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Chinese companies face delisting under US audit law

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Congress has passed legislation that would force Chinese companies to delist from American exchanges unless they comply with US accounting rules.

The House of Representatives on Wednesday passed the bill, which could affect companies from China Telecom to Alibaba, following Senate passage in May. Donald Trump is expected to sign the legislation, which has benefited from a bipartisan consensus over taking a tougher line against China.

The Holding Foreign Companies Accountable Act requires Chinese companies to give the US Public Company Accounting Oversight Board access to audited accounts — something that is currently prohibited by Beijing. It would also force companies listed on US exchanges to prove that they are not controlled by a foreign government.

In August, the US Treasury and the Securities and Exchange Commission issued recommendations to ban Chinese companies from American exchanges unless they complied with US accounting standards.

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“I am pleased Congress has acted with strong bipartisan support to level the playing field for all issuers in our markets,” Jay Clayton, the SEC chairman, said on Wednesday following the passage of the bill. “Today’s vote, in combination with the commission’s ongoing work, will help address these longstanding issues for the benefit of US investors.”

The American Securities Association also welcomed the legislation. “For far too long, the Chinese Communist party has exploited American investors to finance its cyber army, its technology-driven elimination of civil liberties, its human rights abuses, and its destruction of the environment,” said Chris Iacovella, the ASA’s chief executive.

The new legislation is part of a broader push by the US to take a more assertive stance towards Beijing in economic areas such as unequal market access to national security concerns related to spying and technology supply chains.

Last month Mr Trump signed an executive order that prohibited US investors from holding shares in companies that are believed to have connections to the Chinese military.

China previously accused the US of politicising securities regulation, which it said would force Chinese companies to list outside the US and ultimately weaken confidence in American capital markets.

The incoming Joe Biden administration is expected to take a tougher approach to China than the Obama administration, in which the US president-elect served as vice-president, but a less confrontational one than the Trump administration.

But Mr Biden will enter office as Democrats and Republicans on Capitol Hill are broadly in agreement that Washington needs to be much less accommodating to China.

China has long barred companies based in the country from sharing their audits with foreign governments, including those performed by affiliates of the Big Four accounting firms. While discussions between regulators in Washington and Beijing have gone on for years over a deal allowing Chinese businesses to meet US accounting standards, they have so far been unsuccessful. 

A flashpoint emerged this year after Chinese coffee chain Luckin Coffee disclosed an internal investigation had revealed fabricated sales figures. Shares in the company tumbled more than 80 per cent in the aftermath, generating steep losses for US investors. Nasdaq ultimately delisted the company from its exchange.

Chinese groups would have three years to comply with the audit requirements from the PCAOB, if Mr Trump signs the new bill into law. Anna Pinedo, a partner at law firm Mayer Brown, said that would give groups already listed or those debating an initial public offering in the US time to see if a deal between regulators can be reached.

“There is a level of prestige and a depth of liquidity associated with the US capital markets that is special and that continues to attract the best tech companies,” she said. “This is coming [against] the backdrop of a very successful 2020 IPO year, including a successful year for quite a number of Asian IPOs.”

If a deal cannot be reached, it would precipitate delistings from the US, experts said. Bankers in Hong Kong have already been pitching clients on so-called homecomings: deals that would move companies’ primary listing out of New York.

Additional reporting by Kadhim Shubber in Washington

Follow Demetri Sevastopulo on Twitter

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