Gensler Warns of Chinese Company Risks After SEC Crackdown

(Bloomberg) -- U.S. Securities and Exchange Commission Chair Gary Gensler issued his most direct warning yet on Monday about the risks of investing in Chinese companies.

Gensler said in a video message that there is a lot that American investors don’t know about some Chinese companies that are listed on U.S. stock exchanges. His remarks come just weeks after the regulator halted initial public offerings of Chinese companies until they boost disclosures and warned investors may not be aware that they are actually buying shares of shell companies instead of direct stakes in Chinese businesses.

Gensler said on Monday that he’s asked SEC staff to take “a pause for now” in green-lighting IPOs of shell companies that Chinese firms use to list shares in the U.S. and wants investors to have more information about how firms are structured.

“That means disclosing the political and regulatory risk that the government of China could, as they’ve done a number of times recently, significantly change the rules in the middle of the game,” Gensler said in the video.

Gensler’s comments come amid a crackdown in China on private industry, including recent moves by Beijing to ban a swath of private-education firms from making profits. The actions have triggered a dramatic selloff in shares as investors reassess how far the government will go in tightening its grip on the economy.

Gensler also repeated a demand that U.S. officials must be allowed to inspect Chinese firms’ financial audits. The U.S. passed a law in December requiring Chinese companies to allow American officials to review financial information or be delisted.

“If the auditors of Chinese operating companies don’t open up their books and records in the next three years, the companies -- Cayman or Chinese -- won’t be able to be listed here in the U.S.,” said Gensler, referring to the Cayman Islands where many shell companies associated with the firms are based.

Gensler has faced pressure from Capitol Hill to increase scrutiny of Chinese companies as shares of Didi Global Inc. plunged following its U.S. IPO earlier this year. Right after the listing, China announced it was conducting a security review and restricting the ride-sharing company from adding new customers. Chinese companies listing in New York have been a lucrative source of revenue for Wall Street banks that underwrite the deals.

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