Donald Trump is ready with a massive 2 trillion US dollars blow for China, which could spell disaster for leading Chinese corporates. The US legislature recently passed the Holding Foreign Companies Accountable Act with bipartisan support. Now, the US President is expected to sign this legislation. Once signed, the legislation will become a major weapon in Trump’s hands and he can go on to get Chinese companies delisted from American stock exchanges.
Washington is trying to exploit a key deficiency in Chinese companies listed on American stock exchanges. The Securities and Exchange Commission (SEC) requires all listed companies to be registered with the Public Company Accounting Oversight Board or the PCAOB, which has to verify the accuracy of company audits. But China doesn’t play by the rules. More than 200 Chinese companies on American stock exchanges account for $2 trillion haven’t adhered to this requirement.
Beijing doesn’t allow PCAOB to examine the audit-books of listed Chinese companies. The paper dragon claims that the audit-books are national secrets and cannot be shared with other parties.
Now, the Holding Foreign Companies Accountable Act requires companies to certify that they are not under the control of a foreign government. More importantly, if the Public Company Accounting Oversight Board (PCAOB), an American watchdog, isn’t able to audit the accounts of a firm for three consecutive years, the company would stand de-listed from the American stock exchanges.
The provisions of the latest Act, of course, target Chinese companies which aren’t able to get their accounts audited by PCAOB, owing to Beijing’s stubbornness.
What triggered the American lawmakers to bring the latest legislation was a number of infamous incidents involving fraudulent activities on part of Chinese companies like Luckin Coffee, a Chinese company and rip-off of Starbucks that inflated the details of its sales to perform better when its US IPO was released.
The growing sentiment within the United States was that such infamous incidents involving Chinese companies, and the general lack of transparency associated with Chinese companies hurts the American investors.
Once Trump signs the Holding Foreign Companies Accountable Act, he will be able to unleash a complete exodus of Chinese companies from American stock exchanges including some big names like Alibaba and Baidu. The latest American weapons is going to hurt China in more ways than one.
Firstly, the Chinese Communist Party won’t be able to raise new companies and get them to dupe American investors.
Secondly, established American companies which have raised huge amounts of capital from American stock markets for decades will suddenly find themselves blocked. There may be alternates like the Hong Kong or Shanghai Stock Exchange but let’s face it- no stock market can match the capability of American exchanges when it comes to raising capital.
Chinese President Xi Jinping now has to options- either he can let Trump compel the delisting of hundreds of Chinese companies listed on American exchanges, or he can give up the fight and look for a compromise. The only option for Xi to save corporate Chinese giants from getting delisted in the US is to agree on letting the PCAOB examine the audit-books of listed Chinese companies.
If Xi Jinping doesn’t bend in face of the latest American legislation, he will have to see Chinese companies get cramped for capital. Otherwise, he will have to let Trump prevail over himself.