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US-China tensions

Bill to delist Chinese companies heads to Trump's desk

Offers to go private flood in as enterprises consider exodus from US exchanges

Bin Li, CEO of Chinese electric vehicle maker NIO, rings a bell as its stock begins trading on the floor of the New York Stock Exchange in 2018. The company could be forced to delist under a bill expected to be signed by U.S. President Donald Trump.   © Reuters

NEW YORK -- A bill that would delist Chinese companies not following American auditing rules after a buffer period looks set to be one of the last President Donald Trump signs into law in the coming days, after it unanimously passed the U.S. House of Representatives Wednesday.

The Holding Foreign Companies Accountable Act, first introduced to the Senate by Democrat Chris Van Hollen and Republican John Kennedy, gives foreign companies listed in the U.S. three years to comply with the Public Accounting Oversight Board's audits before giving them the boot. The legislation also unanimously passed the Senate in May.

Beijing does not allow the American watchdog to inspect Chinese companies' audits the way it would like to.

Trump's White House has also separately recommended the U.S. Securities and Exchange Commission to delist companies out of compliance by 2022 -- a tighter deadline. The SEC has yet to take up the recommendation.

Stephanie Segal, senior fellow of the Economics Program at the Center for Strategic and International Studies, a Washington think tank, said she "would be surprised if the Chinese authorities respond in the near-term by allowing the [oversight board] to review audit work papers that have been at issue for more than a decade now."

Instead, "the authorities are likely to welcome the re-listing of Chinese companies" in mainland China, Hong Kong or other foreign exchanges, Segal told Nikkei Asia in an email, adding that either the bill or action from the SEC could accelerate moves by Chinese companies to domestic exchanges.

"Having said that, the Chinese companies that benefit from issuing and trading on U.S. exchanges are not without influence" in China and "might urge compliance or compromise before the actual delisting kicks-in" and that they might also be "waiting to see the direction of China policy under the Biden administration," she added. 

The legislation passed Wednesday came after the high-profile accounting scandal in April that saw China's Starbucks challenger Luckin admit to $310 million in fabricated sales. The three-year-old company, backed by big-name institutional investors, was kicked off of the Nasdaq Stock Market in June after most of its valuation evaporated.

The China Securities Regulatory Commission, which cooperated with the SEC on the Luckin investigation, said last month it was looking forward to a fresh round of discussions with American regulatory bodies on how to improve access to Chinese companies' audits. It had sent over a fourth edition of such plans to the U.S. oversight board in August. 

Meanwhile, Chinese tech giants including Alibaba Group Holding and JD.com, both listed in New York, already completed secondary listings in Hong Kong following calls on Capitol Hill last year that called for a delisting ultimatum.

Some others have been receiving offers to go private. In September, Sina -- operator of "Chinese Twitter" Weibo and one of the first Chinese tech companies to list in the U.S. -- entered into a $2.6 billion deal with a holdings firm owned by company executives to go private. The same month, online classifieds platform 58.com delisted from the New York Stock Exchange after being acquired for $8.7 billion by a consortium of investors including Warburg Pincus and General Atlantic, two major U.S. private equity firms.

This week, U.S.-listed Chinese real estate website Fang Holdings, announced it received a preliminary buying proposal from General Atlantic. 

Some experts in the U.S. fear the delisting solution, while well-intentioned, could harm American investors.

"Beijing is unlikely to back down, leading to a tsunami of delistings and cheap take-privates that hurt current investors in China-based firms," Jesse Fried, a Harvard Law School professor, and Matthew Schoenfeld, a portfolio manager in Chicago, warned in a post published on the Harvard Law School Forum on Corporate Governance after the bill passed the Senate.

Word of the scheduled vote on the legislation also set off a sell-off of Chinese stocks this week, with Alibaba and JD.com down over 5% from last Friday's close. Chinese electric vehicle maker NIO, despite reporting better-than-expected results last month, is down over 11%.

"This one hurt!" a London-based retail investor tweeted Wednesday in reference to Chinese electric vehicle maker NIO. "Just sold 75% of a position in a company that I love but due to U.S. announcing plans to delist...Chinese companies, this became really hard to predict!"

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