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US moves on legislation that may deter Chinese stock listings: 'China is the only outlier,' says senator

Akiko Fujita
·4 min read

On Wednesday, the House of Representatives passed bipartisan legislation Senator Chris Van Hollen (D, Md.) co-sponsored with Senator John Kennedy (R, La.), that would subject Chinese firms listed on the U.S. stock exchanges to the same independent audit requirements that apply to American companies. Trump has been supportive of the bill and is expected to sign it.

The Holding Foreign Companies Accountable Act, which passed the Senate unanimously in May, requires firms to disclose whether they are owned or controlled by a foreign government. They must also commit to audits from the Public Company Accounting Oversight Board (PCAOB) within three years.

Van Hollen, a vocal critic of the Chinese government who has moved aggressively to take on Chinese companies listed on U.S. stock exchanges, said the three year window would give Chinese companies and their accounting firms, ample time to comply.

“If we allow a country to pass laws that shield their own companies from providing important information to American investors, then other countries would follow suit,” Van Hollen said. “Right now, China is the only outlier in the entire world. And so, this is a time where their companies are going to have to, you know, find a way to provide this information, or ask for their own governments to change some of these rules.”

New York City, USA - November 11, 2015: Banner on the New York Stock Exchange as the e commerce company Alibaba records record Single's Day sales in New York City on November 11, 2015.
New York City, USA - November 11, 2015: Banner on the New York Stock Exchange as the e commerce company Alibaba records record Single's Day sales in New York City on November 11, 2015.

Companies registered in China and Hong Kong are not currently subject to PCAOB audits.

Maggie Wu, director and chief financial officer for Alibaba, responded to the Senate’s vote in May, saying the company has been audited by PwC Hong Kong since its inception, and prepares financial statements in accordance with generally accepted accounting principles (GAAP) in the U.S.

“The integrity of Alibaba’s financial statements speaks for itself – we have been an SEC filer since 2014 and hold ourselves to the high standards of transparency,” she said. “Each year, we have received an unqualified audit opinion on our financial statements from PwC.”

The growing pressure on Chinese companies is likely to prompt more than 30 companies to seek secondary listings in Hong Kong or mainland China exchanges, according to a report by Jefferies. E-commerce giants Alibaba (BABA), (JD), and online gaming group Netease (NTES) are already among a growing list of Chinese firms that have successfully listed in Hong Kong this year, raising concerns about a large exodus from U.S. exchanges.

Van Hollen said that is unlikely to happen.

“American markets are very important to these Chinese companies and so I do not anticipate them leaving. I anticipate over the next three years, finding a way to comply with these rules,” he said.

Biden will be more ‘consistent and predictable’

President-elect Joe Biden dismissed speculation that he will quickly abandon the Phase 1 trade agreement President Trump signed with China, telling the New York Times Wednesday, “I’m not going to prejudice my options.”

Van Hollen said Biden’s handling of U.S.-China relations will mark a dramatic shift from Trump, largely because it will be more “consistent and predictable.” He said the incoming Biden administration will do much more to “uphold the principles of rule of law and freedom of speech” in his dealings with Beijing.

“I expect the Biden administration to hold China accountable and to do it in a more consistent way,” Van Hollen said. “[With] the Trump administration we've seen a lot of zigging and zagging. We go from President Xi being President Trump's best buddy, to being the devil.”

Biden inherits a toxic relationship with the world’s second largest economy, brought on by a years-long trade war and global pandemic. Under Trump, the U.S. has aggressively gone after Chinese tech companies citing national security concerns, while blaming Beijing for the global repercussions of the coronavirus. In January, Trump inked a Phase 1 agreement, leaving in place 25% of tariffs on $250 billion in Chinese goods. China agreed to purchase an additional $200 billion in American goods over 2020 and 2021, but has fallen behind on its commitments significantly.

The president-elect has called for a global coalition to pressure Chinese leadership, saying it will be a “major priority” in the initial days of his administration. Biden told New York Times columnist Thomas Friedman, his “goal would be to pursue trade policies that actually produce progress on China’s abusive practices — that’s stealing intellectual property, dumping products, illegal subsidies to corporations” and forcing “tech transfers” from American companies to their Chinese counterparts.

Akiko Fujita is an anchor and reporter for Yahoo Finance. Follow her on Twitter @AkikoFujita

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