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Trade war

China warns US audit plan will harm both sides

Confidence in American capital markets would erode, Beijing says, as foreign companies leave

The floor of the New York Stock Exchange: China warns that the proposed law would weaken the U.S. capital markets' international standing.   © Reuters

HONG KONG -- The U.S. is "politicizing securities regulation" with a proposed law that could force Chinese companies off American stock markets, hurting both countries, China's top stock market watchdog warned Sunday.

China is targeted by some parts of the bill, the China Securities Regulatory Commission said in a statement opposing the Holding Foreign Companies Accountable Act that the Senate passed last week by unanimous consent.

Foreign companies would have to leave U.S. stock markets if they fail to comply with the nation's regulatory audits for three consecutive years -- a requirement Chinese companies cannot yet meet, owing to CSRC rules.

The legislation still needs to pass the House of Representatives and be signed by President Donald Trump. It affects 233 Chinese companies with a combined market valuation of $1.03 trillion, according to Goldman Sachs. The U.S. investment bank estimates that U.S. investors currently hold $350 billion worth of these stocks.

The proposed law "would certainly harm the interests of both China and the U.S.," the CSRC said in Sunday's statement. "While impeding foreign issuers from listing in the U.S., it would also undermine global investors' confidence in the U.S. capital markets and weaken the U.S. markets' international standing."

This marked another snag in relations between the world's two largest economies, notwithstanding a temporary truce in the trade war after one and a half years of tariff escalation. The White House released a report last week a spelling out a "fundamental reevaluation" of relations with China, which then said Sunday that political forces in the U.S. are pushing the two powers into a new Cold War.

Washington's proposed law "completely ignores the continuous efforts made by Chinese and U.S. regulators to enhance audit oversight cooperation," said the CSRC, which expressed a hope that both sides will work together to protect investors' interests.

The U.S. Public Company Accounting Oversight Board has long complained of a lack of access to the audit work papers of board-registered firms in China. Since the 2013 signing of a memorandum of understanding, Chinese cooperation "has not been sufficient for the PCAOB to obtain timely access to relevant documents and testimony," the board said recently.

While U.S. regulators have raised noncompliance concerns as a matter of investor protection, the focus has recently intensified with recent cases of alleged accounting irregularities, such as Luckin Coffee. The coffee chain, which listed on the Nasdaq market last year, said in April that senior managers had inflated revenue by $310 million, sending its shares crashing.

Chinese corporations have preferred for years to list in U.S. capital markets for their deep investor base and their dollars amid capital controls at home. And as Sino-American tensions flare anew, top Chinese technology companies are putting together contingency plans for raising capital, such as Hong Kong dual listings, people familiar with the moves have said.

Alibaba Group Holding, which led the move into Hong Kong with a secondary listing last year, said it is "closely monitoring the developments of this bill."

Game developer NetEase, e-commerce operator JD.com and internet search company Baidu are among the Chinese companies said to be considering Hong Kong listings.

The potential for tighter regulatory scrutiny would likely accelerate the dual-listing trend in Hong Kong, Goldman Sachs said.

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