Courtesy of Ji Haixin/VCG via Getty Images
In mid-March it was reported that US and Chinese regulators are approaching a cooperation plan for Chinese companies listed on US stock exchanges. The New York Stock Exchange and Nasdaq had threatened Chinese companies with debarment if the Chinese government did not change their audit access rules.
Now, the news is mixed on that front. Apparently the China Securities Regulatory Commission (CSRC) Published draft guidelines that would allow US auditors to review Chinese companies listed in the US. These rules require foreign-listed companies and relevant securities service providers to disclose previously confidential documents in foreign offerings and listings.
However, the United States Securities and Exchange Commission (SEC) added 12 Chinese companies on their delisting watchlist this week. These include Microvast, China Automotive Systems, Daqo New Energy Corp., Connect BiopharmaOneConnect Financial Technology Co., Green Vision Biotechnology Corp., Legend Biotech, Soahu.com Limited, Studio City International Holdings Limited, Melco Resorts & Entertainment Limited, Logiq and Noah Holdings. The SEC says companies will need to publish evidence by May 3 to stay listed.
It is the fourth group of China Concepts Stock companies to appear on the “pre-delisting list” since early March. If they don’t prove their eligibility, they will be moved to the “determined debarment list,” which requires them to submit the correct documents to the SEC within three years. If this does not happen, they will be immediately delisted after the publication of their 2023 annual reports in early 2024.
In March, five companies, BeiGeneYum China, Zai Laboratory, ACM Research (Shanghai) and Hutchmed, have been placed on the “pre-withdrawal list”. By March 29, all had been moved to the “determined delisting”
However, it was announcement on April 11, BeiGene had changed the auditors for its New York listing from a Chinese company to a US company to comply with US law. This will likely reduce the likelihood of it being delisted from the Nasdaq.
Looking for Alpha wrote, “The company looks like a pretty safe long-term investment because of its strong drug pipeline, as well as its international team and global focus. It may have listings in Hong Kong and Shanghai, but cancer drug maker BeiGene Ltd. makes it clear that it wants to keep its original listing in the United States, which is currently under threat due to US-China tensions.
Zai Lab also reportedly made a similar gesture. According to a Caixin reportBeiGene warned that the move “may not be adequate” to meet SEC requirements.
The United States has enacted the Sarbanes-Oxley Act of 2002 after the accounting scandal at Enron Corp. The Sarbanes-Oxley Act requires all public companies to have their audits inspected by the US Public Company Accounting Oversight Board. Since then, China has denied access. The Trump administration has made this a particularly notable point in its many economic and political disputes with China. The Biden administration has continued its policies.
Examples include Luckin Coffee Inc., a Chinese chain, which was listed on Nasdaq. After it was reported that the company intentionally falsified a significant portion of its 2019 revenue, it was delisted. Congress, in a bipartisan move, has implemented efforts to force US-listed companies based in China and Hong Kong to allow inspections.
Based on Foreign Company Liability Act (HFCAA), the SEC began publishing its “provisional list” of non-compliant companies. China’s new draft guidelines are a signal that the country is taking the issue seriously, and a senior China Securities Regulatory Commission (CSRC) official has called for the new rule to be implemented quickly.
In addition to access to audits, the HFCAA requires foreign companies to disclose whether they are government controlled. The SEC is also demanding that investors receive more information about shell companies, called “variable interest entities” (VIEs) that Chinese companies create to list shares in New York. Since July 2021, the SEC has refused new listings of stocks from China.