US Reminds China It Is Still Taking Care Of Business

JUST BEFORE FORMER US President Donald Trump left office, he signed into law the Holding Foreign Companies Accountable Act (HFCAA), which allows the delisting of any foreign — for which read Chinese — company publicly traded in the United States that does not let US regulators inspect its finances to the same extent required of US companies.

US-listed Chinese companies must disclose their non-US operations’ audits, which Chinese regulations prohibit auditors from sharing.

The law also targets alleged Chinese government control of such companies and was part of Trump’s broader strategy to limit Chinese companies’ access to US capital and technology.

On March 8, HFCAA was used for the first time. The US Securities and Exchange Commission provisionally listed five Chinese companies that it said were not in compliance — biotech firms BeiGene and Zai Lab, Yum China, which runs KFC and Pizza Hut fast food outlets, ACM Research, a semiconductor process equipment manufacturer, and pharma firm HutchMed China.

As the accounting scandal involving Luckin Coffee in 2020 showed, there are legitimate investor reasons for HFCAA, and its wheels turn exceedingly slowly. Delisting will not necessarily follow. The firms have opportunities to come into compliance. Even if they do not, 2024 is the earliest delisting would occur.

So the timing may be coincidental, but this Bystander doubts it.

Concern about Russia using China to end-run Western sanctions over Ukraine is growing within the Biden administration. The SEC’s announcement follows warnings by US Commerce Secretary Gina Raimondo that the US could ‘essentially shut down’ any Chinese companies that defy US sanctions by continuing to supply chips and other advanced technology to Russia.

Semiconductor Manufacturing International Corp, a chipmaker Raimondo mentioned, could become a new Huawei.

Delisting the five companies named would not necessarily impact US efforts to isolate Russia technologically. and certainly not in time to disrupt wartime supply lines.

However, the threat adds to the signals to China and its companies to tread carefully when it comes to US sanctions (and Chinese firms will be careful not to put their exports to the US and EU at risk by overtly violating them), or exploiting the situation created by the war in Ukraine.

This week, Bloomberg reported that some of China’s state-owned energy and commodities giants, including China National Petroleum Corp, China Petrochemical Corp, Aluminum Corp of China and China Minmetals Corp, are considering the opportunities for investment in Russian counterparts such as Gazprom and Rusal.

As well as providing economic support to a strategic partner, any deals would bolster Beijing’s efforts to improve its energy and food security. China is already the leading market for Russia’s exports, taking 13.5% of the total. That will only grow as Western sanctions that China has no intention of honouring bite on Russia.

Trade deals announced shortly before the invasion of Ukraine when Russian President Vladimir Putin was in China for the Beijing Winter Olympics last month now seem even more like a prelude to the future.

That future will be about trade deals in which Russian commodities fulfil China’s needs for energy and food, and China meets Russia’s needs for technology and advanced manufactures containing it like aircraft.

Update: Reuters news agency reports that discussions between Washington and Beijing on resolving the audit issue are progressing ‘relatively smoothly‘, although it sounds as if there is still a fair way to go to bridge the gap between the two sides.

Footnote: Around 250 Chinese companies listed on US exchanges could fall foul of HFCAA, according to another little-known Trump-era agency, the US-China Economic and Security Review Commission, which advises on the US national security implications of China’s bilateral economic activities. A steady addition of small batches to the SEC’s provisional list would accelerate the relocation of listings from the United States to Hong Kong.

Delisting US-Listed Chinese Equities Advances Glacially

THE UNITED STATES is formally proceeding with Trump-era plans to restrict Chinese companies access to US capital by delisting them from US stock exchanges. 

Under the Holding Foreign Companies Accountable Ac that became law in mid-December, the penultimate month of the Trump presidency, the SEC had 90 days to outline a process by which it will request certain US-listed companies to submit documentation to establish that they are not owned or controlled by a foreign government — by which the Trump administration meant China. Foreign firms will also be delisted from US exchanges if they fail to comply with US accounting standards. 

The US Securities and Exchange Commission (SEC) announced on March 24 that it had adopted measures to comply with the legally required 90-day deadline. 

Delistings now look inevitable in a one day, someday, maybe never sort of way. The procedures that have to be followed for US government agency rule-making gives the SEC the latitude to spin-out the process, should it so choose, a choice that the prevailing winds from the White House would drive. 

Many US-quoted Chinese companies could also spin-out any investigation into their ultimate ownership, plus they have to fail to meet the US audit requirement for three successive years. Nonetheless, they would have trouble complying with US audit requirements without violating Chinese laws. It is anyway improbable that they would prove willing to throw open their books to a foreign regulator.

It is possible that even after delisting, Chinese companies’ shares could trade in over-the-counter markets in the United States — unless the Biden administration or, more likely, its successor, decides to implement another Trump initiative to ban US investors from owning Chinese equities.

A bigger headache for Chinese tech firms at the moment is Beijing’s crackdown on the largest of their number, including Alibaba and Tencent, purportedly in the name of antitrust but more likely to rein in the growing power of a sector mostly privately, not state-owned but which authorities need to be aligned with state management of both the economy and cyberspace.