How China Stars Like Alibaba May Be Forced From U.S.

As part of the widening tensions between the U.S. and China, lawmakers in Washington are laying the groundwork to eventually delist major Chinese companies from the New York Stock Exchange and Nasdaq if their audits remain off-limits to American inspectors. China’s watchdogs say such a move would hurt both countries. Chinese companies traded in the U.S. have a cumulative market cap in excess of $1.8 trillion.

1. What’s being done in Washington?

Under a bill that’s sailed through both houses of Congress, Chinese public companies could be kicked off U.S. stock exchanges if American regulators aren’t allowed to review their audits. Chinese firms would have at least three years to comply. President Donald Trump is expected to sign the legislation before he leaves office in January. The measure also would require foreign companies to disclose if they’re controlled by a government. The U.S. Securities and Exchange Commission would be tasked with crafting new regulations to carry out the proposed law. The SEC had already been writing a rule to tackle the same issue, Bloomberg News reported.

2. What’s the point?

China’s refusal to let the U.S. Public Company Accounting Oversight Board examine audits of firms whose shares trade in the U.S. -- including companies registered in Hong Kong -- was long a point of contention even before the implosion early this year of Luckin Coffee Inc., a Chinese chain being delisted after an accounting scandal. The PCAOB was created in the wake of the Enron Corp. accounting scandal to prevent fraud and wrongdoing that could wipe out shareholders. Chinese firms say they can’t comply because Chinese national security law prohibits them from turning over audit papers to U.S. regulators. The NYSE and Nasdaq had pushed back against the idea of threatening delistings but more recently have said they would work to implement the changes.

3. How soon could Chinese companies be delisted?

It would take a while, which explains why markets have taken the possibility in stride. Under the proposed new U.S. law, a company would be delisted only after three consecutive years of non-compliance with audit inspections, and it could return by certifying that it had retained a registered public accounting firm approved by the SEC. (A subsequent failure to comply could result in a five-year ban.) Plus, the SEC would need to draft rules for how the law will work. That means taking public comment and holding two rounds of votes before anything could become final. Industry and members of the public will also have a chance to suggest changes before anything goes on the books. The process will take months or even longer.

4. Who would be affected?

Alibaba Group Holding Ltd. -- by far the largest U.S.-listed Chinese corporation -- for one. On a post-earnings call in May, it said it was monitoring developments but stressed its books are audited under U.S. standards by a major accounting house. Executives added they were aware of discussions between Chinese and American regulators regarding the types of financial information that can be exchanged without violating Chinese laws, but didn’t elaborate. In all, the PCAOB says it’s blocked from reviewing the audits of about 200 companies based in China or Hong Kong, including Alibaba, PetroChina, Baidu and JD.com.

5. Are some of them really controlled by China’s government?

Major private firms like Alibaba could probably argue that they are not, although others with substantial state ownership may have a harder time. As of February 2019, the U.S.-China Economic and Security Review Commission, which reports to Congress, counted at least 11 Chinese companies listed on major U.S. exchanges that were at least 30% state-owned. Also some companies where the state doesn’t own a stake can be subject to pressure, such as when the central government tried to stop Anbang Insurance Group Co.’s acquisition spree before finally taking control of the debt-laden conglomerate in 2018. But when such involvement is behind the scenes, it’s much harder to prove. Meanwhile, companies such as China Mobile Ltd. could be more directly in the firing line: Trump signed an order in November barring American investments in Chinese firms deemed to be owned or controlled by the Chinese military.

6. Why do Chinese companies list in the U.S.?

Companies from around the globe are attracted by the liquidity and deep investor base of U.S. capital markets. They offer access to a much bigger pool of capital, in a potentially speedier time frame. China’s own markets, while giant-sized, remain relatively underdeveloped. Fund-raising for even quality companies is constrained in a financial system that remains dominated by state-owned lenders. Trading in China’s domestic stock market is dominated by retail, not the institutional investors and deep mutual-fund base active in the U.S. And until recently, the Hong Kong exchange had a ban on dual-class shares, which are often used by tech entrepreneurs to keep control of their startups after going public in the U.S. It was relaxed in 2018, prompting big listings from Alibaba, Meituan and Xiaomi.

7. Why is the U.S. doing this?

It’s another front in the U.S.-China economic conflict that had escalated under the Trump administration even before the coronavirus pandemic that Trump blames on China. Trump and his trade advisers have long sought to level what they see as a playing field tilted in favor of Chinese companies, which enjoy the trading privileges of a market economy -- including access to U.S. stock exchanges -- while receiving government support and operating in an opaque system. His administration has accused Chinese companies of undermining the intellectual property of their U.S. counterparts. And alarm has grown among U.S. lawmakers that American money is bankrolling efforts by China’s technology giants to develop leading positions in a variety of high-tech fields.

8. How has China responded?

Chinese Foreign Ministry spokeswoman Hua Chunying said Beijing “firmly opposes politicizing securities regulation.” The China Securities Regulatory Commission said the bill undermine global investor confidence in U.S. capital markets. The Foreign Ministry has said all sides benefit from the overseas listings: Companies can raise funds, the markets have more to offer and investors have a chance “to share the benefits of China’s economic development.” Robin Li, chief executive officer of internet search giant Baidu Inc., which listed on the Nasdaq in 2005, told state media China Daily that he was “very concerned about the U.S. government’s continuous tightening of controls” on Chinese companies. He said Baidu has for some time been considering adding a secondary listing in Hong Kong, as Alibaba did in 2019, but that it’s “not so worried” about a U.S. crackdown having an “irreparable impact” on the business: “Our fundamental judgment is that if it is a good company, there are so many options for listing, and it is not limited to the United States.”

The Reference Shelf

  • U.S.-China flashpoints to watch.
  • The PCAOB’s list of public companies whose audits it can’t examine.
  • Alibaba said it expects to be able to comply.
  • QuickTake explainers on Alibaba’s growth story and its dual listings in New York and Hong Kong.
  • Read the Senate bill and the statement by Senator John Kennedy.
  • The latest report from the U.S.-China Economic and Security Review Commission.
  • China really does want to dominate the world, writes Bloomberg Opinion columnist Hal Brands.

©2020 Bloomberg L.P.

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