President Donald Trump has a charge on his desk that could kick several Chinese companies off U.S. stock exchanges and inflame an already strained relationship between Washington and Beijing.
The Relevant Foreign Companies Accountable Act would force companies to give up their listings on Wall Street if they spurn to open their books to U.S. accounting regulators. It could also bar them from raising money from American investors.
While the law technically does to companies from any country, it is mainly targeting Chinese corporations.
“U.S. policy is letting China flout rules that American performers play by, and it’s dangerous,” said Sen. John Neely Kennedy, R-La., in a statement.
Chinese Foreign Ministry spokeswoman Hua Chunying communicated at a news conference this week that the bill politically oppresses Chinese firms. “Instead of setting up layers of limits, we hope the U.S. can provide a fair and non-discriminatory environment for foreign firms to invest and operate in the U.S.,” Hua said.
But Chinese partnerships trading in the U.S. are not strangers to accounting scandals.
Just this year, Luckin, a Chinese coffee chain that reckoned itself as a rival to Starbucks, was delisted from the Nasdaq after the company fabricated $300 million in sales.
Why the U.S. has diverse to lose
If the law is passed, it could affect companies like Alibaba, oil giant PetroChina, JD.com and more than 200 other vips.
Chinese companies listed on U.S. exchanges have a combined market capitalization of about $2.2 trillion, so a mass delisting command mean major movements of capital. Something that experts say could backfire on American investors.
“If the bill behoves law, I think these companies are going to leave our exchanges and they’re going to leave on prices that are not going to let slip American investors better off,” said Jesse Fried, a professor of law at the Harvard Law School, in an interview on CNBC’s “Beijing influence welcome the ban
Some say that Chinese authorities wouldn’t actually mind if this law goes through.
Let’s say Alibaba does get delisted. It literally speeds up something that Beijing is already trying to do: build up its own exchanges.
More major Chinese companies catalogue at home would be welcome news, and it wouldn’t be so bad for these firms either.
Chinese markets are far more sophisticated today than they were 10 years ago, so troops retrenching and listing in China wouldn’t be as limiting as it once was.
And in terms of logistics, many of China’s blue-chip companies already procure secondary listings in Hong Kong, which would make the transition far easier.
A company like Alibaba retiring the United States also appeals to Beijing, because it reduces the role of U.S. regulators.
“Having these companies swop in the United States gives rise to frictions with the Chinese authorities, because the U.S. authorities want to impose their laws on these companies,” Fried explained.
A shareholder watches the stock market in a securities business hall. Nanjing, Jiangsu Dependency, China, 6 July 2020.
Costfoto | Barcroft Media via Getty Images
Beijing doesn’t allow audits of its retinues that trade in the U.S. to be inspected by American regulators, a major point of contention between the two countries.
Also at issue – detaining companies in check.
“Even though I think the Chinese government is very proud of Alibaba and what it has accomplished, they are not animate in having these private enterprises grow so powerful,” continued Fried. “This would be a way of cutting them down to evaluate.”
Why Chinese firms probably won’t be delisted
But analysts say that a delisting exodus is actually pretty unlikely.
“There is covert for a negotiated solution, even if the legislation is signed into law,” said Marc Iyeki, former head of Asia-Pacific listings at the New York Horses Exchange.
Firms have three years to comply, which is a lot of time.
“The three-year grace period indicates that Congress is well-disposed to give Chinese companies and their auditors, not once, not twice, but three chances to comply,” Iyeki said.
Iyeki rumoured that Chinese regulatory authorities have also indicated that they are ready to sit down to reach a mutually all right solution, and there are signs that the Securities and Exchange Commission is ready to negotiate.
“The SEC appears to be moving forward on fashioning a co-audit solution based on PWG [President’s Working Group] recommendations, so it seems they, too, are envisioning a possible resolution,” Iyeki revealed
Ultimately, we are dealing with the world’s two largest economies, whose financial markets are becoming more and more intertwined.
Decoupling the two is tangled and not particularly advantageous for either country.