As U.S. authorities released a statement that Chinese firms and other countries who fail U.S. accounting standards would be delisted by the end of 2021, experts said this move could give a competitive boost to non-U.S. exchanges, and Chinese companies have broad options in terms of fundraising.
U.S. Treasury Secretary Steven Mnuchin said companies from China and other countries that fail to comply with U.S. accounting standards will be delisted from American stock exchanges by the end of 2021. Mnuchin and other officials recommended the move to the U.S. Securities and Exchange Commission (SEC) last week. They said the aim is to ensure Chinese firms are held to the same standards as U.S. companies. Mnuchin told a White House briefing the SEC was expected to adopt the recommendations.
The move could be targeted at some foreign firms
The U.S. SEC in 2007, at the request of mostly European companies, said foreign companies did not have to adjust financial statements to meet U.S. accounting standards, they can follow international standards. Today, around 20 percent of listed companies in the United States are foreign.
A total of 245 Chinese companies have been listed in the U.S. with a market capitalization of 1.88 trillion dollars as of July 28. Out of the 245 firms, 107 have a market cap below 1 billion yuan, while 23 have a market cap exceeding 100 billion yuan. The 23 firms' total market cap account for over 87 percent of the total market cap for U.S.-listed Chinese companies.
The top five U.S.-listed Chinese stocks in terms of market cap are Alibaba, China Mobile, Pinduoduo, JD.com and China Life Insurance; 165 of the 245 firms are listed on the NASDAQ, 75 are listed on the New York Stock Exchange, while 5 of the Chinese firms listed on the NYSE American.
Talking about how these foreign companies will be affected if the U.S. adopts this compliance measure, Qu Qiang, assistant director and fellow at the International Monetary Institute of Renmin University of China, said the move could be very targeted.
"Even though the U.S. Treasury Department said this standard is facing all the listed companies who are based outside of the United States. But basically, the enforcement of the law can be very targeted. So my bold guess is that it wouldn't affect all the international companies listed in the U.S., but can be used as a very effective and targeted tool against certain countries which are not very welcome," Qu further elaborated.
Thinking behind delisting recommendation
Just because companies follow U.S. accounting standards it doesn't mean there is no financial fraud. Enron, WorldCom, Tyco – these former corporate giants supposedly were following U.S. accounting standards before being exposed for financial fraud.
In the Enron example, Fortune magazine ranked the energy trading company as America's fifth largest company in 2002. While an independent review published in 2002 illustrated how the company's executives stole millions of dollars from complex, off-the-books partnerships while reporting inflated profits to shareholders. Its 2001 bankruptcy filing was the largest in American history at the time with estimated losses totaling 74 billion U.S. dollars.
Also there's no logic to conclude that the foreign companies that follow international accounting standards are transparent to U.S. investors. Talking about what this delisting recommendation is really about, Qu said it's just a move that U.S. authorities use to force companies to follow American rules.
"I think this new requirement's essence is not to ask the company to be honest, but to ask the foreign companies to follow American rules, to show all the details to the American authorities, which means the recommendation could affect the security of the company's finance or even have larger influences on national security issues," Qu added.
Spillover effect on non-U.S. stock exchanges
Talking about whether Washington's move will give a competitive boost to non-U.S. exchanges where international accounting standards are fully acceptable, Qu responded with a firm "yes."
"We have multiple choices right now. Probably everybody has been following the news that a lot of the internet giants like Alibaba, Netease, Jingdong and Meituan are trying or already have a second listing in Hong Kong, back to Chinese market again," Qu added.
In June, NASDAQ-listed JD and NetEase, raised a total of 6.6 billion U.S. dollars through secondary listings on the Hong Kong Stock Exchange amid growing U.S. hostility against Chinese enterprises.
Qu also noted that China's exchanges are exploring more international cooperation, which also offers broad choices for Chinese companies in terms of fundraising.
For example, in 2015, the Shanghai Stock Exchange (SSE), the Deutsche Börse Group and the China Financial Futures Exchange (CFFEX), founded their joint venture called China Europe International Exchange. The exchange offers investment products based on Chinese underlyings to international investors, starting with cash market products like ETFs and bonds. All cash market instruments will be tradable via Xetra, the Deutsche Börse's established cash marketplace with approximately 200 participants.
"And similar arrangements have been going on for quite a long time, not only in Hong Kong and Germany, but also in Singapore and some other market places. So I think in the future there are more options for global companies and global investors," Qu added.