“Exploitative” Chinese companies face new battle to list in US

Chinese companies looking to list on US exchanges are set to face tougher scrutiny, thanks to moves to protect investors by Senators and a homegrown accounting scandal.

On Wednesday (May 20), the US Senate passed the Holding Foreign Companies Accountable Act by unanimous consent. The act sets out new rules aimed at cleaning up accounting practices its sponsors said were hurting investors.

"For too long, Chinese companies have disregarded US reporting standards, misleading our investors," said Senator Chris Van Hollen, who co-led the bill. "Publicly listed companies should all be held to the same standards, and this bill makes commonsense changes to level the playing field and give investors the transparency they need to make informed decisions."

The act prohibits securities of a company from being listed on any US exchange if it has failed to comply with the Public Company Accounting Oversight Board’s (PCAOB) audits for three years in a row.

The bill also requires public companies to disclose whether they are owned or controlled by a foreign government -- with a note announcing the bill citing China's communist government specifically.

"It’s asinine that we’re giving Chinese companies the opportunity to exploit hardworking Americans—people who put their retirement and college savings in our exchanges—because we don’t insist on examining their books," said Senator John Kennedy. "There are plenty of markets all over the world open to cheaters, but America can’t afford to be one of them."

The act -- which will now be heard by Congress -- was passed shortly after an accounting scandal involving China-based coffee chain Luckin pushed Nasdaq to review its rules allowing foreign companies to list, in order to protect investors and improve transparency.

According to sources at the US exchange, cited by Reuters, concerns emerged about a lack of accounting transparency by some Chinese companies looking to IPO, along with their close ties to powerful insiders.

Already last year, the exchange moved to curb the number of smaller Chinese companies it accepted, citing thin trading and poor liquidity. But, at the time, Nasdaq explained that these qualities were unattractive to institutional investors, one of the key groups in its client base.

These latest moves come as relations between the world’s two largest economies have soured again, this time over their actions around Covid-19. However, Nasdaq’s action on its IPO rules at least appear to be separate from these tensions.

Over the past 20 years, the trading venue’s drive to attract Chinese companies to list in the US has been successful. According to data from the US-China Economic and Security Review Commission, there were 156 Chinese companies listed on US exchanges with a total market capitalization of $1.2trn (as @ Feb 19).

Luckin Coffee, whose financial backers include some large, global institutional investors, according to the South China Morning Post, faces being delisted from the index following a $300m accounting scandal.

The company announced on 19 May that Nasdaq had started the delisting process, just a year after it first went public in the US. Nasdaq’s listing qualifications staff cited “public interest concerns” related to the fraud as well as Luckin Coffee’s previous failure to disclose “material information”. Luckin, however, has challenged the move and replaced many of its senior staff in an effort to maintain its US listing.

US regulators scrutinise overseas listings after Luckin Coffee scandal