The fight over audit inspections dates back to the 2002 Sarbanes-Oxley Act, which overhauled regulation of public company audits after the collapses of Enron Corp. and WorldCom Inc. The law set up the PCAOB and required it to conduct regular inspections of the firms that review companies’ books. Though it applies to businesses across the world if they tap the U.S. markets — and more than 50 foreign jurisdictions permit the reviews — China has refused to comply, citing strict confidentiality rules.
U.S. and Chinese officials have repeatedly failed to come up with a compromise. In the meantime, Chinese companies have continued to go public via U.S. stock exchanges even though American law is being ignored. They’ve raised about $12 billion in IPOs this year, the highest since 2014 when Alibaba debuted.
The President’s Working Group report that’s driving SEC action recommended that exchanges such as the New York Stock Exchange and Nasdaq establish enhanced standards to prevent the listing of companies that don’t adhere to U.S. rules. The report called on the SEC to pass new rules, but said they shouldn’t take effect until January 2022 to prevent market disruptions.
U.S. investors’ exposure to Chinese stocks is growing, according to the SEC. More than 150 of the country’s companies, with a combined value of $1.2 trillion, traded on American exchanges as of 2019.
Homecomings
A further clampdown by the U.S. could provide a boost to China’s stock exchanges and the one in Hong Kong. The financial hub has already seen a spate of homecomings from Chinese juggernauts such as Netease Inc. and JD.com., which have sought secondary listings in the city amid increased tension.
Companies looking to tap the U.S. for customers or added visibility are likely to want to comply, but those who don’t consider America to be a target market could move listings to places like Hong Kong, said Benjamin Quinlan, chief executive officer of Quinlan & Associates, a strategy consultant in Hong Kong.
“I do think Hong Kong exchange in particular as well as some of the local and domestic exchanges in China will be key beneficiaries,” Quinlan said.
Analysts also say there’s plenty of cash in Asia to back listings, both in the region and from abroad.
“Some of these Chinese companies are highly competitive, have been growing strongly and leveraged to some very exciting themes of the future,” said Chetan Seth, Asia-Pacific equity strategist at Nomura Holdings Inc. “I expect that there will always be interest from global investors in some of these names. Potential delistings from U.S. exchanges shouldn’t materially impact the fundamentals of the companies.”
—With assistance from Ye Xie, Denise Wee and Colum Murphy.
This article was provided by Bloomberg News.