The Securities and Exchange Commission is taking up the issue. And Sens. Chris Van Hollen (D-Md.) and John Kennedy (R-La.) have sponsored bipartisan legislation that would kick Chinese companies off U.S. stock exchanges if they continue to deny American inspectors access to their audits.
“As we continue to experience the economic fallout and market volatility caused by the COVID-19 pandemic, the need to protect Main Street investors is all the more important,” Van Hollen, a member of the Senate Banking Committee, told POLITICO. “All publicly listed companies should be held to the same reporting standards.”
Yet in the Fox interview, Trump also underscored the ambivalence that many American officials feel about confronting China: He suggested that he doesn’t want to threaten to delist Chinese companies that don’t comply with U.S. regulations if it spurs them to flee to a competing foreign stock exchange.
“Let’s say you want to get tough,” Trump said, and federal officials demanded compliance with U.S. audit inspections as a condition for listing. “What do they do? They say, ‘OK, well, we’ll move to London or we’ll go to Hong Kong.’”
That reluctance has also been reflected in recent actions by the SEC.
Last month, SEC Chairman Jay Clayton fired an unusual warning shot when he publicly cautioned investors about the risks posed by Chinese companies that trade on U.S. exchanges, because of their refusal to allow regulators to inspect their audits.
Yet Clayton’s stern message came just weeks after the SEC sent the opposite signal: The regulator said in March that it would allow companies to delay disclosures of material information to investors if they could cite difficulties caused by the coronavirus — a move spurred in part by requests from businesses with operations in China that were struggling to meet the deadlines. The agency says some 700 public companies took advantage of the delay, many with operations overseas.
Critics say the agency is wary about chasing the Chinese from U.S. exchanges, in part because it doesn’t want to deprive Americans of the chance to invest in their enterprises. The stock exchanges themselves have an incentive to maintain the presence of a key emerging market on their venues.
Still, the SEC’s Office of the Investor Advocate will meet on the issue on May 21, a session that Van Hollen and Kennedy requested. A staff roundtable —which allows a public airing of the problem with regulators, industry and advocates — is planned for the summer.
In refusing access to their audits, Chinese companies have cited national security concerns at the direction of their government — something formalized in a law enacted in March. White House Economic Council Director Larry Kudlow raised alarm about the law in a letter Monday, which he said prevents U.S. regulators “from directly conducting its oversight function inside Chinese territory.”
Most U.S.-listed Chinese companies also use an unusual corporate structure to get access to exchanges, which involves multiple foreign jurisdictions, creating numerous legal hurdles for any enforcement by the SEC.
Carson Block, founder of Muddy Waters Research, which is known for documenting fraudulent accounting by publicly traded Chinese companies, said a provision in the 2012 JOBS Act also provided a fresh avenue for Chinese listings with lax disclosure, through a “Reg A Plus” offering. That allows non-public companies to raise capital on public exchanges without the normal registration requirements of an IPO.
“That lured a lot of retail investors back into some of the really low-quality China frauds,” said Block.
Recent market failures have provided clear examples of the consequences for investors of Chinese companies’ refusal to give the Public Company Accounting Oversight Board access to their audits.
Of particular concern to Kennedy, Van Hollen and other policymakers is the case of Kangmei Pharmaceutical, which blamed an accounting error last year for a $4.4 billion overstatement in cash holdings. Trading of shares was later frozen by Hong Kong regulator, but not before the company was included in a number of popular global index funds accessible to U.S. investors.
Last month, investors watched more than $5 billion in value evaporate in a single day of trading for Luckin Coffee — 75 percent of the stock’s value — due to suspected accounting fraud.
Luckin went public on U.S. exchanges in May 2019 and was touted as a Chinese rival to Starbucks. But trading in the Xiamen-based company’s stock was halted in early April after an internal investigation found some $310 million in fabricated transactions. That led Chinese regulators to raid Luckin headquarters.
Luckin Coffee made its IPO debut on the Nasdaq — and Clayton’s warning about China got a cool reception from the exchange’s CEO and President, Adena Friedman.
“We can’t just live with a warning, we have to find a path forward together and it takes all of us together to figure that out,” said Friedman when asked about the SEC statement in an interview with POLITICO’s Ben White in late April.
Clayton’s China warning was also lambasted in a Wall Street Journal editorial by former SEC Chairman Arthur Levitt and Michael Mann, founding director of the SEC’s Office of International Affairs.
“Instead of announcing a renewed effort to fix the problem, the regulators washed their hands of it. One wonders what they hope to achieve other than looking tough on China,” they wrote.
They said the statement also „sells short the recourse the SEC has” against Chinese companies, which includes stopping a listing, suspending trading or barring participation in U.S. markets by those who break the rules.
When contacted for comment about multiple criticisms of the regulator’s China response, an SEC spokesperson said: “Over the last several years, the SEC has been working to address the risks posed by investments in U.S.-listed companies based in emerging markets such as China. Put simply, U.S. regulators continue to lack the ability to inspect and enforce our laws in certain emerging markets.”
A Chinese embassy spokesperson did not immediately respond to a request for comment.
The Institute for China-American Studies, a Washington-based nonprofit funded by a foundation in China, had this to say: “Companies from both countries need to abide by the relevant regulations, and financial regulations, of the other side,” said Sourabh Gupta, a resident senior fellow at the institute, in an email.
For industry advocates, the SEC’s China talk is cheap after years of inaction.
“Chinese companies can’t continue to get a free pass from the same disclosure and transparency rules American companies are subject to,” said American Securities Association CEO Chris Iacovella.
“To protect investors and enforce the rule of law, the SEC must prevent Chinese companies from accessing our capital markets, individually or by using the passive index loophole, until they agree to comply with all U.S. laws,” said Iacovella.
Source: politico.com
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