Is This the Regulatory Game-Changer the Market’s Been Waiting For?
You probably don’t need reminding that China is an economic powerhouse. Not only is it the world’s second-largest economy, but virtually everything including the kitchen sink is made there. Perhaps that’s why hundreds of Chinese companies are listed on U.S. markets.
Chinese stocks are often considered the top performers at any given time, across all different types of sectors.
But there’s one slight caveat…
Even though a ton of Chinese businesses are listed on U.S. stock exchanges, Beijing goes out of its way to make sure American investors don’t get an exact overview of each company’s financial standing. Chinese law requires accounting information to remain in China, which restricts access.
In other words, their audit reports aren’t always reviewed by U.S. regulators.
We’re often told not to believe everything we read on the internet without digging a little bit deeper ourselves. So, why shouldn’t people have access to reports from Chinese companies with overseas listings?
This is a real question regulators have been asking, especially since the Chinese government told Didi Global Inc. (DIDI), the Chinese version of Uber, to stop registering new drivers and users just days after it made history in 2021 as the biggest IPO of a Chinese company in seven years.
In fact, the U.S. Securities and Exchange Commission has been calling out specific Chinese companies listed on U.S. markets for failing to comply with the Holding Foreign Companies Accountable Act set in 2020.
It’s a law that requires publicly traded companies to prove they’re not controlled or owned by the Chinese government. The act also gives the SEC the power to delist Chinese companies from U.S. exchanges if American regulators can’t see the company’s financial reports for three consecutive years.
Delisting means a Chinese company traded on an exchange like the Nasdaq or NYSE would lose access to a wide collection of buyers and sellers. This also includes its institutional sponsorship.
So now, peace is threatening to erupt…
The China Securities Regulatory Commission said last Thursday that it’s preparing to give U.S. regulators full access to the books of 200-plus companies with ADR listings as soon as this year. This framework would allow most Chinese businesses to keep their listings and liquidity.
Then on Friday, the commission said in a statement to CNBC that it held a meeting earlier in the week with some accounting firms to talk about and prepare for joint inspections.
This is great news for many Chinese companies that have been exposed to growth challenges thanks to potential delisting fears… And could ultimately put this problematic issue to rest, where traders can start to focus solely on these companies’ gains.
Still, this could be the regulatory game-changer the market and investors have been waiting for.
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