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As U.S.-China tensions continue to mount amid a war of words over China’s culpability in the coronavirus pandemic, the Senate looks set to consider sweeping new legislation that could ultimately bar many Chinese companies from listing shares on U.S. exchanges, or otherwise raising money from American investors.
Sen. John Kennedy, a Louisiana Republican, is preparing to submit the Holding Foreign Companies Accountable Act for unanimous consent in the Senate as early as on Tuesday, said Henrietta Treyz, director of economic policy at Veda Partners, in a note. The legislation has been co-sponsored by Democratic Sen. Chris Van Hollen of Maryland and Republican Sen. Kevin Cramer of North Dakota.
The law would require Chinese companies to establish they are not owned or controlled by a foreign government. Furthermore, they would submit to an audit that can be reviewed by the Public Company Accounting Oversight Board, the nonprofit body that oversees audits of all U.S. companies that seek to raise money in public markets.
“The central core of the U.S. stock markets is that publicly listed companies are subject to financial oversight,” wrote attorney Steve Dickinson of Harris Bricken in the China Law Blog, adding that American companies seeking to raise money publicly must be audited by an accredited auditor and that these audits are further monitored by the PCAOB. China has refused to allow its companies to follow U.S. securities law, arguing that Chinese law bars auditors’ work from being transferred out of the country, Dickinson wrote.
“Stated more directly, unlike companies from the U.S. and Europe and everywhere else in the world, Chinese companies that list on the U.S. stock exchanges are exempt from meaningful financial oversight,” the lawyer said.
The Senate legislation is not the first attempt by Congress to reform this state of affairs, which resulted from a 2013 agreement between the Securities and Exchange Commission and Chinese regulators. But with U.S.-China relations deteriorating in an election year, chances of this bill becoming law are higher than during past efforts, Treyz said.
“It is our view that if this bill is allowed to come up for a vote — meaning if no senator objects to the unanimous consent request today — then the bill will ultimately pass the U.S. Senate,” she wrote. “It has bipartisan support … and both Democrats and Republicans are eager to paint a clear picture that they are tough on China.”
The Trump administration has also voiced support for stricter oversight of Chinese companies. White House economic adviser Larry Kudlow told Fox Business Network on Tuesday morning that “we have to” push for more accountability from Chinese companies listed in U.S. markets.
“We have to for investor protection, and we have to for national security,” Kudlow said. “A lot of these companies, by the way, have already had scandals and cost investors a lot of money, because of their failure to be transparent in their reporting. The Chinese government forbids that kind of transparency.”
The U.S.-China Economic and Security Review Commission compiled a list in 2019 of more than 600 Chinese companies that are listed on U.S. stock exchanges, including Alibaba Group Holding Ltd. BABA, +0.89% , Baidu Inc. BIDU, +2.00% and JD.com Inc. JD, -2.28% , all of which could be at risk of being delisted if this legislation were to pass.
