Opinion: Chinese companies listed on US stock exchanges need to open their books
Just days ago, US and Chinese negotiators reached an agreement on the financials of Chinese companies listed on US stock exchanges. If implemented successfully, the deal could significantly improve transparency for US investors looking to invest in Chinese companies.
However, the deal could also reveal worrying links between some Chinese companies and Beijing’s military activities.
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Avoid US control
It has been a longstanding policy for any company listed on a US stock exchange to disclose its financial information to the US Public Accounting Oversight Board (PCAOB). This ensures that investors can make informed decisions – and avoid investing in unscrupulous or fraudulent companies. But thanks to a 2013 agreement, Chinese companies were able to circumvent PCAOB rules and still raise money on US exchanges. That means Chinese companies have simply sidestepped transparency and investor protection measures.
Congress attempted to fix this through the Holding Foreign Companies Accountable Act (HFCAA) of 2020. The law required all Chinese companies to comply with the PCAOB transparency rules within three years.
This recently became a problem on Wall Street when five of China’s largest state-controlled companies – including PetroChina 601857,
China Petroleum and Chemical SNP,
and Aluminum Corp. of China ACH,
– announced that they would voluntarily withdraw from the New York Stock Exchange (NYSE).
The companies said they were unable to meet “disclosure requirements” mandated by the HFCAA — a financial regulator that PetroChina called a “significant administrative burden.”
In reality, Beijing did not want its companies to meet such transparency requirements. Indeed, Beijing has long banned investors from seeing the full financials of Chinese companies — and strictly forbids foreign regulators from inspecting audits conducted by Chinese accounting firms.
Beijing claims this is being done under the guise of “national security”. But the truth is, the Chinese Communist Party (CCP) simply doesn’t want the world to scrutinize the finances of its state-owned companies – and their ties to Beijing’s political and military programs.
Wall Street undisturbed
This hasn’t worried Wall Street, however. Investment firms have consistently ignored such risks.
Notably, Wall Street helped PetroChina raise more than $9 billion in November 2007 as Beijing sought to attract global investment. Wall Street firms easily sold out of China to American investors with high yields thanks to “almost infinite funding from the Chinese government.” And since PetroChina’s IPO, hundreds of other Chinese companies have also raised trillions of dollars in US and global markets.
To make the new deal between Washington and Beijing viable, US regulators must address significant opacity issues. The CCP also requires Chinese companies to be listed on foreign stock exchanges only under a Variable Interest Entity (VIE). That’s because Beijing doesn’t allow foreign ownership or foreign control over Chinese companies. The VIE structure is simply a clever shuffling of paperwork that allows US investors to buy stock in a company but prevents them from gaining actual ownership or voting rights in the real Chinese company.
According to the US-China Economic and Security Review Commission, there are currently 261 Chinese companies listed on US exchanges with a total market capitalization of $1.3 trillion. Beijing has repeatedly worked to prevent US investors from auditing the books of these state-owned companies. The question now is whether the implementation of the HFCAA – and the new deal with Beijing – will ensure thorough monitoring.
If China fails to comply with US law, its state-owned companies could be removed from US markets. This would benefit American investors and also help protect the integrity of US capital markets. Now Washington must ensure the HFCAA is enforced rigorously — and that Chinese companies finally open their books fully to US regulators.
Aaron Ringel, former Assistant Secretary of State for Global Public Affairs, is Vice President for International Policy and Advocacy at the Coalition for a Prosperous America, a nonpartisan advocacy group representing farmers, ranchers, manufacturers, and labor organizations that make and grow things in the United States.
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