On Friday US President Donald Trump signed a law the Holding Foreign Companies Accountable Act, which will remove Chinese companies from American stock exchanges if they fail to comply with US auditing oversight rules within three years.
The law, which will monitor all foreign companies listed on US exchanges but is mainly considered as being directed at Chinese firms, is the latest move from Washington targeting some of the biggest players in China’s economy.
The relations between the two countries have exacerbated, the Trump administration has used a range of tactics including sanctions, trade blacklists and import bans to confine Beijing and many of its flagship companies.
These include bans of TikTok and WeChat, China’s most successful social media apps, with Washington citing national security concerns over data collection; and a prohibition on American technology suppliers from selling equipment to Huawei Technologies, China’s flagship telecommunications company, also because of security concerns.
Earlier this month, the administration issued an order aiming China’s huge textile industry. A new customs rule will impede imports of cotton textiles tied to the Xinjiang Production and Construction Corps, a quasi-governmental entity that controls about a third of China’s cotton production and has been accused of rampant human rights abuses.
The new trading law will impact almost all Chinese companies listed on US exchanges, none of which now bow to the US auditing rules. Most other foreign companies on US exchanges are already in compliance, but Chinese law prohibits Chinese-based companies from doing so.
As of October 2, 217 Chinese firms with a combined market capitalisation of US$2.2 trillion were listed on major US stock exchanges, according to the most recent congressional report by the US-China Economic and Security Review Commission.
This is the prolongation of a trend that has been in play for several years now, but with new strength and urgency as Trump goes out, said Yun Sun, director of the China Programme at the Stimson Centre, a think tank in Washington.
Although the damage will be significant, I don’t think the Chinese will see it as irreversible, she added. The future lies with Joe Biden, who will become president on January 20.
The US Securities and Exchange Commission (SEC), which had been drafting its own proposal to demand Chinese companies to use auditors overseen by the United States, will develop the details of how to institute the new law.
Andrew Karolyi said it was difficult to say how China might respond, a professor of finance at Cornell University.
Karolyi said he would tip the balance in favour of the more optimistic scenario in which the Chinese companies would begin to disclose the nature of their engagement with government agencies to solidify their listings in New York.
He added that joint inspections between Chinese and American auditors may help solve the impasse, if they can agree to start them.
A pessimistic scenario is that Chinese firms with government links comply and seek to delist and deregister toward setting up secondary cross-listings in Hong Kong, Singapore, London or elsewhere, he said.
The Holding Foreign Companies Accountable Act was introduced in 2019 by Senator John Kennedy, Republican of Louisiana, and Senator Chris Van Hollen, Democrat of Maryland.
It passed the Senate unanimously in May, and was overwhelmingly approved in the House on a voice vote on December 2.