It’s too late for the US to get rid of Chinese stocks – By Jane Li & John Detrixhe (Quartz) / May 21 2020
Ringing the ceremonial bell on an American stock exchange is a career highlight for many Chinese entrepreneurs. But those stocks haven’t always panned out for US investors, and fewer of them may be listed on America’s iconic markets in the future.
Chinese companies are under increasing scrutiny from US politicians as well as regulators. US president Donald Trump said he’s debating whether to tighten restrictions on these firms as a way to punish Beijing for its handling of the Covid-19 pandemic, and the White House is also pushing the Thrift Savings Plan, which covers the retirement savings of around 5 million American civil servants, to avoid investing in Chinese companies. Last month the chairman of the SEC warned that disclosures in emerging markets, including China, are more likely to be “incomplete or misleading.”
While the White House and the SEC may have different objectives, they’re right to be worried about these securities. At the core of their concerns are incomplete financial disclosures by some Chinese enterprises. For years, American regulators haven’t been able to inspect Chinese firms’ accounting audits, which is in accordance with directives from Beijing.
Unlike at US companies, Chinese executives are able to avoid having their audits reviewed by the Public Company Accounting Oversight Board (PCAOB), the nonprofit created in the US in 2002 after the accounting scandals of WorldCom and Enron. The US Senate passed a bill this week that would prohibit companies from listing on US exchanges if they’ve failed to comply with PCAOB audits for three years in a row, and would also require them to disclose whether they are owned or controlled by a foreign government.
“The utility of an auditor’s report depends upon the veracity of the underlying data, which is precisely the source of the current dispute,” said Brock Silvers, the chief investment officer at Adamas Asset Management, which focuses on investing in growth companies in Asia. “The PCAOB demands access to underlying audit data of Chinese companies as per US law, while Chinese regulators forbid the sharing of such data as per Chinese law. The US regulators have been partially enabling such fraud by allowing Chinese firms to adhere to their own local laws.”
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