The listing of large Chinese tech companies on US exchanges is in jeopardy as the US enters into force a law that provides for the exclusion of companies from the listing of companies that are not admitted to audit for three years. Chinese companies will also have to prove that they are not owned or controlled by a government agency.
Dual-listed Chinese tech stocks in Hong Kong fell sharply on Thursday amid concerns about the risk of being excluded from US exchanges.
Alibaba Group (BABA) shares fell 3.9%, Baidu (BIDU) shares closed 9.65% lower, JD.Com (JD) fell 3.57%, NetEase (NTES) shares, in turn, decreased by 2.25%.
The decline came amid Thursday’s 0.07% drop in the broader Hang Seng Index and a 1.2% drop in the Hang Seng Tech Index, which fell 11.3% in March.
The reason – this week the US Securities and Exchange Commission (SEC) announced the final stage of the implementation of the “Law on accountability of foreign companies” (the Holding Foreign Companies Accountable Act). The bill was passed back in 2020 with bipartisan support in the Senate and House of Representatives, and signed by then-ruling President Donald Trump.
This law provides for the exclusion of shares of foreign companies from listing on US stock exchanges in the event that companies refuse US government agencies to conduct an audit. In addition, companies will be required to provide certain documents proving that they are not owned or controlled by a government agency in a foreign jurisdiction.
The SEC confirmed this week that Chinese companies will have to name each board member who is an official of the Chinese Communist Party.
For years, Chinese public companies have denied audits to the US Public Company Accounting Oversight Board, citing reasons for protecting China’s national security. Listed firms that have not been audited include Alibaba and Baidu.
China’s foreign ministry has responded to the SEC’s statements with criticism, saying the measures will damage the reputation of the US capital markets.
“This is clearly discrimination against Chinese companies, this is a senseless political suppression of Chinese companies registered in the United States,” Ministry spokeswoman Hua Chunying said Thursday. “This deprives the US public and investors of the opportunity to participate in the growth of Chinese business.”
US lawmakers passed the Foreign Company Accountability Act, stating that if Chinese companies attract American money, they must act under US law. Otherwise, trading the shares of such companies on the American stock exchanges exposes investors to the risks of fraud.
The United States only requires China to “bring its business in the United States in line with the rest of the world and ensure the transparency of the audit of its companies.”
One of the indicative reasons for the adoption of this law was the scandal with the Chinese public company Luckin Coffee, which reported false information to investors. Nasdaq has excluded Luckin Coffee from trading.
“Many investors thought the US and the Biden administration would be more China-friendly and easier, but this news shows that it will be just as difficult,” said Louis Jie, managing director of Wealthy Securities.
The first meeting of US diplomats under President Biden with Chinese officials showed that tensions between the world’s superpowers continue to heat up. Read more about the statements of key diplomats of the countries on Marketinfo.pro “The first negotiations between the United States and China under President Biden showed intense tension.”
This situation further complicates the macro environment for Chinese tech companies, which have come under increased government control and antimonopoly measures.
So, last year, the potentially largest in the world IPO of the financial holding Ant Group was suspended.
And earlier this week, Reuters reported that Tencent founder Pony Ma met with representatives of China’s antitrust law this month. Tencent, which is only traded in Hong Kong, also dropped significantly.