The birth of the Great Wall of the SEC

What just happened?

Shares of Chinese dual-listed companies fell sharply on Thursday in Asia after the U.S. securities regulator took action to expel foreign companies from U.S. exchanges if they failed to meet U.S. auditing standards. The chaos is part of the broader persecution of Chinese private companies that has unnerved investors. (1)

What does this mean?

There are cases of Chinese tech companies rejecting government requests for data. Many large Chinese companies do not comply with U.S. regulatory standards, including Baidu, China Mobile, PetroChina, and Semiconductor Manufacturing International Corporation. Some analysts said that Chinese companies incorporated in the U.S. might not comply with U.S. accounting requirements as they may violate Chinese law. The new law directly targets Chinese companies that raise funds in the United States, which have historically failed to comply with U.S. laws requiring audits of public companies to be overseen by a US-based non-profit organization called the Public Company Accounts Oversight Board. (2)

The law was passed in the wake of anti-Chinese sentiment among U.S. lawmakers on both sides, who argued that Chinese companies must follow the same rules that any other company, foreign or domestic, must follow to raise funds. The Company Liability Act, signed by then-President Donald Trump in December, aims to remove Chinese companies from U.S. stock exchanges if they fail to comply with U.S. auditing standards for three consecutive years. The rules also require companies to prove to the Securities and Exchange Commission that they are not owned or controlled by a foreign government agency and to identify all board members who are officials of the Chinese Communist Party, the Securities and Exchange Commission said in a statement on Wednesday. Congress also ruled that SEC rules require these companies to make new disclosures, including whether they are under government control, whether Chinese Communist Party officials have on their corporate boards, and whether they hold shares. owned by government agencies. (3)

How does it impact the legal sector?   

The rule initiates a procedure that may result in more than 200 companies being excluded from U.S. trade. The new U.S. Securities and Exchange Commission rules stipulate how regulators will identify delisted companies and the procedures for excluding non-compliant companies from trading. This is the latest conflict between financial officials in the world's two largest economies. In addition, Bloomberg News reported earlier this week that China plans to ban companies from entering overseas stock markets through VIE. The bill's approval was also approved after the release of the White House report in August. The chairman of the U.S. Securities and Exchange Commission, Jay Clayton and other significant regulators approved new rules defining Chinese companies that would prevent access by U.S. accounting regulators. (4)

Because the Chinese government blocks foreign direct investment in critical industries such as technology, these companies form front organizations - so-called variable ownership companies or VIEs - in foreign jurisdictions such as the Cayman Islands, which then go public, including the stock exchange. New York. And Nasdaq. Companies worldwide are attracted by liquidity and a prominent investor base in the U.S. capital markets. Many of these companies have shown very good results over the years," he said. (5)

Gensler argued that American investors might not realize that most Chinese companies that list their shares on U.S. exchanges do not do so directly. But as Chinese stocks have poured into U.S. stock exchanges in recent years, the issue has raised the alarm among lawmakers, investor advocates, and Trump himself. I don't think we'll see a considerable drop in the value of China's stock any time soon, but this is something that has been happening for a while now. (6)

The Committee on Foreign Investment in the United States (CFIUS), the government body that oversees acquisitions of American companies from abroad, has increased powers in line with China's interests. In the past, American and Chinese companies could safely trade and invest in an area that had little to do with China's human rights record. Things went wrong because there was a strong push in China to invest in growth opportunities, and it wasn't easy to control these companies. (7)

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¹ https://www.cnbc.com/2021/03/25/chinese-tech-stocks-fall-as-us-sec-begins-law-aimed-at-delisting.html, https://www.cnn.com/2021/07/26/investing/premarket-stocks-trading/index.html and https://www.reuters.com/article/us-usa-sec-foreigncompanies/chinese-tech-stocks-slump-as-u-s-sec-begins-rollout-of-law-aimed-at-delisting-idUSKBN2BG2AI

² https://www.theatlantic.com/international/archive/2020/07/tiktok-ban-china-america/614725/, https://www.marketwatch.com/story/the-latest-threat-to-chinese-stocks-could-come-from-u-s-regulators-experts-warn-11629820651, https://www.reuters.com/article/us-usa-sec-foreigncompanies/chinese-tech-stocks-slump-as-u-s-sec-begins-rollout-of-law-aimed-at-delisting-idUSKBN2BG2AI and https://www.nytimes.com/2020/12/02/business/economy/chinese-companies-to-face-more-scrutiny-as-bill-clears-house.html

³ https://www.politico.com/news/2020/12/02/congress-clears-bill-to-ban-trading-in-chinese-firms-that-thwart-us-auditors-442362, https://www.marketwatch.com/story/the-latest-threat-to-chinese-stocks-could-come-from-u-s-regulators-experts-warn-11629820651 and https://www.reuters.com/article/us-usa-sec-foreigncompanies/chinese-tech-stocks-slump-as-u-s-sec-begins-rollout-of-law-aimed-at-delisting-idUSKBN2BG2AI

⁴ https://news.yahoo.com/sec-moves-step-closer-delisting-180000075.html and https://www.politico.com/news/2020/12/02/congress-clears-bill-to-ban-trading-in-chinese-firms-that-thwart-us-auditors-442362

⁵ https://www.marketwatch.com/story/the-latest-threat-to-chinese-stocks-could-come-from-u-s-regulators-experts-warn-11629820651 and https://www.washingtonpost.com/business/why-the-us-is-threateningto-delist-china-stars-like-alibaba/2021/03/30/a65f7d32-9117-11eb-aadc-af78701a30ca_story.html

⁶ https://www.politico.com/news/2020/12/02/congress-clears-bill-to-ban-trading-in-chinese-firms-that-thwart-us-auditors-442362, https://www.marketwatch.com/story/the-latest-threat-to-chinese-stocks-could-come-from-u-s-regulators-experts-warn-11629820651 and https://www.fool.com/investing/2021/02/04/heres-why-shareholders-of-chinese-stock-shouldnt-p/

⁷ https://www.theatlantic.com/international/archive/2020/07/tiktok-ban-china-america/614725/ and https://www.fool.com/investing/2021/02/04/heres-why-shareholders-of-chinese-stock-shouldnt-p/