(Bloomberg) — The U.S. House of Representatives approved legislation that could ultimately lead to Chinese companies — including behemoths like Alibaba Group Holding Ltd. and Baidu Inc. — getting kicked off American exchanges if regulators aren’t allowed to review their financial audits.
The legislation won bipartisan support in the House after easily clearing the U.S. Senate in May. Its passage now sends the bill to President Donald Trump, who is expected to sign it, in his administration’s latest parting shot at Beijing.
While the legislation provides a phase-in period — penalties only kick in after three straight years of failure to comply — it represents intensifying scrutiny in Washington of ties with China. Chinese firms for years have relied on access to American capital markets, and more broadly to dollar-based finance, as a key funding component.
“U.S. policy is letting China flout rules that American companies play by, and it’s dangerous,” said Senator John Kennedy, one of the bill’s lead sponsors, in a statement. “Today, the House joined the Senate in rejecting a toxic status quo, and I’m glad to see this bill head to the president’s desk.”
Investors have mostly shrugged off the anticipated legislative move. Alibaba, the largest U.S.-listed Chinese company, was steady in after-hours trading, following a 1% drop on Wednesday. The offshore yuan was little changed. Hong Kong Exchanges & Clearing climbed as much as 1.6% as investors bet the measure may boost the city’s role as a financing center for mainland firms.
The development highlighted several other steps taken by the Trump administration, including an order to impound cotton from China and guidelines that would reportedly limit travel visas for China’s 92 million Communist Party members. Any of them with a 10-year visa would now see it reduced to one month, the New York Times reported, citing a State Department spokesman.
The U.S. Department of Homeland Security said Wednesday that customs officers at American ports would impound “shipments containing cotton and cotton products originating from” the Xinjiang Production and Construction Corps., a military-affiliated entity that’s one of China’s largest producers. This follows earlier U.S. action against the company that bar it from making any transaction with American companies and citizens.
The legislation approved by the House represents a watershed moment in a long-running dispute between Washington and Beijing. At issue is China’s refusal to let the Public Company Accounting Oversight Board examine audits of firms whose shares trade in the U.S. The requirement for the inspections by the agency, which was created in the wake of the Enron Corp. accounting scandal, is meant to prevent fraud and wrongdoing that could wipe out shareholders.
In addition to requiring companies to allow U.S. inspectors to review their financial audits, the measure — introduced by Kennedy, a Louisiana Republican; and Senator Chris Van Hollen, a Maryland Democrat — requires firms to disclose whether they are under government control.
When asked about the legislation on Wednesday, Chinese Foreign Ministry spokeswoman Hua Chunying told reporters Beijing “firmly opposes politicizing securities regulation,” and called for enhancing dialogue and cooperation. The ministry didn’t immediately reply to a request for comment Thursday on the House’s passage of the bill.
Van Hollen said in a statement that the delisting bill would protect people who “have been cheated out of their money after investing in seemingly legitimate Chinese companies that are not held to the same standards” as other public companies. “This bill rights that wrong, ensuring that all companies on the U.S. exchanges abide by the same rules,” he said.
Read More: Market Calls Bluff on $2 Trillion Delisting Threat: China Today
Fang Xinghai, the vice chairman of the China Securities Regulatory Commission, last month expressed optimism that the clash could be resolved with President-elect Joe Biden’s arrival in the White House next month. “It’s not an intractable problem,” Fang said, adding that it’s important to ensure that Chinese companies have access to international capital markets.
Regulators in the two countries have been engaged in on-again, off-again negotiations amid the standoff for more than a decade. Over the years there have been moments of optimism that the two sides were closing in on a deal, but ultimately it always fell through — with China citing strict confidentiality laws. More than 50 other foreign jurisdictions now permit the PCAOB inspections.
Despite the inability of American inspectors to review audits of Chinese firms, they’ve been allowed to continue to trade in the U.S., as the dynamic has been profitable to American stock exchanges, investment banks and asset managers. According to the Securities and Exchange Commission, more than 150 of the country’s companies, with a combined value of $1.2 trillion, traded on U.S. exchanges as of 2019 and there have been a spate of initial public offerings this year.
Major companies such as Vanguard Group Inc., the New York Stock Exchange, and Nasdaq have all expressed concern that the trend could reverse, with a crackdown causing Chinese companies to move their listings to Hong Kong or countries where investor protections are weaker than in the U.S. American investors would still be able to purchase the stock.
Alibaba Chief Financial Officer Maggie Wu said during a May 22 earnings call that the company “will endeavor to comply” with legislation that seeks to bring transparency to investors buying stocks on U.S. exchanges. Her comments were directed specifically at the Kennedy-Van Hollen legislation, which at that point had just passed the Senate.
The bill would prohibit foreign companies from trading in the U.S. if PCAOB inspectors aren’t allowed to review their auditors’ work for three consecutive years. The businesses would also have to disclose whether they’re controlled by the Chinese Communist Party, or any other foreign government.
Jay Clayton, the outgoing chairman of the Securities and Exchange Commission, said the legislation would help “level the playing field for all issuers” in the U.S. stock market. “Today’s vote, in combination the commission’s ongoing work, will help address these long-standing issues for the benefit of U.S. investors,” he said in a statement.
The SEC has been pushing ahead with writing a rule to tackle the same issue, which would lead to the de-listing of companies for not complying with U.S. auditing rules, Bloomberg News reported last month. The effort is in response to recommendations released earlier this year by top Trump-appointed financial officials including Clayton and Treasury Secretary Steven Mnuchin.
The NYSE said in a statement that it was “hopeful this legislation’s time horizon will allow” for balancing both protection and choice for investors. Meanwhile, Nasdaq said it “stands ready to work with our listed companies to comply with any and all regulations” and looks forward to cooperating with the SEC to bolster transparency.
The bill passed on Wednesday tasks the SEC with writing a rule to implement part of the measure. As in the Senate, the bill passed the House by voice vote, underscoring the bipartisan support for the measure.
(Updates with New York Times report on visas in sixth paragraph)
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