By Dave Michaels and Alexander Osipovich
WASHINGTON -- The House unanimously approved legislation on
Wednesday that threatens a trading ban of shares of Chinese
companies, such as Alibaba Group Holding Ltd., over concerns that
their audits aren't sufficiently regulated.
The bipartisan measure passed the Senate in May and could
quickly become law with President Trump's signature. The fight over
China's resistance to allowing overseas inspections of its
companies' audits has lasted for years but reached a fever pitch
during the Trump administration.
Under the measure, Chinese companies and their auditors would
have three years to comply with the inspections before a trading
prohibition could take effect. If a breakthrough looked unlikely,
the companies would probably respond ahead of a ban by either going
private or moving their listing to a non-U.S. exchange.
U.S. regulators are working on another proposal that could allow
Chinese auditors to comply with the inspection requirement without
violating their home country's laws, which limit the sharing of
information. The Securities and Exchange Commission could issue
such a proposal this month, although it wouldn't immediately take
Chinese firms have raised money from U.S. shareholders for
years, but their auditors violate a fundamental investor
protection: China typically won't allow American regulators to
check their work. Chinese companies including Luckin Coffee Inc.
have imploded in accounting scandals over the past decade, raising
awareness of the audit-inspection gap.
"Without this bill, the Chinese have been just stonewalling us,
and we certainly shouldn't make it easier for a Chinese company to
get American capital than an American company," Rep. Brad Sherman
(D., Calif.), a certified public accountant who sponsored similar
legislation this year, said in an interview. The Senate legislation
was sponsored by Sens. John Kennedy (R., La.) and Chris Van Hollen
Mr. Trump is likely to sign the legislation, Mr. Sherman added.
He said on the House floor Wednesday that he is hopeful China would
now agree to a regime to conduct inspections.
House lawmakers included a statement that clarifies the bill's
intent. The instructions don't have the force of law but direct the
SEC to implement the measure without harming American companies
that do business in China and thus use Chinese accounting firms for
part of their annual audit. Some critics of the legislation have
worried the bill could wind up hurting U.S. companies operating in
Kicking Chinese companies off U.S. exchanges would lead to huge
movements of capital and end an era in which fast-growing Chinese
firms flocked to New York to go public. More than 250 companies
based in China or Hong Kong are listed on U.S. exchanges, with a
combined market capitalization of more than $2 trillion, according
to S&P Global Market Intelligence.
The legislation could give Washington more leverage in
negotiating with Beijing to resolve the standoff over audit
inspections, and may ultimately hasten a deal to allow Chinese
firms to maintain their U.S. listings, said Marc Iyeki, the former
head of Asia-Pacific listings at the New York Stock Exchange.
"Three years is a lot of time," Mr. Iyeki said. "You have two
interlocked economies and financial markets, and it would be
difficult to untangle them completely. There is a good benefit to
both sides to have a resolution that both sides can live with."
In the U.S., audit supervision is handled by a special watchdog,
the Public Company Accounting Oversight Board, which was set up
after the accounting scandals that took down Enron Corp. and others
nearly 20 years ago. The SEC oversees the PCAOB and appoints its
If the bill eventually results in an exodus of Chinese
companies, it would deal a blow to the NYSE and Nasdaq, which
collect listing fees from such firms and benefit from their trading
volumes. Executives from both exchanges have criticized the
legislation, saying there are less drastic ways to resolve the
"The NYSE has consistently advocated for investor protections
balanced with investor choice, and we are hopeful this
legislation's time horizon will allow for a resolution that
supports both of these fundamental needs," said a spokesperson for
the NYSE, which is owned by Intercontinental Exchange Inc.
Some larger Chinese companies listed on the NYSE and Nasdaq have
recently floated shares in Hong Kong, giving them a place to go if
they are kicked off U.S. exchanges. Alibaba last year established a
secondary listing on the Hong Kong stock exchange, and its rival
JD.com Inc. and online-gaming group NetEase Inc. followed suit this
Other Chinese companies could respond to the threat of a U.S.
trading ban by going private. That concerns some investors, who
worry that management teams could take their companies private at a
lower share price, benefiting insiders who would buy out public
shareholders. In June, Aberdeen Standard Investments warned that a
wave of going-private transactions by Chinese companies could
result in bad deals for investors.
"We believe that these transactions may be at prices that do not
reflect the full value of the companies involved, with the
transactions representing a transfer of value from minority
investors to acquirers," the U.K. asset manager said in a letter to
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(END) Dow Jones Newswires
December 02, 2020 18:13 ET (23:13 GMT)
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