The Senate approved legislation Wednesday (May 20, 2020) that could lead to Chinese companies such as Alibaba Group Holding Ltd. and Baidu Inc. being barred from listing on US stock exchanges amid increased tense relations between the world’s two largest economies.
The bill was introduced by Senator John Kennedy who is a Republican from Louisiana and Chris Van Hollen who is a Democrat from Maryland and was approved by unanimous consent and would require companies to certify that they are not under the control of foreign government.
US lawmakers had protested over the billions of dollars flowing into some of Chinese companies, from pension funds and college endowments in search of fat investment returns.
Alarm has grown that American money is in efforts by the country’s technology giants to develop leading positions in everything from artificial intelligence and autonomous driving to internet data collection.
Shares in some of the biggest US-listed Chinese firms, including Baidu and Alibaba, slid Thursday in New York while the broader market gained.
If a company can’t show that it is not under the control of the foreign gevernment or the Public Company Accounting Oversight Board, or PCAOB, isn’t able to audit the company for three consecutive years and determine that the company is not under the control of a foreign government, the company’s securities would be banned from the exchanges.
Kennedy said on the Senate floor that he do not want to get into a new Cold War, adding that he wants China to comply with the rules.
‘All publicly listed companies should be held to the same standards, and this bill makes common changes to level the playing field and give investors transparency they need to make informed decisions, Van Hollen said that he is proud that they are able to pass it today with overwhelming bipartisan support, and urge the House colleagues to act quickly.
Since discussions on increased disclosure requirements began last year, many Chinese companies have either listed in Hong Kong already or plan to do so, said James Hull, a Beijing-based analyst and portfolio manager with Hullx.
He said that all Chinese U.S.-listed companies are potentially impacted over the coming years and increasing disclosure may effect some smaller companies, but there’s been risk disclosures around PCAOB.
In a view of broad support for the measure, Representative Brad Sherman who is a Democrat from California on the House financial Services Committee, introduced a companion bill. Sherman stated that Nasdaq has started to delist China-based Luckin Coffee after executives at the company admitted fabricating $310 million in sales between April and December 2019.
Sherman said that he commend the Senate counterparts for moving to address this critical issue. If this legislation already been made into law, U.S. investors in the famous company Luckin Coffee likely would have avoided billions of dollars in losses.
House leaders are discussing the legislation – and a separate Senate-passed bill to sanction Chinese Officials over human rights abuses against Muslim minorities – with lawmakers and members of the relevant committees, a Democratic aide said.
The Senate measure – S. 945 – is an example of the rising bipartisan push back against China in Congress that had been building over trade and other issues. It has been amplified especially by Republicans as President Donald Trump has sought to blame China as the main culprit in the corona virus pandemic.
GOP lawmakers have in recent weeks unleashed a torrent of legislation aimed at punishing China for not being more forthcoming with information or proactive in restricting travel as the corona virus began to spread from the city of Wuhan, where it was first detected.
Trump said on China on Wednesday night, suggesting that leader Xi Jinping is behind the disinformation and propaganda attack on the United States and Europe.
Trump said in a series of tweets that it all comes from the top and China was desperate to have former Joe Biden, the former Vice President win the presidential race.
Kennedy told Fox Business on Tuesday that the bill will apply to US exchanges such as Nasdaq and the New York Stock Exchange.
Kennedy said that he would not turn his back on the Chinese Communist Party if they were two days dead. They cheat and he have got a bill to stop them from cheating.
China is refusing to allow the PCAOB to examine audits of firms whose shares trade on the New York Stock Exchange, Nasdaq and other U.S. platforms from long. The inspections by the agency, which stood up in 2002 in response to the massive Enron Corp, accounting scandal, are meant to prevent fraud that could wipe out shareholders.
Since then China and the US have been at odds on the issue as companies including Alibaba and Baidu have raised billions of dollars selling shares in American markets. The long undissolved issue came to the forefront last year as Washington and Beijing clashed over broader trade and economic issues, and some in the White house have been urging Trump to take a harder notice on the audit inspections.
Last week, Trump said in an interview on Fox Business that he’s looking at Chinese companies that trade on the NYSE and Nasdaq exchanges but do not follow US accounting rules. He said that cracking down could not work and simply result in the firms moving to exchanges in London or Hong Kong.
While not technically pert of the government, the PCAOB is overseen by the Securities and Exchange Commission. The ability to inspect audits of Chinese firms that list in the US is certain to come up at a round table that the SEC is holding on July 9 on risks of investment in China and other emerging markets.
Senators Kevin Cramer, Tom Cotton, Bob Menedez, Marco Rubio and Rick Scott are also sponsors of the bill. Rubio appreciated the Kennedy-Van-Hollen bill and said it is somewhat similar to the bill he introduced last year.
He further said that he is proud to work with Senator Kennedy on this important legislation that would protect American investors and pensioners from risky investments in fraud and opaque Chinese companies that are listed on U.S. exchanges and trade on over-the-counter markets. If Chinese companies want access to the U.S. capital markets, they must comply with American laws and regulations including financial transparency and accountability.
According to the SEC, 224 US-listed companies representing more than $1.8 trillion in combined market capitalization are located in countries where there are obstacles to PCAOB inspections of the kind this legislation mandates.