US pushes for delisting of Chinese companies

LONG TERM POLICY:
Even if the outgoing US administration urges new regulations, they would not be implemented until under its successor in 2022

The U.S. Securities and Exchange Commission (SEC) is pursuing a plan that threatens to fire Chinese companies from U.S. stock exchanges, sparking a late clash between Washington and Beijing as U.S. President Donald Trump’s administration ends.

By the end of this year, the SEC intends to propose a regulation that would lead to the delisting of companies for not complying with U.S. audit rules, people familiar with the matter said.

Agency officials have swiftly adopted a rule since August, when the Presidents’ Task Force on Financial Markets, a regulatory board whose members include SEC Chairman Jay Clayton and U.S. Treasury Secretary Steven Mnuchin, urged the regulator to pass new restrictions that could go into effect as early as 2022, said the people who asked not to be named in the private talks.

The SEC decision is unusual as most agencies stop releasing major new policies after a US presidential election, especially when a new party takes power.

In addition, the rule is unlikely to be finalized before the end of Trumps’ tenure on January 20. Clayton, who plans to step down by the end of the year, is also said to have left before any settlement ends. That would leave it up to an SEC chief chosen by President-elect Joe Biden.

However, unlike many policies in this era of heightened partisanship, the crackdown on China appeals to both Republicans and Democrats in the US Congress.

In May, the US Senate approved an unopposed bill that orders the SEC to begin the process of delisting Chinese companies whose audits are not inspected by US regulators.

All of these factors could put pressure on the Democratic successor to the Claytons.

The SEC declined to comment on the plan. The NASDAQ Golden Dragon China index fell 0.9% on Tuesday, compared to 0.5% for the benchmark S&P 500. The indicator, which tracks Chinese companies listed in the US, closed at a low record at the end of last week.

China Securities Regulatory Commission Vice Chairman Fang Xinghai () issued a positive note on resolving the issue at a roundtable earlier this week, saying it was important to ensure that Chinese companies have access to international capital markets.

I think during the Biden administration we should be able to fix this problem because it is not an intractable problem, Fang said at the New Economy Forum. All it takes is goodwill on both sides and goodwill on both sides.

The Chinese action lists have caught Trump’s attention as he steps up his attacks on China over the COVID-19 pandemic and other grievances. Last week, he signed an executive order banning US investments in Chinese companies owned or controlled by the Chinese military.

The SEC’s work on a proposal was reported earlier by the Wall Street Journal.

The report from the task force behind the SEC’s action recommended that exchanges such as the New York Stock Exchange and NASDAQ set improved standards to prevent companies that violate U.S. rules from listing. The report called on the SEC to pass new rules, but said they should not go into effect until January 2022 to avoid market disruption.

US investors’ exposure to Chinese stocks is increasing, according to SEC data.

More than 150 Chinese companies, worth a combined US $ 1.2 trillion, were traded on exchanges in the United States last year.

Further crackdown from the United States could boost Chinese and Hong Kong stock exchanges, and analysts say there is plenty of liquidity in Asia to fund new listings as well.

Some of these Chinese companies are very competitive, have experienced strong growth and have taken advantage of some very exciting themes of the future, said Chetan Seth, equity strategist at Nomura Holdings Inc.

I expect global investors to still be interested in some of these names. Potential write-offs from US stock exchanges are unlikely to have a significant impact on company fundamentals, Seth added.