Senate passes bill on oversight of Chinese companies, Alibaba shares move lower

The U.S. Senate passed legislation on Wednesday that could ban many Chinese companies from listing shares on U.S. exchanges or raising money from American investors without adhering to Washington’s regulatory and audit standards.

The bill, sponsored by Louisiana Republican Sen. John Kennedy, would require companies to certify that “they are not owned or controlled by a foreign government.” Alibaba, the e-commerce giant based in China, saw its U.S.-listed shares fall more than 2% on the news.

Though the law could be applied to any foreign company that seeks access to U.S. capital, lawmakers say the move to strengthen disclosure requirements is aimed principally at Beijing.

The White House did not immediately respond to CNBC’s request for comment.

“The Chinese Communist Party cheats, and the Holding Foreign Companies Accountable Act would stop them from cheating on U.S. stock exchanges,” Kennedy, a member of the Senate Banking Committee, wrote on Twitter Tuesday afternoon. “We can’t let foreign threats to Americans’ retirement funds take root in our exchanges.”

Specifically, the statute would require a foreign company to certify it’s not owned or manipulated by a foreign government if the Public Company Accounting Oversight Board is unable to audit specified reports because the firm uses a foreign accounting firm not subject to inspection by the board. If the board is unable to inspect the company’s accounting firm for three consecutive years, the issuer’s securities are banned from trade on a national exchange.

The Public Company Accounting Oversight Board is the nonprofit body that oversees audits of all U.S. companies that wish to raise money in the public markets. The Securities and Exchange Commission has oversight authority over the PCAOB, including the approval of the Board’s rules, standards, and budget.

U.S. and Chinese flags seen at the US Department of State on May 23, 2018.

Brendan Smialowsk | AFP | Getty Images

The bill’s passage via unanimous consent around noon reflects the growing anger among U.S. lawmakers toward China, its handling of the Covid-19 outbreak and what many American regulators say is a persistent disregard of American financial disclosure standards. 

“Hopefully, this is a wake-up call to China to bring itself into conformity with the rest of its world and allow transparency into the audits of its companies,” Clete Willems, a former Trump administration trade advisor and partner at Akin Gump, told CNBC.

The soured sentiment toward China isn’t confined to Capitol Hill, either.

The White House last week directed the body in charge of overseeing billions in federal retirement savings to halt plans to invest in Chinese companies. Labor Secretary Eugene Scalia warned that then-current plans to invest federal savings would place “billions of dollars in retirement savings in risky companies that pose a threat to U.S. national security.”

Scalia, who both cited bipartisan calls to restrict U.S. investment in China, wrote that President Donald Trump was concerned that federal employees — including members of the U.S. armed forces — could wind up supporting companies at odds with American geopolitical interests.

A supporting letter penned by National Economic Council Director Larry Kudlow and national security advisor Robert O’Brien reinforced the White House view that such investments in China could “‘present significant national security and humanitarian concerns for the United States.'”

The Securities and Exchange Commission, the entity that oversees wide swaths of American securities markets and federal rules, has also recently warned that investments in foreign-based companies could pose extraordinary risks.

“In many emerging markets, including China, there is substantially greater risk that disclosures will be incomplete or misleading and, in the event of investor harm, substantially less access to recourse, in comparison to U.S. domestic companies,” SEC Chaiman Jay Clayton said in a press release on April 21.

The SEC announced on Monday that it will host a roundtable on July 9 “to hear the views of investors, other market participants, regulators, and industry experts on the risks of investing in emerging markets, including China.”

Investors have long called on the SEC to crack down on nefarious business practices.

But they’ve magnified those pleas in recent weeks after Luckin Coffee, once thought to be a promising new China-based coffee chain and an up-and-coming Starbucks rival, revealed in April that its chief operating officer fabricated 2019 sales by about 2.2 billion yuan ($310 million).

Luckin, which trades on U.S. exchanges through am American depositary receipt, is down more than 90% in 2020 and the company has since fired both its CEO and COO.

The company said in a regulatory filing Tuesday that it received a written notice from the Nasdaq staff, who have determined that its shares should be delisted thanks to “public interest concerns” and its “past failure to publicly disclose material information.”

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