SEC statements and companies’ delisting… With the “Foreign Companies Liability Act” that came into effect in 2020 in the USA, if the independent auditors of foreign companies whose stocks are traded on the US stock exchanges do not submit the necessary documents to the US authorities for 3 consecutive years, the stocks of these companies can be removed from the US stock exchanges. SEC Chairman Gary Gensler stated that independent auditors of companies that want their securities to be traded on US stock exchanges should be subject to scrutiny by US authorities, adding that China and Hong Kong do not allow scrutiny by US officials.
The outline of the problem… If you want to issue public securities in the US, the firms that audit your books must be audited by the Public Company Accounting Oversight Board under the Sarbanes-Oxley Act of 2002, passed in response to the Enron, and WorldCom accounting scandals. The 2020 Holdings Foreign Companies Liability Act prohibits overseas businesses from listing in the United States unless the supervisory board has reviewed the companies’ audit firms for three years. China and Hong Kong are the only two countries that have refused to allow inspections, despite Washington’s requests since 2002. The head of the SEC said that although more than 50 foreign countries allow such scrutiny, China and its semi-autonomous region Hong Kong currently do not – many US-traded Chinese stocks facing delisting in 2024. In other words, if these companies do not comply with the audit rules for two more years in a row, their shares may be banned from trading in the US capital markets from 2024.
US and China tensions and tightening of controls… The SEC’s new rule, which determines how the regulator determines companies subject to delisting and the procedure to kick non-compliant companies from stock markets, is the latest development in the struggle between financial officials in the world’s two largest economies. While much of the recent tension has been around shell companies that Chinese firms use to get listed in the US, regulation goes back decades. The issue became urgency after growing tensions between the two countries and the high-profile accounting scandal at Luckin Coffee Inc. In a bilateral move that was rare during the Trump administration, in December 2020, Congress mandated Chinese companies to finally open their books.
NASDAQ Golden Dragon Index vs. Alibaba stock comparison… The NASDAQ Golden Dragon China Index is a modified market capitalization-weighted index of companies whose stocks are publicly traded in the United States and most of which are operated in the People’s Republic of China. Source: Bloomberg
How the rule works… As the first step of the new rule, the institution will identify companies that may not comply with the audit inspection requirements. When a company is classified as a “commission-defined issuer” by the SEC, it will need to provide documentation proving that it is not government owned or controlled. Firms will also have to indicate in their annual reports additional information about the operating company and any shell companies used in commerce: the percentage of shares held by a government agency, whether the government agency has a financial interest, the name of each member of the board of directors from the Communist Party of China. The SEC rule lays down the process of applying a first trade ban to firms after three years of non-compliance, as required by 2020 law.
While the Nasdaq Golden Dragon Index accelerates its decline, there are great decreases in stocks such as Alibaba and Didi.
Conclusion? While the problem ostensibly stems from accounting standards and the lack of transparency in auditing, the suspicion that Chinese companies are providing financial benefits to government officials through front, offshore companies is actually the main reason for the delisting. The projections of Chinese companies listed in the US also seem appropriate for international investors, who find it more attractive to enter a liberal US market than to enter the Chinese market. Therefore, these companies are able to achieve significant market dominance. Although China is a semi-controlled semi-liberal economy, the area it occupies in the world economy makes it impossible to exclude it in terms of investment options. As well as the political tension between the US and China, the tension about Hong Kong’s further connection to mainland China is a phenomenon that can harm international investors in terms of market functioning.
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Hibya Haber Ajansı
Kaynak: Hibya Haber Ajansı