Washington
THE US House of Representatives approved legislation that could ultimately lead to Chinese companies - including behemoths like Alibaba Group Holding Ltd and Baidu Inc - getting kicked off American exchanges if regulators aren't allowed to review their financial audits.
The legislation won bipartisan support in the House after easily clearing the US Senate in May. It's passage now sends the bill to President Donald Trump, who is expected to sign it, in his administration's latest parting shot at Beijing.
While the legislation provides a phase-in period - penalties only kick in after three straight years of failure to comply - it represents intensifying scrutiny in Washington of ties with China. Chinese firms for years have relied on access to American capital markets, and more broadly to dollar-based finance, as a key funding component.
"US policy is letting China flout rules that American companies play by, and it's dangerous," said Senator John Kennedy, one of the bill's lead sponsors, in a statement. "Today, the House joined the Senate in rejecting a toxic status quo, and I'm glad to see this bill head to the president's desk."
In addition to requiring companies to allow US inspectors to review their financial audits, the measure - introduced by Mr Kennedy, a Louisiana Republican, and Senator Chris Van Hollen, a Maryland Democrat, - requires firms to disclose whether they are under government control.
When asked about the legislation on Wednesday, Chinese Foreign Ministry spokeswoman Hua Chunying told reporters Beijing "firmly opposes politicising securities regulation," and called for enhancing dialogue and cooperation. The ministry didn't immediately reply to a request for comment on Thursday on the House's passage of the bill.
In another hit to China, the US Department of Homeland Security said on Wednesday that customs officers at American ports would impound "shipments containing cotton and cotton products originating from" the Xinjiang Production and Construction Corps, a military-affiliated entity that's one of China's largest producers. This follows US sanctions announced against the company in August that bar it from making any transaction with American companies and citizens.
Mr Van Hollen said in a statement that the delisting bill would protect people who "have been cheated out of their money after investing in seemingly legitimate Chinese companies that are not held to the same standards" as other public companies. "This bill rights that wrong, ensuring that all companies on the US exchanges abide by the same rules," he said.
The measure represents a watershed moment in a long-running dispute between Washington and Beijing. At issue is China's refusal to let the Public Company Accounting Oversight Board (PCAOB0 examine audits of firms whose shares trade in the US. The requirement for the inspections by the agency, which was created in the wake of the Enron Corp accounting scandal, is meant to prevent fraud and wrongdoing that could wipe out shareholders.
Investors have mostly shrugged off the anticipated legislative move. Alibaba, the largest US-listed Chinese company, was steady in after-hours trading, following a 1 per cent drop on Wednesday. The offshore yuan was little changed. The move may even boost Hong Kong's role as a financing centre for mainland firms.
Fang Xinghai, the vice chairman of the China Securities Regulatory Commission, last month expressed optimism that the clash could be resolved with President-elect Joe Biden's arrival in the White House next month. "It's not an intractable problem," Mr Fang said, adding that it's important to ensure that Chinese companies have access to international capital markets.
Regulators in the two countries have been engaged in on-again, off-again negotiations amid the standoff for more than a decade. Over the years there have been moments of optimism that the two sides were closing in on a deal, but ultimately it always fell through - with China citing strict confidentiality laws. More than 50 other foreign jurisdictions now permit the PCAOB inspections.
Despite the inability of American inspectors to review audits of Chinese firms, they've been allowed to continue to trade in the US, as the dynamic has been profitable to American stock exchanges, investment banks and asset managers. According to the Securities and Exchange Commission, more than 150 of the country's companies, with a combined value of US$1.2 trillion, traded on US exchanges as of 2019 and there have been a spate of initial public offerings this year.
Major companies such as Vanguard Group Inc, the New York Stock Exchange, and Nasdaq have all expressed concern that the trend could reverse, with a crackdown causing Chinese companies to move their listings to Hong Kong or countries where investor protections are weaker than in the US. American investors would still be able to purchase the stock.
Alibaba chief financial officer Maggie Wu said during a May 22 earnings call that the company "will endeavour to comply" with legislation that seeks to bring transparency to investors buying stocks on US exchanges. Her comments were directed specifically at the Kennedy-Van Hollen legislation which at that point had just passed the Senate.
The bill would prohibit foreign companies from trading in the US if PCAOB inspectors aren't allowed to review their auditors' work for three consecutive years. The businesses would also have to disclose whether they're controlled by the Chinese Communist Party, or any other foreign government.
Jay Clayton, the outgoing chairman of the Securities and Exchange Commission, said the legislation would help "level the playing field for all issuers" in the US stock market.
The NYSE said in a statement that it was "hopeful this legislation's time horizon will allow" for balancing both protection and choice for investors. Meanwhile, Nasdaq said it "stands ready to work with our listed companies to comply with any and all regulations" and looks forward to cooperating with the SEC to bolster transparency. BLOOMBERG