NEW YORK/SHANGHAI -- A total of 150 mostly China-based companies face possible delisting from the U.S. stock market over auditing rules, and American lawmakers want the deadline to come as soon as next year.
As of Friday, the list maintained by the U.S. Securities and Exchange Commission covered roughly 60% of all Chinese companies whose shares trade in the U.S., such as online search provider Baidu, and will likely continue to grow.
With the U.S. Congress pushing to accelerate their delisting to as early as 2023, pressure to decouple the American and Chinese markets is only building.
Publicly traded companies in the U.S. are required to have their auditors inspected by the SEC-appointed Public Company Accounting Oversight Board (PCAOB). Under the Holding Foreign Companies Accountable Act passed in 2020, those that fail to comply for three straight fiscal years beginning Dec. 18, 2020 will be delisted.
China for years has refused foreign audit inspections, citing national security concerns. But the SEC pressure may be working.
The securities watchdog updated listing rules in response in December 2021, and began publishing a list of companies flagged under the U.S. law this past March.
Talks between the SEC and the China Securities Regulatory Commission have shown newfound urgency. The CSRC in April proposed allowing foreign regulators to inspect audit results for Chinese companies. A CSRC official expressed confidence that an agreement was not too far away.
Meanwhile, leading Chinese car-hailing service Didi Global voluntarily exited the NYSE on Friday, in line with an earlier vote by its shareholders. Chinese authorities are believed to be urging companies that handle sensitive information, like Didi, to stop trading in the U.S. It would be easier for China to accept audit inspections if they apply to only lower-risk companies.
The SEC is showing little sign of easing pressure for Chinese concessions. YJ Fischer, director of the SEC's Office of International Affairs, said in a speech in late May that some progress was being made. But "even if an agreement is signed between the PCAOB and Chinese authorities, it will only be a first step," she said.
Fischer said the PCAOB started a pilot inspection of a Chinese audit firm in 2016, but was unable to complete it due to Chinese authorities withholding and redacting information. "PCAOB must be able to access audit work papers from all, not some, China-based issuers and their registered public accounting firms, as well as conduct complete inspections and investigations in China and Hong Kong," she said.
Both Democrats and Republicans in the U.S. Congress are pushing for a hardline approach on China. The House of Representatives and the Senate have separately passed legislation to delist companies after failing to meet the audit requirement after two years instead of three. If U.S. President Joe Biden signs the reconciled version of the bills, noncompliant companies could be kicked off the U.S. stock market as early as 2023.
Tougher regulation in both the U.S. and China has all but shut the door on new listings by Chinese companies in the U.S. There have only been five such initial public offerings since July 2021, according to data provider Dealogic.
Leading Chinese corporations listed in the U.S. have sought secondary listings elsewhere. Electric car maker Nio began trading in Hong Kong in March and Singapore in May in addition to New York.
An accelerated delisting deadline could lead to market turmoil. Some companies may not be able to transition to the Hong Kong stock exchange -- said to have even tougher listing standards -- before they stop trading in New York. This could leave U.S. investors with huge paper loses or force them to sell at deep discounts.
Political calculations are also being made on both sides. With the U.S. midterm elections coming up in November, neither the Biden administration nor Congress can afford to be seen as making major concessions toward China. Meanwhile, Chinese President Xi Jinping has vowed to prevent a "disorderly expansion of capital" and seeks to dilute the influence of foreign investors in sectors of the economy with national security implications.