(Bloomberg) -- A high-powered U.S. panel recommended tightening the disclosure requirements for Chinese companies listed on American exchanges, following mounting concerns about the potential exposure of investors to fraud.
The President’s Working Group on Financial Markets said Thursday that it’s recommending the Securities and Exchange Commission strengthen requirements governing the submission of audit papers from Chinese listings -- both new and existing -- to the main American accounting-standards agency.
The group has not established how the new rules will be enforced, according to a senior Treasury official who briefed reporters on the condition of anonymity. While the final consequence would be delisting, the Treasury and the SEC will establish how binding the rule is during the rule-making period of the new regulation, the person said.
The issue of Chinese stock listings has attracted the attention of President Donald Trump, who has ratcheted up his attacks on China over the coronavirus pandemic and as friction mounts due to Beijing’s recent moves that chip away at Hong Kong’s political freedoms.
Trump Request
In June, Trump asked for recommendations from the President’s Working Group, made of of agencies including the Treasury Department and Securities Exchange Commission, on how to fix the problem.
The group of regulators, which includes the Federal Reserve chair, made the recommendations unanimously, Treasury Secretary Steven Mnuchin said in a statement.
“The recommendations outlined in the report will increase investor protection and level the playing field for all companies listed on U.S. exchanges,” he said.
At issue is an almost two-decade-old dispute over China’s refusal to allow the inspectors from the Public Company Accounting Oversight Board to review audits of firms that trade on American markets.
Compliance Period
Currently listed Chinese companies would have until Jan. 1, 2022, to come into compliance, while firms seeking a new listing will need to adhere to the new rules. The specific regulations are still to be written, officials told reporters Thursday.
SEC Chair Jay Clayton called the recommendations “common-sense” and plans to work with regulators to implement them, he said in a statement.
The group made several additional recommendations to the president: enhanced issuer disclosures and fund disclosures, greater due diligence of indices and index providers, along with guidance for investment advisers.
Tensions between the world’s two largest economies have further deteriorated in recent weeks. Trump has threatened to ban Chinese music video app TikTok from the U.S. market over national security concerns unless an American company buys it by Sept. 15.
Tensions Rising
Secretary of State Michael Pompeo this week urged American companies to bar Chinese applications from their app stores, signaling that U.S. efforts to banish Chinese technology from U.S. computers and smartphones will extend well beyond the push to force a sale or shutdown of TikTok.
Bipartisan legislation that would require more transparency from Chinese companies’ audits is moving through Congress. The bill would give firms three years to comply with U.S. auditing standards before they would get delisted from American exchanges.
Adding urgency to the debate over Chinese companies is this year’s high-profile accounting scandal at Luckin Coffee Inc. Since reaching a high of $50 a share in January, the Chinese chain has cratered more than 90% in Nasdaq trading. Following an internal investigation, Luckin disclosed that fabricated transactions had inflated its 2019 revenue by about $300 million.
©2020 Bloomberg L.P.
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