The US Securities and Exchange Commission (SEC) is pushing ahead with a plan that threatens to kick Chinese companies off US stock exchanges, setting up a late clash between Washington and Beijing as the administration of US President Donald Trump winds down.
By the end of this year, the SEC intends to propose a regulation that would lead to the delisting of companies for not complying with US auditing rules, people familiar with the matter said.
Agency officials have been moving quickly on a rule since August, when the president’s Working Group on Financial Markets — a regulatory council whose members include SEC Chairman Jay Clayton and US Secretary of the Treasury Steven Mnuchin — urged the regulator to pass new restrictions that could take effect as soon as 2022, said the people who asked not to be named in discussing private deliberations.
The SEC move is unusual because most agencies stop issuing major new policies after a US presidential election, especially when a new party is taking power.
In addition, it is unlikely that the rule would be finalized before Trump’s term ends on Jan. 20. Clayton, who plans to step down by the end of the year, would also be gone before any regulation is finished. That would leave completing it to an SEC head picked by president-elect Joe Biden.
However, unlike many policies in this era of heightened partisanship, cracking down on China appeals to both Republicans and Democrats in the US Congress.
In May, the US Senate approved a bill without opposition that directs the SEC to start the process of delisting Chinese companies whose audits are not inspected by US regulators.
All of these factors could put pressure on Clayton’s Democratic successor.
The SEC declined to comment on the plan. The NASDAQ Golden Dragon China Index fell 0.9 percent on Tuesday, compared with a 0.5 percent drop for the benchmark S&P 500 index. The gauge, which tracks Chinese companies listed in the US, closed at a record high at the end of last week.
China Securities Regulatory Commission Vice Chairman Fang Xinghai (方星海) sounded a positive note on resolving the issue at a panel discussion earlier this week, saying that it is important to ensure that Chinese companies have access to international capital markets.
“I think during the Biden administration, we should be able to resolve that problem because it’s not an intractable problem,” Fang said at the New Economy Forum. “All it takes is goodwill on both sides and a willingness on both sides.”
Chinese stock listings have attracted Trump’s attention, as he ratchets up his attacks on China over the COVID-19 pandemic and other grievances. Last week, he signed an executive order barring US investments in Chinese firms owned or controlled by the Chinese military.
The SEC’s work on a proposal was reported earlier by the Wall Street Journal.
The Working Group report that is driving SEC action recommended that exchanges such as the New York Stock Exchange and NASDAQ establish enhanced standards to prevent the listing of companies that do not adhere to US rules. The report called on the SEC to pass new rules, but said that they should not take effect until January 2022 to prevent market disruptions.
US investors’ exposure to Chinese stocks is growing, SEC data showed.
More than 150 Chinese companies, with a combined value of US$1.2 trillion, as of last year traded on exchanges in the US.
A further clampdown by the US could provide a boost to China’s stock exchanges and the one in Hong Kong, and analysts say that there is also plenty of cash in Asia to finance further listings.
“Some of these Chinese companies are highly competitive, have been growing strongly and leveraged to some very exciting themes of the future,” said Chetan Seth, an equity strategist at Nomura Holdings Inc.
“I expect that there will always be interest from global investors in some of these names. Potential delistings from US exchanges shouldn’t materially impact the fundamentals of the companies,” Seth added.
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