Government To Delist Hundreds Of Chinese Companies After Big Rule Change

( New rules established by the Securities and Exchange Commission could result in the delisting of many Chinese companies from exchanges in the United States.

The rules, which went into effect on Monday, say that companies that don’t comply with audits for three years in a row will face a trading ban of five years. While 2024 would be the earliest that companies could face a ban, shares of these delisted firms could still be traded in America, in a method known as “over the counter.”

The new rules are directed specifically at Chinese firms that are listed on exchanges in the U.S. but refuse to have their audits verified. The new SEC rules would be in conjunction with compliance from the Holding Foreign Companies Accountable Act.

Since 2002, the Public Accounting Oversight Board has been overseeing audits of public companies. The board has provided independent and external oversight of various audits.

China is saying that firms from their country are definitely in compliance, since the Big Four accounting firms in the U.S. audit them. However, these Chinese firms don’t allow any of the audits to be sent over to the board for review.

Part of the problem here is that a law in China stipulates that any Chinese company must first get permission from the Communist government before they allow regulators with foreign securities to inspect any of their activities.

In addition, Chinese companies have to get permission before they provide any foreign entity with materials that relate to activities they take in capital markets. The Chinese government has traditionally never allowed audits of Chinese companies, though.

In December, Gary Gensler, the chairman of the SEC, said more than 50 foreign countries have cooperated with the PCAOB, the People’s Republic of China and Hong Kong haven’t. The new rules they are instituting will aim to force them to cooperate, or pay a hefty price for continuing to not do so.

This is a huge problem for U.S. regulators that reared its ugly head in recent years. In April of 2020, Chinese coffee company Luckin Coffee ended up firing the CEO after they discovered he fabricated more than $310 million in sales.

When that information was released, trading on the company was halted. The firm ended up losing 83% of its overall value before being delisted and then declaring bankruptcy.

The new SEC laws are trying to address disclosures that regards any foreign jurisdiction that prevents U.S. agencies from doing inspections. The SEC act will require all companies to disclose whether they are controlled or owned by any foreign government entity.

Both state-controlled and state-owned companies are currently listed on all three of the major U.S. exchanges.

This is presenting a huge problem for American government agencies, and they’re finally looking to do something aggressive about it. Whether this is enough to convince the Chinese companies or government to act as the SEC wants is a whole other story.