Advisers to US President Donald Trump are pushing forward the idea of delisting Chinese companies from US stock exchanges unless they comply with American auditing procedures. Washington has been considering the measure since May when the Senate unanimously passed legislation with the same goal in mind.
Setting a Deadline for Non-Compliant Chinese Stocks
The Treasury Department and Securities and Exchange Commission (SEC) announced the administration’s intention to proceed with the idea on Thursday. Their coordinated efforts are the result of direction from Trump himself who instructed them to devise a list of possible options, as Reuters reported. Their announcement Thursday fulfilled a 60-day ultimatum the president set in June.
Crucially, officials have decided upon a Jan. 1, 2022 deadline for Chinese companies to come into compliance. Should the refuse to satisfy the conditions set forth by the US Public Company Accounting Oversight Board (PCAOB), which all US companies must abide by, these companies will be delisted according to plans laid out by the Treasury Department and SEC.
US: ‘We Are Simply Leveling the Playing Field’
Chinese companies that are filing for their first-time listings will have to immediately comply with US auditing regulations. Congress has sought ways to bring Chinese companies in-line with their US counterparts, particularly as economic and diplomatic relations between the US and China continue to sour.
“We are simply leveling the playing field, holding Chinese firms listed in the U.S. to the same standards as everyone else,” a Treasury official said on Thursday.
Little Fairness in China
Although the China Securities Regulatory Commission (CSRC) said it has no rules barring China-based audit firms from working with the PCAOB, the US organisation feels differently. Despite a 2013 agreement between Washington and Beijing that was written to facilitate easier audit access, the PCAOB has often had their requests for information denied.
China locking out the US regulatory agency is not new, nor is it a response to increased tensions. In fact, the PCAOB has struggled for years, but now Washington has taken notice and decided to act, as the Financial Times reported.
China: ‘What They are Doing is Political Manipulation’
The Chinese Ministry of Foreign Affairs argued delisting the nation’s companies is a political maneuver.
“Some US monitoring authorities are failing to comply with their obligations,” it responded. “What they are doing is political manipulation. They are trying to force Chinese companies to delist from the US market. It will harm US investors’ interests.”
The ministry offered no evidence of US favoritism, and while it argued the move will hurt American investors, the Trump administration is actually taking the step to protect its citizens. As more American, empowered by stimulus checks, began to invest in the stock market, Chinese stocks became popular.
They haven’t all been on the up-and-up, however. Take, for instance, the case of Beijing-based Luckin Coffee. The company appeared on the Nasdaq exchange last year. This spring, the stock price rocketed skyward as the company reported stellar 2019 revenues. The problem? Most of its financial data was fabricated.
The company has since been delisted and booted several top executives including CEO and chairman Zhengyao Lu.
No Fault in Trump’s Decision
The Trump administration’s plan to hold Chinese companies accountable to US audit procedures was a long time coming. Beijing has managed to play by a different set of rules than US companies for too long, but evaded retaliatory action because Washington was too afraid of upsetting China.
Trump is not afraid, however. Democrats may hold many grudges against the president, but everyone, regardless of party, is in agreement that action is needed against China. Consequently, legislation passed the Senate unanimously and Trump will find widespread report for stricter auditing practices.
Furthermore, the move to delist non-compliant Chinese stocks cannot reasonably be construed as unfair. Unlike tariffs, sanctions, and other trade-related policies, requiring Chinese businesses to comply with the same accounting policies as US companies is in no way unreasonable.
Critics Don’t Understand the Move
In the worst case scenario, delisting Chinese companies only makes it more difficult for American investors, but not impossible. Yen Nee Lee argued that the move would be “pointless” in an article for CNBC, citing a report form the Peterson Institute for International Economics.
But they miss the point. While they claim delisting will not hurt China or lockout American investors, those aren’t the goals of the administration’s move to delist non-compliant companies. The goal is simply fairness, that all companies no matter their origin are playing by the same set of rules, and protecting American investors from fraudulent businesses.
No Response Needed from Beijing
Ultimately, there are few options for Beijing to use as retaliation. The Communist Party of China already has the state in a stranglehold and nothing happens without its blessing. American companies listed in Hong Kong, for instance, will have already been subjected to enhanced scrutiny.
It could impose more tariffs or even sanctions, but on what basis? If Washington had asked for something onerous an argument could be made that a response is needed. However, that is not the case here.
Establishing procedures within the SEC and bringing companies up to compliance will be a painstaking and long process that will consume the better part of next year. Unlike tariffs that can be leveraged immediately, the regulatory change is a slow-moving beast.
In the end, legitimate Chinese companies will find a way to open their books to the PCAOB and comply. The ones that don’t can simply court US investors from the Hong Kong exchange.