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

A law passed by the U.S. Senate yesterday would bar listings of Chinese and other foreign firms that don’t meet the same accounting standards as American firms and also ban listings by firms that are controlled by foreign governments.  

And the impact could potentially be big if it gains final approval. “All Chinese companies listed in the U.S. are non-compliant in terms of audit standards,“ says Brock Silvers, Chief Investment Officer at Adams Asset Management in Hong Kong, which has managed $1 billion since its inception. U.S. law insists that regulators have access to the underlying audit data, while China restricts such sharing, he said. 

Non-state owned companies would have to be non-compliant with U.S. accounting rules for three years before being delisted. (See details here.) As of last year, there were more than 10 Chinese companies trading in the U.S. that are plainly government-controlled and could be at risk including: Petrochina, China Life, China Telecom, China Eastern, China Southern, Huaneng Power, Aluminum Corp. of China, and China Petroleum.   

One hard question for auditors checking China’s U.S. listings may be the definition of a government-controlled company. Auditors can only check and vouch for documents obtained from government agencies; it may not be easy to say when a company is in fact controlled by another party.  

China billionaires with fortunes tied to U.S. listings include Alibaba’s Jack Ma and Baidu’s Robin Li.

“Given the worsening relationship between the countries as decoupling gains momentum, combined with recurring frauds at China’s U.S.-listed firms, Washington seems unlikely to relent on audit standards,“  Silvers said. “A recent Nasdaq proposal tried to finesse the issue by substituting assurances for data access, but the Senate was evidently unpersuaded.”

Regardless of which party wins the November presidential election in the U.S., “Chinese firms may face delisting” unless new rules are adopted on auditing by Beijing, Silvers said.  

Whether Beijing will relent or not is “unclear as of yet,” he said. “It may well come down to the health of the Chinese economy at the time.”  

@rflannerychina