SEC chief warns 'clock is ticking' on delisting Chinese stocks

New York

SECURITIES and Exchange Commission (SEC) chair Gary Gensler has a warning for hundreds of Chinese companies that have raised billions of dollars in US markets: Submit to more scrutiny soon or get kicked out.

In a Tuesday interview, he pledged to strictly enforce a three-year deadline that requires Chinese firms to permit inspections of their financial audits. If businesses refuse, their shares could be delisted from the New York Stock Exchange and Nasdaq as soon as 2024. "The path is clear," he said. "The clock is ticking."

The tough stance would seem to squash the hopes of some on Wall Street that Mr Gensler might drag his feet in implementing the mandate from Congress and give Beijing more time to strike a deal with Washington regulators that allows the gravy train of Chinese stock sales to continue. They've been lucrative for big banks, exchanges and asset managers.

In his comments, Mr Gensler laid out how he plans to deal with a multitude of tricky investor protection issues involving China. The conflicts, which have festered for almost two decades, have come to the fore in recent months as the Chinese government reined in prominent companies that trade on American exchanges, causing massive drops in their share prices and rattling investors.

The actions prompted SEC last month to suspend new initial public offerings of China-based companies until they more clearly detail the potential pitfalls that shareholders face. On Tuesday, Mr Gensler said he expects the same level of transparency from every Chinese firm that sells stock in the United States, including those that already trade in New York. Investors need "full and fair" disclosure, he said, adding that the agency was looking especially for information on "regulatory risks, the various political risks" that companies in China could encounter.

Those enhanced disclosures are likely to come by next year, he said, declining to add what consequences firms would face for not complying.

As for the initial pubic offering (IPO) pause, Mr Gensler signalled it would continue as long as companies disclosures aren't adequate. It could last "three weeks or three months", he said. "It is really up to the issuers" and their lawyers and accountants.

The SEC was drawn into the conflict last year when lawmakers passed legislation calling for the agency to close loopholes that have allowed Chinese companies to shield their books from US inspectors. More than 50 other countries permit the reviews of audits, which are conducted by the US' Public Company Accounting Oversight Board (PCAOB).

China has refused, citing strict confidentiality laws and national security concerns. There are now 281 Chinese companies listed in the US, as well as another 110 based in Hong Kong, where American inspectors are also denied full access to financial data. That includes Alibaba Group Holding Ltd and Baidu Inc.

In recent weeks, the Chinese government has signalled that it wants to resolve the standoff over the audit requirement. On Monday the State Council issued guidelines aimed at boosting cooperation with cross-border accounting oversight.

Mr Gensler, however, indicated there was little to negotiate after the bipartisan passage of the December 2020 law, called the Holding Foreign Companies Accountable Act.

He said that PCAOB inspectors should be given access to any audit they choose and the ability to review so-called work papers, the documents underpinning accountants' assessments.

Advocates who have been pushingSEC to demand more transparency from Chinese public companies said they were heartened that the SEC chair, who came aboard in April, is focusing on the issue after years of inaction at the regulator. BLOOMBERG