Biggest Losers From China Delisting Law May Be Small American Investors

Shareholders in Chinese companies traded in the U.S. – not China – could end as the biggest losers from a law intended to protect American investors that was passed by the Senate this week.

“The people that would be hurt worst would be American shareholders, not Chinese,” said Steve Dickinson, a China specialist at Seattle-based law firm Harris Bricken. “It would pull the rug out from everybody.”

The legislation could bar listings of Chinese and other foreign firms that don’t meet the same accounting standards as American firms and also bar listings of firms that are controlled by foreign governments.  It still needs approval by the U.S. House of Representatives, and then to be signed by President Trump and, finally, implemented.  

Chinese companies don’t currently have to meet existing U.S. accounting rules, resulting from some two decades of policies to encourage their offerings.  “If (the Senate law) was adapted today, every Chinese company would be delisted,” Dickinson said.    

Rather than make the implementation retroactive, the law should take effect with an eye to future listings. “If going forward, all of these rules would apply, that would make sense,” he said. “I’m a strong advocate for this set of rules going forward – I was also an advocate in 2008,” Dickinson said. 

 Since then, numerous U.S. investors have suffered from fraud, including most recently Luckin Coffee, whose collapse in Nasdaq trading cost shareholders billions of dollars. 

Most “respectable” China state-owned business don’t meet U.S. auditing standards, said Dickinson. China state-controlled companies whose shares trade in the U.S. include Petrochina, China Life, China Telecom, China Eastern, China Southern, Huaneng Power, Aluminum Corp. of China, and China Petroleum.  

They are among more than 200 Chinese companies currently traded on U.S. exchanges, Dickinson said.  That group includes Internet heavyweights such as Alibaba, Baidu, Pinduoduo and NetEase.

 There is “zero” chance that Chinese authorities will uniformly allow companies there to open up their books in a way that satisfies U.S. auditing rules, Dickinson said. China, he said, “doesn’t want that financial information to be known by outsiders.” 

Related stories: 

China Delisting Wave In The U.S.? It May Be Up To Beijing

China Listings Have Benefitted U.S. Investors, Rule Changes Should Be Fair — Amcham Shanghai 

 @rflannerychina