SEC Moves Closer To Delisting Chinese Companies

Just yesterday, Beijing denied reports that it plans to block domestic Chinese firms from listing abroad (particularly in the US). Now, little more than a day later, the SEC is sharing its final plan for forcing Chinese firms to de-list from American exchanges should they refuse to open their books and abide by stringent American auditing standards.

The SEC has been plotting this for years now, inspired by the collapse of Luckin Coffee and a handful of other Chinese firms, which greatly irritated US regulators while triggering a mild populist backlash among investors. But Beijing hasn’t allowed a single domestic firm to list in the US since Didi’s ill-fated summer IPO, which preceded Beijing’s decision to punish the company by barring its apps from domestic app stores (although millions of Chinese users continue to use Didi). In response to criticisms that the CCP has actively worked to cover up corporate malfeasance by foreign-listed Chinese firms, the Party has insisted that Chinese firms would risk giving up trade secrets should they submit to American demands for better auditing.

It’s pretty clear that Beijing won’t allow any privately owned Chinese firms (all of which, remember, are still effectively controlled by the state) to provide the Americans with the insight they’re demanding.

For those who don’t remember, Luckin Coffee shares crashed to $0 in early 2020 after it was revealed that the ‘Starbucks of China’ fabricated $300MM in sales.

As we mentioned above, the SEC is planning to adopt a new rule mandating that foreign companies – mostly Chinese firms – open their books to US scrutiny, or risk being kicked off the New York Stock Exchange and Nasdaq within three years.

China and Hong Kong are the only two jurisdictions that refuse to allow these inspections, which have been required by Washington since 2002.

For nearly 2 decades, the US has tolerated the hold outs because Wall Street sees China as the biggest untapped market for American firms. But now, the leaders of the world’s two largest economies are butting heads. While much of the recent tension has focused on the shell companies that Chinese firms use to list in the US – entities known as VIEs, or variable interest entities, Thursday’s regulation dates back decades.

According to US rules, the firms must submit to audits by approved American auditors (ie the Big Four and a handful of other competitors), and then allow the audits to be reviewed by the PCAOB.

“If you want to issue public securities in the U.S., the firms that audit your books have to be subject to inspection by the Public Company Accounting Oversight Board,” SEC Chair Gary Gensler said in a statement. “While more than 50 jurisdictions have worked with the PCAOB to allow the required inspections, two historically have not: China and Hong Kong.”

During December 2020, Congress mandated that Chinese companies finally open their books and required the SEC to write rules for the companies that don’t comply.

Once it takes full effect, the rule will clear the way for some 200 Chinese firms to be booted from the top US exchanges.