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Trump administration to tighten rules for U.S.-listed Chinese companies
Source: Wall Street Journal
  • The Trump administration has floated the idea of forcing Chinese companies to de-list from American stock markets if they fail to meet U.S. accounting guidelines
  • A government task force released a set of proposals today designed to reduce the risk of investing in China-based companies
  • Currently, the Chinese government bans the U.S. financial regulator — the Public Company Accounting Oversight Board (PCOAB) — from inspecting auditing firms in China
  • Under the new laws, Chinese companies would need to grant PCOAB access to work papers of their auditing firms or a co-auditor outside of China to remain listed on U.S. exchanges
  • U.S. Treasury Secretary Steven Mnuchin said the proposals will level the playing field for all companies listed on U.S. stock markets

The Trump administration has floated the idea of forcing Chinese companies to de-list from American stock markets if they fail to meet U.S. accounting guidelines.

On June 4, President Trump gave a task force 60 days to come up with suggestions for protecting U.S. investors from risks related to Chinese companies. The team released their recommendations this morning.

The task force was made up of Treasury Secretary Steven Mnuchin, U.S. Securities and Exchange Commission (SEC) Chairman Jay Clayton, Chairman of the Board of Governors of the Federal Reserve System Jerome Powell, and U.S. Commodity Futures Trading Commission Chairman Heath Tarbert.

The reason for the task force is to ensure Chinese companies listed in the U.S. are governed by the same accounting standards as other companies.

Currently, the Chinese government does not allow the U.S. financial regulator — the Public Company Accounting Oversight Board (PCOAB) — to inspect auditing firms in China. Moreover, Chinese companies are not allowed to share internal auditing documents with the PCOAB.

At the forefront of the task force's recommendations is that all listed companies be required to grant the PCOAB access to work papers of their principal audit firm.

The recommendation gives an exception to companies whose governments restrict the granting of access to audit papers — such as China — by allowing them to hire a co-auditor outside of China with similar resources to the PCOAB, thereby allowing the regulator another means to review the audit.

The task force review recommends a transition period until the start of 2022 to let companies get their operations up to scratch.

Treasury Secretary Steven Mnuchin said the team's recommendations are designed to enhance listing standards across the board on American exchanges.

"The recommendations outlined in the report will increase investor protection and level the playing field for all companies listed on U.S. exchanges," Secretary Mnuchin said.

"The United States is the premier jurisdiction in the world for raising capital, and we will not compromise on the core principles that underpin investor confidence in our capital markets,” he continued.

Other recommendations in the report include enhanced disclosure requirements for China-based companies so investors know what they're getting into before they clinch a buy, as well as enhanced fund disclosure requirements and greater due diligence of indexes and index providers.

Of course, today's recommendations are not law. Yet.

Before the rules are approved, the SEC will need to formally draft the proposals and then allow some time for public comment, meaning it could be months before the new rules come into force.

While the official reasoning behind the new proposals is to de-risk investment into Chinese companies, it comes amid several Trump administration crackdowns on China and Chinese entities.

Just today, the President ordered a ban on massive China-owned tech apps TikTok and WeChat. The Trump administration has also lambasted China's territorial claims over the South China Sea, floated sweeping travel bans for members of the Chinese Communist Party and employees of Chinese tech companies, and slammed the recently-introduced Beijing sedition laws over Hong Kong.


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