A long-running battle between U.S. securities regulators and Chinese companies that sell their shares in the United States is expected to result in five large state-controlled Chinese firms leaving the New York Stock Exchange, with other departures possible in the future.
Last week, oil company Sinopec, China Life Insurance Company, Aluminum Corporation of China Limited, PetroChina, and Sinopec Shanghai Petrochemical announced that they would voluntarily delist from the NYSE.
The immediate effect for investors who have purchased shares of the five firms will be an exchange of what are known as American Depository Receipts, which trade in the U.S., for shares of the firms that trade in Hong Kong. But what it means for the larger number of investors who hold shares in the hundreds of Chinese firms listed on U.S. exchanges is less clear.
The departure of the five firms will leave only China Eastern Airlines and China Southern Airlines as major state-owned enterprises that remain listed in the U.S., raising questions about whether they will eventually delist, as well.
Other departures possible
Some other large Chinese firms have either already delisted or appear to be making plans to do so. Didi, the Beijing-based ride-hailing company, delisted under pressure from the Chinese government earlier this year. This week, fast food giant Yum China Holdings announced it is converting its current secondary share listings in Hong Kong to a primary listing, which would make delisting simpler. E-commerce giant Alibaba took the same step last month.
In a recent interview with CNBC, former NYSE President Tom Farley said that from an economic perspective, the departure of the five Chinese government-owned firms is “a non-event.” The companies do not trade widely in the U.S., he said.
However, he added, “Symbolically, it’s very important,” because it opens the door to the departure of large Chinese companies like Alibaba and JD.com, which do trade heavily in the U.S.
“This is China saying, ‘Hey, these are gone, and the next batch to go are the Alibabas and the JD.coms.’ That would be a big deal both economically and symbolically,” Farley said.
Alibaba’s market capitalization, the cumulative value of its outstanding shares, is over $232 billion. JD.com, another e-commerce firm, has a market capitalization of more than $87 billion.
Battles over access
At its root, the argument has been about disclosure. U.S. securities regulators, who are charged with assuring that individual investors have the information they need to make informed decisions, require that publicly traded companies provide extensive information about their business and accounting practices.
In particular, the Public Company Accounting Oversight Board (PCAOB) requires companies to provide it with full access to the working papers of their auditors. Created in the wake of several major accounting scandals, including at Enron in 2001 and WorldCom in 2002, the PCAOB’s mission is to ensure that the established business accounting rules are being followed by firms that sell their shares to the public.
The Chinese government, however, has long balked at the requirement that audit working papers be surrendered to the U.S. government. The primary complaint is that many of the firms possess data that the government in Beijing views as being too sensitive to share with other governments.
This has led to a stalemate between the PCAOB and Chinese officials.
According to the agency itself, “The PCAOB spent significant time and resources negotiating a Memorandum of Understanding (MOU) with the Chinese authorities for enforcement cooperation. Unfortunately, since signing the MOU in 2013, Chinese cooperation has not been sufficient for the PCAOB to obtain timely access to relevant documents and testimony necessary to carry out our mission consistent with the core principles identified above, nor have consultations undertaken through the MOU resulted in improvements.”
Farley, the former NYSE president, said that even though Chinese firms would be hurt by withdrawing from the U.S. market, which has the largest supply of investment capital in the world, it could still happen.
“This dispute may end up being intractable,” he told CNBC, “and you very well may see these companies pick up and go home if this negotiation doesn't improve markedly.”
Secrecy questioned
Frank Tian Xie, a professor of business at the University of South Carolina Aiken, told VOA that while the Chinese government may have some security concerns about U.S. regulators’ access to company data, there are other reasons why Beijing is resistant to comply with U.S. rules.
Xie said it is an “open secret” that Chinese companies do not always comply with accounting rules, and that enforcement within China is lax. Turning over their business records to U.S. authorities would invite “disaster” for many Chinese firms, Xie said.
“They just cannot fare well with more scrutiny from U.S. authorities,” Xie said.
However, Xie added, he does not believe there will be a wholesale exodus of Chinese companies from U.S. stock markets, because the benefits of listing in the U.S. are too significant.
“There are good, bona fide Chinese companies with honest people doing their business,” he said. If Chinese authorities allow them to comply with U.S. regulations, they will try to maintain their U.S. listings.
“Chinese companies want to have their stocks listed on American exchanges, because of the prestige — it's an honorable thing to have — and so they can gain access to U.S capital,” Xie said.
Long timeline
The struggle intensified last December, after the Securities and Exchange Commission finalized new rules that made it possible for the agency to prohibit trading of the shares of noncompliant Chinese firms.
The new rules were written to implement the Holding Foreign Companies Accountable Act of 2020, which Congress passed with the explicit intent of forcing Chinese firms trading in the U.S. to prove that they are not controlled by the Chinese government and to force compliance with transparency rules.
As of Aug. 7, the SEC had placed 162 Chinese firms on a list of those at risk of a trading prohibition because of their failure to comply with the law.
Any actual prohibition would take place only after a company had been found to be in violation of reporting requirements for three consecutive years, beginning in 2023.
