By Emel Akan
WASHINGTON—A rising number of Chinese companies are considering delisting from the U.S. stock exchanges as Washington increases its crackdown on foreign companies that fail to comply with U.S. audit standards.
Chinese online travel giant Ctrip is the latest company reportedly exploring going private. The company has held early-stage talks with a number of investors including private equity firms and tech companies about funding its delisting from Nasdaq, Reuters reported.
If the deal goes through, Ctrip would join other companies that are considering delisting from the U.S. exchanges, amid growing tensions between the United States and China.
China’s largest online classifieds platform 58.com and Beijing-based web search company Sogou Inc. are among the companies that recently announced potential delisting of their shares from the New York Stock Exchange (NYSE).
For more than a decade, Chinese companies have taken advantage of U.S. capital markets but operated under lax standards.
Beijing has refused to allow audit inspections of its U.S.-listed companies, citing state secret laws. Hence, these firms do not follow the same disclosure requirements as their U.S. counterparts, causing investors to face risks and losses.
In recent months, the White House and Congress have called for greater oversight of U.S.-listed Chinese companies.
Whistleblower and activist short-seller Dan David believes the Chinese regime will not change its behavior unless Washington pushes for more accountability.
“My negotiations over the last 10 or 15 years in China have been that you really have to push things to the edge before there’s any movement. I think [Chinese firms] are going to challenge this to the last minute. I know they’re lobbying Congress” through their U.S. business partners, David told The Epoch Times.
In “The China Hustle,” a documentary released in 2018, David explained how the Chinese companies mislead U.S. investors through overstating their operations, revenues, and profits. He helped expose $15 billion in fraud in U.S. capital markets and had 12 companies delisted from the exchanges.
After the financial crisis of 2008, hundreds of Chinese firms listed on U.S. exchanges through reverse mergers with public but mostly dormant U.S. companies. Many turned out to be frauds, the documentary showed.
Another prominent whistleblower of Chinese companies, Carson Block of Muddy Waters Capital recently helped uncover the Luckin Coffee accounting fraud. The shares of the Chinese coffeehouse chain crashed and were subsequently delisted from Nasdaq after the company’s long history of financial crimes was exposed in an 89-page report by Muddy Waters.
The scandal was a wake-up call for U.S. lawmakers, regulators, and investors about the extreme risks Chinese companies pose to U.S. capital markets, Block told CNBC.
As of September last year, 172 Chinese firms were listed on major U.S. exchanges, with a collective market capitalization of more than $1 trillion, according to the U.S.-China Economic and Security Review Commission annual report.
The U.S. watchdog, the Public Company Accounting Oversight Board (PCAOB), has long complained about the inability to inspect the audit work papers of these firms.
White House to Tighten Rules
A working group appointed by President Donald Trump on Aug. 6 released a report with a list of recommendations to address risks posed by the Chinese companies in U.S. financial markets.
The working group has recommended that the Securities and Exchange Commission take measures to enhance the listing standards on U.S. exchanges for access to audit work papers.
Under the plan, U.S. regulators will provide a transition period until Jan. 1, 2022 for currently listed companies to come into compliance with the new standards.
The other recommendations include requiring enhanced disclosures of the risks of investing in Chinese firms, reviewing the risk disclosures of registered funds that have exposures to these firms, requiring funds that track indexes to perform more due diligence on an index and its index provider, and issuing guidance to investment advisers with respect to fiduciary obligations.
“The recommendations outlined in the report will increase investor protection and level the playing field for all companies listed on U.S. exchanges,” Treasury Secretary Steven Mnuchin, who leads the working group, said in a statement.
Meanwhile, the U.S. Congress has taken action to protect American investors and their retirement savings.
Sens. John Kennedy (R-La.) and Chris Van Hollen (D-Md.) introduced bipartisan legislation, the Holding Foreign Companies Accountable Act, which passed the U.S. Senate by unanimous consent on May 20. The bill still awaits a vote in the House.
Under the bill, foreign companies whose auditors fail to be inspected by the PCAOB for three consecutive years will be subject to trading suspension.
The bill would also require companies to disclose whether they are owned or controlled by a foreign government, including China’s communist government.
A Bipartisan Issue
On May 22, Rep. Bradley Sherman (D-Calif.) introduced identical legislation in the House, which was later included in the National Defense Authorization Act of 2020.
Some lawmakers, however, are trying to determine whether any changes are needed in the bill so it does not hurt companies that have small operations in China, according to legislative staff for a member of the House Financial Services Committee.
“The intent of the bill is not to capture companies which have operations mostly in jurisdictions where the PCAOB can inspect the work of their auditors but may have a percentage of their operations in China or another jurisdiction where this is a problem,” he told The Epoch Times.
If it becomes law, Chinese companies like PetroChina, Alibaba Group, and Tencent will be forced to comply with the U.S. rules or lose access to the world’s largest capital markets.
“This is truly a no brainer bipartisan issue,” David said.
“It was gratifying to see a unanimous vote in the Senate. It should be the same in the House. And it should get done. And if it doesn’t get done, China’s not going to change.”
The trend of Chinese companies delisting from U.S. exchanges is expected to continue. And the proposed crackdown in the United States is pushing Chinese companies to seek secondary listings in Hong Kong.
Nasdaq-listed gaming company NetEase and e-commerce giant JD.com, for example, debuted in the Hong Kong stock exchange in June.
Critics argue that if Chinese companies start leaving U.S. exchanges it could hurt financial-sector profits and the global competitiveness of U.S. markets. Over the past 15 years, the U.S. stock exchanges, investment banks, and money-management firms have benefited from the U.S. listing of Chinese firms. U.S. lawyers and bankers have earned fat commissions by taking these firms public.
Experts believe, however, the greater oversight will pay off in the long term as it would improve the investment environment.
“A U.S. listing has always been attractive to firms seeking visibility and foreign currency. The new law won’t diminish this,” Shang-Jin Wei, professor of Chinese business and economy at Columbia Business School wrote in an article in Project Syndicate.
“The more likely outcome of the new U.S. law is that it will strengthen the PCAOB’s bargaining position vis-à-vis foreign authorities,” he said.