Rubio proposes to delist Chinese companies | China Accounting Blog | Paul Gillis

Rubio proposes to delist Chinese companies

Senator Marco Rubio has introduced the Equitable Act—an acronym for Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges. The act would serve to resolve the longstanding conflict over the inability of the Public Company Oversight Board to examine the work of Chinese auditors that report on the financial statements of US listed Chinese companies. 

There are presently over 156 Chinese companies traded on US exchanges with a market capitalization of over $1.2 trillion, including widely held Alibaba Group Holdings (NYSE: BABA).

The PCAOB has long been blocked by China from inspecting Chinese accounting firms (including the Chinese member firms of the Big Four).  China argues that allowing the US to enforce US laws on Chinese soil against Chinese persons violates its national sovereignty and risks disclosure of state secrets. US investors suffer because fraud prone Chinese companies are not subject to the same regulatory oversight as other companies that trade on US exchanges.  

The Rubio proposal is modelled after an earlier proposal by Representative Mike Conaway of Texas who introduced legislation late in the last session of Congress that effectively expired with the new Congress in January.  

The proposal effectively says that Chinese companies will be kicked off US exchanges in three years if a breakthrough in PCAOB inspections does not take place. At this stage, I would call it an even bet as to whether China negotiates a settlement. I don’t think this is a critical issue for China, and I think China could craft a deal, but I can’t see what the US would offer in exchange. 

I think this legislation has a good chance of passing, and that will start the three-year countdown for negotiations or for the companies to find another listing home. I expect most of them will move their listings to Hong Kong. Mainland exchanges are not ready for most of these companies. There will likely be some regulatory changes required in Hong Kong to make this happen. Most of the companies have weighted voting rights, and Hong Kong now allows for IPOs of unicorns with weighted voting rights, but most of these companies would likely need special accommodation.  

If the move to Hong Kong is not seamless, there may be trading opportunities present. Many mutual funds are not permitted to hold illiquid securities, and it is possible that there will be a period of time while the listings move where the stock cannot be traded. Prices may temporarily suffer until the listing is restored in Hong Kong.  

Hong Kong could speed the relocation process by allowing the companies to use SEC documents and US GAAP financial statements for the initial listings. Hong Kong generally requires companies to prepare financial statements under Hong Kong Financial Reporting Standards, which are equivalent to IFRS.  The Rubio proposal is a full employment act for accountants and lawyers.  

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