The COVID-19 pandemic has caused many countries to reconsider their relationship with China, and it has also intensified the tension and competition between the US and China.
With the US expected to gradually get the virus under control in the next couple of months, US President Donald Trump’s focus has begun to shift to the next stage: demanding accountability from Beijing and his re-election campaign. Therefore, tensions between the two sides are likely to increase — from their trade dispute to economic, technological and political confrontations.
Following the US Department of Commerce’s announced on May 15 that it would tighten export controls aimed at restricting Huawei Technologies Co’s access to US chip technologies, the US Senate on Wednesday unanimously approved a bill that could bar some Chinese companies from listing their shares in the US and apply stricter auditing rules to them.
The key effect of the proposed Holding Foreign Companies Accountable Act — if also passed by the US House of Representatives — would be to prohibit foreign firms from listing and trading their shares on any US exchanges if the Public Company Accounting Oversight Board cannot review their audits.
Chinese companies listed on US exchanges are not subject to the same investor protection regulations and accounting standards as their US counterparts, as Beijing refuses to allow its companies to follow US securities regulations. This means retail investors in US-listed Chinese companies are exposed to a greater risk of fraud.
The Senate bill also demands that foreign companies, especially Chinese ones, prove they are not owned or controlled by a foreign government — and Beijing in particular.
Even though the bill has yet to become law, it has added pressure to US-listed Chinese stocks, with Baidu reportedly considering delisting from the NASDAQ because of concerns about its undervalued stock price, Reuters reported on Thursday.
There have been increasing calls on the US government to push for more accountability from Chinese companies that are listed on US exchanges, and the latest example is that the NASDAQ on May 15 issued a delisting notice to Chinese coffee chain Luckin Coffee to address concerns about fabricated transactions in the company’s annual report.
There are still more questions than answers about the bill, such as how the legislation would define whether a company is controlled by a foreign government, how authorities would act to prosecute fraud and when it might be passed by the House.
However, the essence of the legislation is to point out that investing in Chinese companies might be riskier than it seems if there are issues with transparency in their reporting.
Just last month, Chinese video streaming giant iQiyi, tutoring operator TAL Education Group and e-commerce company Pinduoduo were accused of fraud and inflating their numbers, while analysts last week questioned online education provider GSX Techedu’s revenue and student numbers.
While the US is tightening listing rules to limit the channels for Chinese companies to raise money publicly, Beijing is relaxing its listing standards and encouraging Chinese companies to return to Hong Kong, Shanghai or Shenzhen for listing. For US-listed Chinese firms, withdrawing from Wall Street in favor of a listing nearer to home could be an alternative if the US legislation were to pass.
However, investors, especially those keen on cross-border investment opportunities, still need to beware the possibility of fraudulent reporting as some Chinese firms, if not most, still lag behind in corporate governance — and, given the lack of strong oversight by authorities — stay in business under weak legal structures.
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