In threatening to delist Chinese companies that don’t adhere to U.S. accounting rules, the U.S. may have shot itself in the foot. I am referring to the Holding Foreign Companies Accountable Act (HFCAA), which the U.S. House of Representatives passed earlier this month. The bill had already passed the U.S. Senate in May and now heads to President Donald Trump for his expected signature. It requires foreign companies whose stocks are listed on a U.S. exchange to allow the U.S. Public Company Accounting Oversight Board (PCAOB) to oversee the audits of their financial records or face delisting. China has refused to let the PCAOB exercise this oversight function.
Yet the truth is that many of the Chinese companies that trade on a U.S. exchange don’t need access to the U.S. capital markets in order to raise money. The NYSE and the NASDAQ are no longer the only games in town, even if some in Congress don’t appreciate that fact.
Consider: In the trading session immediately following the House vote, some of the best-known Chinese stocks did very well. For example, Alibaba Group Holding’s
stock gained 1.4%; Baidu
gained 3.8% while Tencent Holdings
Or take the Chinese companies whose stocks trade on a U.S. exchange that are at least 30% owned by the Chinese government. One might think they would be especially hard hit by the legislation. Yet in the first day of trading after the House vote, these stocks produced an average gain of 0.41%.
The Chinese might very well like nothing more than to deprive the U.S. exchanges of the listings of premier global brands such as Alibaba, Baidu and Tencent. One of China’s oft-stated goals is to make its stock exchanges the pre-eminent ones of the world’s financial system in the way the NYSE has been in past decades.
These are my conclusions after talking to Andrew Karolyi, a professor of management at Cornell University’s SC Johnson College of Business. He is one of academia’s leading experts on foreign companies’ listings on U.S. exchanges. In an interview, he told me that the HFCAA is a “very blunt instrument for achieving a very narrowly-defined goal.”
That goal is one that few can disagree with: insuring that foreign companies whose stocks are listed on a U.S. exchange meet certain minimum accounting standards. But Karolyi says this goal is more likely to be achieved through “quiet and agile diplomacy” between the U.S. Securities and Exchange Commission and the Chinese Securities Regulatory Commission (CSRC).
To be sure, the PCAOB has been engaged (in one form or another) in such diplomatic efforts for almost two decades, ever since the Sarbanes-Oxley Act created the agency, and an agreement has remained elusive. It’s possible that’s because China doesn’t want to reach an agreement, for the reasons mentioned above.
But hope remains eternal in some circles that China would still like to preserve the U.S. listing of many of its companies, and if so, some sort of agreement is possible. The HFCAA might even facilitate such an agreement by imposing the threat of mass delisting if one is not achieved. There currently are more than 300 Chinese companies with ADRs, according to the BNYMellon ADR Directory.
In the meantime, U.S. investors face the prospect that it will become more difficult to invest in these several hundred Chinese companies whose stocks have been delisted. To be sure, it won’t be impossible, since you will still be able buy their ordinary shares on a Chinese exchange. But investing them will at a minimum involve increased transaction costs.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at firstname.lastname@example.org