You’re kidding me, right?
Nope. And unless foreign companies are compliant with the Sarbanes Oxley Act (SOX), they might even be kicked out.
That’s around 200 Chinese firms, including names every China investor knows: Alibaba
The Holding Foreign Companies Accountable Act could potentially lead to Chinese companies delisting from the NYSE and Nasdaq
The legislation does not target a specific nationality, but Chinese companies will find it difficult to comply with its requirements because — if one goes by the idea that no company is truly a private one in China — then state’s secrets come into play for everyone. This may be able to be avoid at the major Chinese tech firms that want to remain listed here, but it won’t work for the truly state owned enterprises like Petrochina
The Act, if approved by Trump, could lead to the wipe out of some $1 trillion in Chinese capital from American exchanges.
The broad-based legislation requires companies listed here demonstrate that ‘they are not owned or controlled by a foreign government’.
Perhaps more importantly, if the Public Company Accounting Oversight Board (PCAOB) is unable to inspect an issuer’s accounting firm for three consecutive years, the issuer’s stock will be delisted.
For example, Petrobras (PBR) is SOX compliant. It is a state owned enterprise. It’s Brazilian. Is Petrochina (PTR) SOX compliant? If China declares states rights on its SOEs, then the answer should be no on PTR.
Aberdeen Standard Investment’s Head of Corporate Governance for Asian Equities, David Smith, has been watching this closely. He is mainly concerned that small shareholders will not be in tune with what is going on and will watch their share value evaporate.
Sarbanes-Oxley is a complex financial law. It includes issues that are within the control of the publicly traded companies, as well as issues that are more broadly focused. If you take Alibaba, for example, their 20F (here) includes Exhibits 12.1 – 13.2 which are the attestations required by executive officers on s302 and s906 (both related to financial reports). The company’s auditor has also attested to management’s assessment of internal controls under s404b, a key focus of SOX.
However, Section 106 of SOX requires foreign public accounting firms to provide such workpapers to the Securities and Exchange Commission and/or the PCAOB upon request. It is this issue that has been the focus of attention for many years with China. This is generally outside of the control of the issuers.
Chinese companies are faced with an impossible choice between complying with the U.S. government’s securities regulations and its home country’s rules regarding state’s rights to secret financial information.
“Many if not all of the firms that delist will re-list in either Mainland China or Hong Kong,” says Smith.
The U.S. and China have been discussing audit issues for a number of years, and the PCOAB has voiced concerns over its difficulty inspecting the onshore audit work of accounting firms in China. Chinese law requires company books and records of transactions in China to be kept locally. China has invoked its state security law in the past to restrict records of audit work from being transferred overseas.
The PCOAB has been complaining about China for years and any moves to remedy the situation has been slow. Now Congress is getting in on the act and the SEC is being pressured to think twice about the double standards here. Most of the companies not complying with SOX are Chinese.
Chinese companies also have very little influence over their ability to facilitate these audits, so at a time when their country is seen as the bad guy, they may feel they are being treated unfairly. Not wanting to deal with the drama, there is a risk that companies will delist.
Alibaba listed in Hong Kong last November. It is still listed here.
In the latest wave of anti-China moves, more restrictions were placed on Huawei and there was an arrest of a retired CIA officer named Alexander Yuk Ching Ma accused of working for China through third parties with whom he was sharing information destined for Beijing.
“This process should ebb and gain in intensity as we head into the election with a final flurry a day before the elections,” thinks Sebastien Galy, a macro strategist for Nordea Asset Management.
The bi-annual meeting to discuss the Phase 1 trade deal was cancelled last weekend. And many are speculating that President Trump will leave the agreement.
“Traders are keeping a close eye on the situation. U.S.-China tensions are mounting and this means uncertainty in global markets,” says Naeem Aslam, chief market strategist for AvaTrade.
As China and the U.S. bicker, Chinese companies that wanted to cash in on the U.S. investor are worried they may lose out on that market and have to head home. American companies looking to cash in on China’s market may one day list their shares in Shanghai or Shenzhen.
“It is possible,” says Smith from Aberdeen. “We may see multinationals list certain subsidiaries on mainland China exchanges, (especially) companies with a strong nexus of operations in China, or with strong brand recognition in China. We’re probably not close to seeing it just yet, but I think it is certainly plausible what we may see it one day.”