Ban on Chinese companies passes senate | China Accounting Blog | Paul Gillis

Ban on Chinese companies passes senate

Readers will have recognized that I have reduced my blog postings significantly in the last year. I was trying to ease towards retirement but activity has increased so much I feel compelled to write from quarantine. I was in California at Chinese New Year and got stuck.  

This week the Senate passed by unanimous consent Kennedy’s bill titled Holding Foreign Companies Accountable Act. Kennedy’s bill was one of three bills that had been introduced on the topic. I am unclear why Kennedy’s bill was chosen over Marco Rubio’s Equitable Act, but the Kennedy bill is shorter and had more co-sponsors including Florida’s other senator.  

The bill now has to pass the house and be signed by the President. I don’t think that is certain, given that I expect considerable lobbying pressure to kill it from US institutions that would be adversely affected. 

If the bill is enacted it does two things: 

1) Of minor significance is a requirement for companies to disclose party affiliations including whether a foreign government has control, and whether any board members are CCP members and whether the articles of incorporation contain any language from the party. No penalty is provided for failure to do this. 

2) Companies that are audited by an accounting firm that cannot be inspected by the PCAOB are banned from trading on exchanges and OTC markets after three years.  

There are 224 companies (213 China, 11 Belgium) that appear to be subject to the trading ban.  Total market cap is $1.8 trillion (1/3 BABA).

The ban does not take place until three years after enactment, giving ample time for a negotiated solution or for companies to make plans to move their listings to Hong Kong. I predict that China will compromise and find a way to allow inspections. 

This week the White House also directed the Federal Retirement Thrift Investment Board (which manages the Thrift Savings Planmfor federal employees) to not use the MSCI ACWI ex US index which includes about 4% Chinese stocks. While the Federal Pension fund is the nation’s largest, the direction does not apply to private pension funds.  

The National Legal and Policy Center, an NGO, wrote to Blackstone on May 13 . asking the firm to divest of 137 Chinese stocks in response to corona virus and human rights concerns. I think the greatest risk to Chinese stocks is an NGO campaign similar to that conducted against South Africa’s apartheid policy.

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