The U.S. House of Representatives has passed the Holding Foreign Companies Accountable Act, which aims to delist Chinese companies from U.S. stock exchanges if they do not comply with auditing oversight rules after three years. However, doing so might force them to break Chinese law, leaving many no choice but to delist. Major Chinese companies such as Alibaba and Tencent are listed in the U.S. The Holding Foreign Companies Accountable Act was introduced in 2019 by Senator John Kennedy, Republican of Louisiana, to protect American investors from investing in Chinese companies that lacked transparency. The United States’ auditing supervisor, the Public Company Accounting Oversight Board (PCAOB), has been battling China for decades over its resistance to supply audits of publicly-traded companies. Beijing has cited state-secret laws as the reason for not complying. “Enforcing disclosure laws here would be a welcome and overdue step,” said Derek Scissors, Researcher focusing on U.S. economic relations with Asia at the American Enterprise Institute. “Transparency is more important than the profits its critics are shielding,” said Scissors, referring to resistance to the legislation, including arguments that it would harm investors and capital markets in the U.S. “It is not a good-faith argument to say transparency in our investment in the People’s Republic of China is bad for the country,” he said.  

The outgoing Trump administration is still waging a concerted effort to get tough on China, both as part of its legacy and to try to put in place policies that may be difficult for President-elect Joe Biden’s administration to unwind. “The House joined the Senate in rejecting a toxic status quo,” Kennedy said. “Communist China is right now using U.S. stock exchanges to exploit American workers and families – people who put their retirement and college savings in public companies.” Moments before the bill passed, its House sponsor, California Democrat Brad Sherman, said: “This bill is not anti-China, and it is not designed to prohibit the trading of Chinese companies. Rather it provides a three-year window during which we expect China will enter into a reasonable agreement with the SEC and the PCAOB, so that we have the additional level of protection for investors that we expect and have demanded since we passed the Sarbanes-Oxley bill in 2002.” 

The lawmakers’ support for the regulation showed the strong bipartisan agreement in cracking down on U.S.-listed Chinese companies, and it was a blow to these firms, which have sought capital and prestige from U.S. markets. More than 210 Chinese firms with a combined market capitalization of about USD2.2 trillion were listed on major U.S. stock exchanges as of October, according to the most recent congressional report by the U.S.-China Economic and Security Review Commission. Separately, the U.S. Securities and Exchange Commission (SEC) is pushing ahead with a similar but less stringent proposal that would require the Chinese companies to use auditors overseen by the United States. Non-compliant companies, however, would still be allowed to trade over the counter. 

The SEC is aiming to introduce the regulation for public comment this month. Officials have been drafting the proposal since August, urged by the President’s Working Group on Financial Markets – a group that includes SEC Chairman Jay Clayton and Treasury Secretary Steven Mnuchin. But pushing the regulation forward just weeks before the administration leaves office is unusual because agencies typically stop issuing major new policies during a presidential transition period. Making the deadline even more difficult, Clayton has announced plans to step down by the end of the year and will be gone before any regulation is finalized. That would leave completing the work to a SEC chief chosen by Biden. “The SEC has had six months since Senate passage to propose an alternative; their time has passed,” said Scissors. It is unclear whether the passage of the bill will end the SEC’s effort to introduce its regulations. But it does mean Chinese companies will likely face a harsher law, if signed, that could suspend their stocks from trading on American exchanges, giving them little maneuverability. 

The legislation requires Chinese companies to be in compliance with the U.S. audit rules within three years. It is likely “for another bilateral deal to be made long before the three-year deadline” is reached, said Scissors. The SEC and the stock exchanges have acknowledged the long-standing problems with publicly-traded Chinese companies, but they cautioned that cracking down on the listings could lead to an exodus of firms that account for hefty listing fees and revenue. They have been advocating for a market-driven approach instead that could include more stringent oversight of U.S. arms of auditing firms such as Deloitte, PwC, Ernst & Young and KPMG, the South China Morning Post reports. 

The need to list in the U.S. has diminished for Chinese companies as the stock markets in Shanghai and Shenzhen have together become a backbone of the Chinese mainland’s economy. Total combined market capitalization stood at about CNY77 trillion, up 16 times compared with the end of 2000, making China’s A-share market the world’s second-largest after the U.S. In 2019, companies on the A-share market reported revenue of CNY50.47 trillion, equivalent to more than half of China’s GDP. Those companies cover all 90 industries in the Chinese economy and account for more than 70% of China’s top 500 enterprises. Listed companies in the mainland also turned in better business performances than many U.S. listed companies. In the first three quarters, the profitability of CSI 300 index companies – the 300 largest and most liquid A-share stocks – only slipped by 7.6% on a yearly basis, while the net profits of S&P 500 companies slumped by about 40%, the Global Times adds.