The Trump administration is prepared to terminate a 2013 agreement between U.S. and Chinese auditing authorities in a move aimed at increasing pressure on Chinese-listed companies in the United States to comply with U.S. auditing standards.
The Reuters news agency cited Keith Krach, undersecretary for economic growth, energy and the environment at the State Department, who said a lack of transparency has prompted officials to lay the groundwork to exit the 2013 memorandum of understanding.
“This is a national security issue because we cannot continue to afford to put American shareholders at risk, to put American companies at a disadvantage and allow our preeminence of being the gold standard for financial markets to erode,” Krach told Reuters.
The development follows years of tension between American auditors and Chinese companies over the financial documentation required of companies that list shares on U.S. exchanges, especially the technology-oriented Nasdaq exchange.
Legislative response
Reuters said termination of the 2013 agreement would not immediately threaten the listed status of those companies. Legislation currently moving through the U.S. Congress, however, eventually could force the delisting of Chinese companies that fail to comply with certain terms of the agreement.
Under the agreement, procedures were established for an agency known as the Public Company Accounting Oversight Board (PCAOB) to seek documents in enforcement cases against Chinese auditors. But the PCAOB says it still cannot get the access to audits that it needs to ensure that listed Chinese companies have accurate financial and corporate records.
William Duhnke, chairman of the PCAOB, said last week that there had been discussions with his Chinese counterparts on improving oversight of U.S.-listed Chinese companies, though little progress had been made.
“From our perspective, any further discussions about access are unlikely to be productive unless and until the Chinese authorities are willing to embrace certain principles that ensure our fundamental ability to accomplish our mission,” Duhnke said at a virtual round-table discussion organized by the U.S. Securities and Exchange Commission (SEC).
'State secrets'
The PCAOB was established by the Sarbanes-Oxley Act in 2002 to oversee the audits of public companies traded on U.S. exchanges. China is one of the only countries in the world that have failed since then to reach an agreement with the board.
When asked to disclose financial information to U.S. auditors, many Chinese companies with significant government links refuse on the ground that they would be revealing "state secrets."
Yet these companies are often embroiled in accounting scandals and accused of inflating their financial records to attract more capital. The latest scandal involves the Xiamen-based coffee chain Luckin, which overstated the company’s 2019 sales by about $310 million. The company’s share value fell by 80% after the disclosure.
The U.S. Senate in early May passed a bill that could bar many Chinese companies from listing shares on U.S. exchanges unless they abide by U.S. auditing rules.
The Holding Foreign Companies Accountable Act would require Chinese companies to demonstrate they are neither owned nor controlled by a foreign government. It would also require the companies to submit to an audit that can be reviewed by the PCAOB, or face delisting from U.S. exchanges.
Not all American investors welcome the move. Some have voiced concerns that the bill, if it becomes law, could shut them out of high-yield investment opportunities that would remain open to investors in other countries.
Guo Yafu, CEO of TJ Capital Management, told VOA the efforts of Congress and the Trump administration could be a double-edged sword. He said the new rules could greatly limit the growth of these Chinese companies, but “it will also hurt Wall Street.”
“These Chinese companies might seek secondary listings in Hong Kong, London or Singapore,’ he told VOA.
Guo said both London and Singapore were trying to attract these companies by offering to cover part of their listing fees. “For example, the Singapore government says they will cover 20% of listing fees for foreign companies willing to list in its exchange, and 75% in the case of high-tech companies,” he said.
Hong Kong
Hong Kong also is a hot destination for secondary listings for Chinese firms. Alibaba, the e-commerce giant based in China, already has a secondary listing on the Hong Kong stock exchange.
New doubts have arisen about the safety of capital invested in Hong Kong, however, with the passing by Beijing of a controversial new national security law. U.S. President Donald Trump responded to that law Tuesday by signing an executive order that ended America’s special trade treatment of Hong Kong.
“Hong Kong will now be treated the same as mainland China — no special privileges, no special economic treatment and no export of sensitive technologies," Trump said at a press conference.
These new developments have many companies rethinking their choice of secondary listing destinations.
Yet Alicia Gracia-Herrero, chief economist for Asia Pacific at French investment bank Natixis, told VOA that Hong Kong remains a viable choice for Chinese companies.
“Hong Kong is still an option since the bulk of the funds there are not U.S.-related but China/Asia-related. Subsidiaries of major Chinese companies and financial institutions are major investors in Hong Kong and they are bound to stay, the more so if they are [partially] state-owned,” she told VOA.
According to an analysis by the Harvard Business Review, China is still very dependent on Hong Kong for trade, foreign direct investment, equity and debt capital, and foreign currency exchange. “That self-interest should keep its leaders from going too far with implementing the security law,” it said.
Nevertheless, Gracia-Herrero said America’s Nasdaq exchange remains unequaled as a platform for high-tech companies to secure U.S. dollar financing.
