The Chinese government is scrambling to keep Chinese companies from being blacklisted from the US stock market – and it’s changing its laws to do so.
As of April 2nd, the Chinese Securities Regulatory Commission published a draft rule meant to replace a law ratified a decade ago that prevents Chinese businesses from sharing financial information and other sensitive data with foreign regulators. Specifically, the Commission removed the stipulation that Chinese regulatory agencies may only examine any financial documents from Chinese companies listed abroad in the new draft. Therefore, cross-border regulatory cooperation will now be possible under the new rule, with the Chinese regulator offering its assistance throughout the process.
This revision to a long-standing law is seen as Beijing’s response to the US’ 2020 Holding Foreign Companies Accountable Act. This law gives that country’s Securities and Exchange Commission (SEC) the authority to delist foreign companies from the New York Stock Exchange and NASDAQ if they refuse to let American regulatory bodies review their financial statements for three consecutive years.
Indeed, the said Act was a retaliatory move by the US following its frustration at how its regulators were barred from auditing the financial records of Chinese companies operating within its jurisdiction. At the time, Beijing used national securities issues as an excuse to prevent such inspections, ordering companies trading overseas to do their audits in Mainland China, away from the scrutiny of foreign regulators.
According to Ken Cheung Kin Tain, chief strategist for Asian foreign exchange at Mizuho Bank, Beijing’s revision of the law may be construed as a long-term solution that will break the stalemate regarding the auditing requirement issue between China and the United States and prevent the delisting of Chinese companies from foreign stock exchanges in the future.
A Timely Decision
Beijing’s decision is a timely one. In March of this year, the SEC threatened to delist several Chinese companies for failing to comply with its auditing requirements, including AI developer Baidu and fast-food restaurant giant YumChina. This led to a massive sell-off of Chinese equities and a 25% drop in the value of the Nasdaq Golden Dragon China Index within the span of four trading sessions.
Markets worldwide welcomed the amendment, causing a rally in Chinese tech stocks. Baidu was up 7.8%. Its US-traded stock was up by 6%. Video-sharing company Bilibili was up by 13%, JD.com and Alibaba were up 3.7%.