Opinion: Chinese companies listed on US exchanges must finally open their books

New: SEC’s Gensler warns Chinese deal is just ‘first step’ to avoid stock delisting

Avoid US scrutiny

It is a long-standing policy for any publicly traded company in the United States to disclose its financial statements to the US Public Accounting Oversight Board (PCAOB). This allows investors to make informed decisions and avoid investing in unscrupulous or fraudulent entities. But thanks to a 2013 agreement, Chinese companies were able to avoid PCAOB rules and continue to raise funds on US exchanges. This means that Chinese companies have simply circumvented transparency and investor protection measures.

Congress attempted to address this issue through the Foreign Corporations Accountability Act (HFCAA) of 2020. The law required all Chinese companies to comply with PCAOB transparency rules within three years.

This became a problem on Wall Street recently when five of China’s largest state-controlled companies, including PetroChina 601857,
-0.18%

RPT,
-3.58%,
China Petroleum and Chemicals SNP,
-1.80%

600028,
+0.70%,
and Aluminum Corp. from China ACH,
-3.46%

601600,
-1.70%
—announcement that they would voluntarily withdraw from the New York Stock Exchange (NYSE).

The companies said they would not be able to meet “disclosure requirements” imposed by the HFCAA – a financial oversight that PetroChina described as a “significant administrative burden”.

In reality, Beijing has not wanted its companies to comply with such transparency requirements. In fact, Beijing has long banned investors from viewing the full financial statements of Chinese companies and strictly prohibits foreign regulators from inspecting audits performed by Chinese accounting firms.

Beijing claims this is done under the guise of “national security”. But the truth is that the Chinese Communist Party (CCP) simply does not want the world to scrutinize the finances of its state-owned companies and their links to Beijing’s political and military agendas.

Quiet Wall Street

That didn’t trouble Wall Street, however. Investment firms have repeatedly turned a blind eye to these risks.

Notably, Wall Street helped PetroChina raise more than $9 billion in November 2007, when Beijing sought to attract global investment. Simply Wall Street Firms sold U.S. investors on big returns from China, thanks to “near-infinite funding from the Chinese government.” And since PetroChina’s IPO, hundreds of other Chinese companies have also raised billions of dollars in US and global markets.

To make the new agreement between Washington and Beijing viable, US regulators will have to meet significant challenges of opacity. The CCP still requires Chinese companies to be listed on foreign stock exchanges only under a “Variable Interest Entity” (VIE). This is because Beijing does not allow foreign ownership or control of Chinese companies. The VIE structure is simply a clever mix of paperwork that allows US investors to buy shares in a company but prevents them from obtaining actual ownership or voting rights in the real Chinese company.

According According to the US-China Economic and Security Review Commission, 261 Chinese companies are currently listed on US stock exchanges, with a total market capitalization of $1.3 trillion. Beijing has worked repeatedly to prevent US investors from examining the books of any of these public companies. The question now is whether the implementation of the HFCAA – and the new agreement with Beijing – will provide extensive monitoring.

If China fails to comply with US law, its state-owned companies could be pulled from US markets. This would benefit US investors and also help protect the integrity of US financial markets. Now Washington needs to make sure the HFCAA is strictly enforced and that Chinese companies finally fully open their books to US regulators.

Aaron Ringel, former assistant secretary of state for global public affairs, is vice president of international policy and advocacy at the Coalition for a Prosperous America, a bipartisan advocacy organization representing farmers, ranchers, manufacturers, and labor organizations that make and grow things in the United States.

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