Congress clears bill to ban trading in Chinese firms that thwart U.S. auditors

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By Kellie Mejdrich
·5 min read
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The House cleared legislation on Wednesday that threatens to kick Chinese companies off U.S. stock exchanges if they continue to deny U.S. regulators access to their audits, sending the bill to President Donald Trump for his signature.

The vote on the legislation, S. 945 (116), marks one of the few bipartisan moves by Congress to take action against China since the start of the coronavirus pandemic. The bill — which passed the Senate unanimously in May — is also part of a broader crackdown on China's involvement with Wall Street that has been gaining momentum in Congress, within the financial industry, and the White House.

"This may be one of the most important investor protection pieces of legislation this year," said Rep. Brad Sherman (D-Calif.), chair of the subcommittee overseeing capital markets on the House Financial Services Committee, in an interview before the bill was cleared on a voice vote.

Sherman said he was confident Trump would sign the bill, adding that Sen. John Kennedy (R-La.), the sponsor of the legislation in the Senate, "certainly hasn't heard that the president plans to veto the legislation."

The legislation would require foreign companies to provide access to U.S. auditors to inspect their financial reports or else risk being prohibited from trading on any U.S. stock exchange or over-the-counter market. It calls on the Securities and Exchange Commission to produce rules that would prevent trading in stocks of companies that have blocked inspectors for three consecutive years.

Congress also directed that the SEC rules require new disclosures from these companies, including whether they are under government control, have Chinese Communist Party officials on their corporate boards, and have any shares owned by governmental entities.

If Trump signs the bill into law, it would mark a major escalation of a long-standing conflict between the two countries regarding access to U.S. capital markets. China has continually refused to allow American regulators to review the accounting audits as required under the Sarbanes-Oxley Act of 2002, an issue financial regulators have documented in detail.

The White House did not immediately respond to a request for comment about whether the president would sign the bill.

At a press conference earlier Wednesday, Chinese Foreign Ministry spokesperson Hua Chunying spoke against the legislation, saying it shows “the United States applies discriminatory policies to Chinese companies and launches political oppression against them."

“We firmly oppose politicizing securities regulation. We hope the U.S. side can provide a fair, just and non-discriminatory environment for foreign companies to invest and operate in the U.S., instead of trying to set up various barriers,” Hua said.

But Kennedy said it was a matter of protecting U.S. investors, including retirees.

"Communist China is right now using U.S. stock exchanges to exploit American workers and families—people who put their retirement and college savings in public companies," the Louisiana Republican said in a statement. "U.S. policy is letting China flout rules that American companies play by, and it’s dangerous."

He said Congress rejected "a toxic status quo."

American Securities Association CEO Chris Iacovella said Congress’ action was “a major step toward ending China’s fraud on America’s capital markets.” He commended lawmakers for “coming together to protect American investors and retirement savers from fraudulent companies controlled by the Chinese Communist Party.”

Congress strengthened federal accounting audit laws, including through the inspections at issue in this bill, after a number of notable scandals where Enron, WorldCom and other public companies entered fraudulent balance sheet entries to deceive investors.

But as Chinese equities have poured into U.S. stock exchanges in recent years, the problem has raised alarms among lawmakers, investor advocates, and Trump himself.

A congressional commission said the market capitalization of Chinese public companies on the top three exchanges had roughly doubled from September 2019 to October 2020.

The U.S.-China Economic and Security Review Commission, which Congress established in 2000 to study the national security implications of the bilateral economic relationship, said that as of September 2019, 172 Chinese firms were listed on major U.S. exchanges, with a total market capitalization of more than $1 trillion. By October 2020, that had grown to 217 companies with a total market cap of $2.2 trillion, the commission said.

Concerns escalated further this year after an accounting scandal led to the delisting of Xiamen-based Luckin Coffee from the Nasdaq stock exchange. The company was touted as a Chinese rival to Starbucks and went public on the U.S. exchange in May 2019. But its shares plummeted in April after an internal investigation uncovered $310 million in fabricated transactions.

There were signs of bipartisan support in the House for Kennedy's bill: The day the Senate bill passed, Sherman announced he would introduce identical companion legislation, H.R. 7000 (116).

Nasdaq also proposed more stringent listing standards this summer for countries that restrict access to regulators, including in China.

Passage of the bill also follows the release of a White House report in August where SEC Chair Jay Clayton and other top regulators endorsed new rules to delist Chinese companies that don't allow the U.S. accounting watchdog access to documents used by their auditor.

"I urge the president to sign this bill into law immediately,” said Sen. Chris Van Hollen (D-Md.), an original co-sponsor of the measure.

"Millions of American families rely on modest investments to retire, send their kids to college, and weather financial emergencies," Van Hollen said in a statement. "But many have been cheated out of their money after investing in seemingly-legitimate Chinese companies that are not held to the same standards as other publicly listed companies."

In a Fox interview in May, Trump said he was looking "very strongly" at forcing the Chinese to comply with American accounting rules. But he also underscored the ambivalence that many American officials feel about confronting China: He suggested he doesn’t want to threaten to delist Chinese companies if it spurs them to flee to a competing foreign stock exchange.

"Let’s say you want to get tough,” Trump said, and federal officials demanded compliance with U.S. audit inspections as a condition for listing. “What do they do? They say, ‘OK, well, we’ll move to London or we’ll go to Hong Kong."