By Akiko Fujita and Krystal Hu
American stock exchanges have emerged as the latest battleground in the ongoing political fight between the U.S. and China. While bilateral discussions on trade have made little headway in recent weeks, Republican and Democratic lawmakers on Capitol Hill have aggressively moved forward with legislation that increases oversight for more than $1 trillion worth of U.S.-listed Chinese companies, putting stocks like Alibaba (BABA) in the spotlight and future listings on these exchanges in question.
“We welcome investment from companies from China so long as they are complying with other laws,” Senator Chris Van Hollen (D-MD) said, speaking to Yahoo Finance. “But they should play by the same laws as everyone else. Those rules are designed to protect American investors and to protect confidence.”
Two bipartisan bills have been introduced over the last few months, aimed at going after Chinese companies that don’t comply with auditing rules in the U.S.
Van Hollen’s bill, which was co-sponsored by Sen. John Kennedy (R-LA) and introduced in March, gives listed Chinese firms three years to come in compliance with oversight requirements of the PCAOB, a non-profit corporation Congress created in 2002, in an effort to restore reporting credibility.
A similar bill was introduced this week, sponsored by Sen. Marco Rubio (R-FL) and Democratic Senators including Kristen Gillibrand (D-NY) subjects U.S.-listed Chinese companies to the regulatory oversight that includes turning over its audits or face delisting.
“President Trump has created an unprecedented opportunity for the U.S. to use its leverage to extract fair, sustainable, and enforceable trade reforms from China,” said Rubio in an Op-Ed published in the Wall Street Journal. “The SEC and [Public Company Accounting Oversight Board] negotiators should use this opening to engage with their Chinese counterparts to bring China into line with international norms.”
Putting the integrity of a U.S. system in another country’s hands For years, U.S. stock exchanges have attracted Chinese firms looking to take advantage of relaxed rules on profitability, dual-class ownership structure, and access to a large pool of capital. 156 Chinese companies currently trade on the major exchanges, with a combined market cap of $1.2 trillion, according to the U.S.-China Economic and Security Review Commission.
But those same companies have managed to skirt financial auditing by the PCAOB, in part because they operate as Foreign Private Insurers that are subject to regulation in their home country’s exchange. Chinese law requires financial records to remain within the country to protect national security and state secrecy, making PCAOB verification nearly impossible, and raising the risk for accounting fraud.