White House Seeks Crackdown on U.S.-Listed Chinese Firms

The Trump administration plan would require rule-making by the Securities and Exchange Commission, which ultimately oversees the auditing standards of companies whose shares are traded in the U.S.

Photo: Andrew Harnik/Associated Press

WASHINGTON—Chinese companies with shares traded on U.S. stock exchanges would be forced to give up their listings unless they comply with U.S. audit requirements under a plan recommended Thursday by the Trump administration.

The proposal addresses a long-simmering dispute over U.S. regulators’ inability to inspect the financial audits of Chinese companies that sell shares in U.S. markets. It follows bipartisan legislation that passed the Senate in May, which would give Chinese companies that don’t comply three years to delist in the U.S. and find a new exchange.

Under the plan, Chinese firms that are already listed on the New York Stock Exchange and Nasdaq Stock Market would have to comply by 2022—or give up their listings on those exchanges.

To comply, Chinese auditors would have to share their work papers with the Public Company Accounting Oversight Board, a specialized audit regulator overseen by the U.S. government.

Chinese firms that aren’t yet public—but which plan to do an initial public offering in the U.S.—would have to comply before they can go public on NYSE or Nasdaq, and wouldn’t get until 2022 to follow the rules, according to senior Treasury Department and Securities and Exchange Commission officials.

The move came as part of a recommendation by the President’s Working Group on Financial Markets intended to protect American investors from what the administration has described as risks posed by Chinese companies.

“The recommendations outlined in the report will increase investor protection and level the playing field for all companies listed on U.S. exchanges,” Treasury Secretary Steven Mnuchin, who heads the group, said.

A spokesperson for the Chinese embassy in Washington didn’t respond to a request seeking comment.

It is the latest step in the administration’s policy of getting tough with China, which started with the imposition of tariffs early in President Trump’s term. In a separate action Thursday, the administration reimposed tariffs on some imports of Canadian aluminum.

The administration has stepped up actions against China recently, seeing them as popular with voters as the 2020 election approaches. The measures include sanctions over Beijing’s new national security law in Hong Kong and its treatment of Uighurs in Xinjiang province, as well as regular criticism by Mr. Trump and his top aides of China’s handling of the coronavirus pandemic.

The stock proposal follows a number of steps by the administration to put pressure on Beijing. Last week, regulators told the Chinese owner of TikTok, a popular video app, that its ownership poses a national-security threat, exacerbating the tense relationship between the world’s two largest economies.

U.S. officials said they are concerned that TikTok, owned by Beijing-based ByteDance Ltd., could pass to China’s authoritarian government any data it collects from U.S. citizens’ streaming videos. TikTok has said it would never do so. TikTok is in talks to sell its U.S. operations to Microsoft Corp. Executives are trying to complete negotiations by Sept. 15.

The U.S. ordered China last month to shut its consulate in Houston, with officials accusing it and other Chinese diplomatic missions of economic espionage and visa fraud. China retaliated by ordering the closure of the U.S. consulate in Chengdu.

The plan announced Thursday is similar to legislation that passed the Senate in May and was sponsored by Sens. John Kennedy (R., La.) and Chris Van Hollen (D., Md.). Similar legislation has passed the House as an amendment to a defense-spending bill, said Rep. Brad Sherman (D., Calif.), who added in an interview on Thursday: “This is not an anti-China provision. This is an investor-protection provision.”

The administration’s plan would require rule-making by the SEC, which ultimately oversees the audits of companies whose shares are traded in the U.S.

The Senate bill, which was passed unanimously, addresses investor-protection concerns that have lingered for years but which gained political traction as tension between the U.S. and China grew. Chinese companies such as Alibaba Group Holding Ltd. and Baidu Inc. have together raised tens of billions of dollars by tapping into U.S. capital markets.

Some significant accounting frauds involving Chinese companies have exposed the gap in U.S. audit oversight. Luckin Coffee Inc., an upstart rival to Starbucks Corp. in China, is the latest example. Luckin said employees fabricated more than $300 million in sales, only 11 months after its initial public offering on Nasdaq. The firm has since been delisted. It later fired its chief executive officer and chief operating officer, and Chinese regulators are preparing to take punitive action against the once-hot startup.

It isn’t clear how the Chinese companies and auditors would be able to comply with the U.S. demand.

China has implemented a law that prevents its citizens and companies from complying with overseas securities regulators without the permission of its own market supervisor and various components of the Chinese government.

One way around that hurdle, under the Trump administration’s plan, would effectively involve a Chinese company getting a second audit from an accounting firm whose records can be inspected by the accounting oversight board.

Under such an approach, a U.S. accounting firm could conduct a “co-audit” of a Chinese company’s financial statements alongside the audit performed by its Chinese affiliate. The board would theoretically have access to the work papers of the U.S. accounting firm, which would assume liability for any shoddy or inadequate work, officials said.

Co-audits have been performed in other countries, senior SEC officials said.

A NYSE spokesman said the exchange’s listing standards “have long represented the industry’s gold standard because they balance investor protections with providing the broadest possible range of public-market investments and any new regulations should aim to maintain that balance.”

A spokesman for Nasdaq declined comment.

The accounting board and the SEC have long tried to negotiate with China for access to audit records.

Those efforts have largely failed, while the SEC was historically unwilling to kick the companies off the NYSE or Nasdaq markets.

Write to Dave Michaels at [email protected]

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