Here’s Why Shareholders of Chinese Stock Shouldn’t Panic — at Least Not Yet

In the waning days of 2020, President Trump signed the Holding Foreign Companies Accountable Act into law. The measure prohibits the stocks of foreign companies from trading on U.S. exchanges if they refuse to submit their audits to U.S. regulators for review. This would lead to the very real possibility that Chinese stocks could be delisted from U.S. exchanges.

On this episode of Fool Live that aired on Dec. 3, 2020, “The Wrap” host Jason Hall, Motley Fool Canada Analyst Iain Butler, and Fool.com contributor Danny Vena discuss the new law and what it means for investors.

Danny Vena: I do see one in there, Jason, that I feel like I can probably respond to. There’s a question from Stacy here. It says, “Do I need to be worried about the passing of the congressional resolution to delist Chinese stocks if they don’t comply with our audit process?”

I mean, I actually just covered that this morning. Essentially, what has happened is, the Senate earlier this year passed the Holding Foreign Companies Accountable Act. That was taken up by the House of Representatives. Both of those bodies of Congress passed that bill unanimously, and it was send to President Trump who is expected to sign that today. I don’t know if that’s happened yet or not.

But essentially, what this bill would do is it would require foreign companies to submit to the same accounting disclosures that are required of U.S. companies. Additionally, they would have to certify that they are not owned or controlled by a foreign government. Then finally, one of the provisions is that, in addition to making those statements, they would have to back that up by having their audits checked by the Public Company Accounting Oversight Board, which is the same government regulator that checks the audits of US companies. Now, there’s been a lot of press about this. It’s actually something that’s been in the works for years, and I wrote about it earlier.

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Jason Hall: If you go back to May, the measure was passed by the Senate. This isn’t new news. But the fact that it’s finally about to be signed into law, it’s a big deal.

Vena: Right. I would say this, the SEC, the Securities and Exchange Commission, in the U.S. is already laying the groundwork, and they are preparing the regulations that would follow on this law once it takes effect. What they’re going to do is, it’s going to take about a year before they can put forward these regulations. They have to propose the regulations. They have to ask for public comments. They have to put it out there. They have to vote on it, and then finally issue the regulations.

It’s going to be some time, and it’s not necessarily going to automatically delist Chinese stocks from the US stock exchanges. Essentially, what they are going to do is they’re going to require of these companies that they submit to the U.S. audit process.

Right now, that would conflict with Chinese law, which says that companies are not allowed to submit their audit papers to regulators of any other country, not just the U.S.

Then the onus is going to be on the Chinese government and those companies to decide whether or not they want to submit to this. I don’t think we’re going to see a huge drop in the price of Chinese equities anytime soon, but this is something that has been going on for some time. It’s probably still going to be another year before we see the final regulations. I wouldn’t make any rash decisions right now, but it’s a story that we definitely want to follow.

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Hall: Another piece of it too is, I think if you think about some of the big trading firms, some of the big investors, they’re just going to buy them in Hong Kong. This is not going to somehow undermine investment by American investors in Chinese companies. It’s just going to make it a little more difficult for us retail, main street people to be able to do it.

I think the bigger thing to me is that there is a positive here. It is a push for a little more accountability, for a little more transparency, which, let’s be frank, there have been decades of concerns about this.

I can remember The Motley Fool had a service maybe a decade or so ago. It didn’t go well because there was a major push to invest in the economic opportunities for growth in China, and it was just so difficult to really vet those companies. Iain, I would really be interested to hear your perspective on this in terms of Canadian investor on the Toronto exchange, obviously it’s a different situation when it comes to investing in Chinese companies.

Iain Butler: Well, I think you’re accountability point is well taken. We actually had a company here by the name of Sino-Forest, maybe about 10 years ago, that rose to a pretty significant size and it was just an absolute total fraud. They said they had a plantations of trees that did not exist. I think that’s a really well made point.

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I though think too, I wonder if the Toronto Stock Exchange is licking at the chops of this going, “Could we get Alibaba (NYSE:BABA) trading on our exchange?” That’s a real potential opportunity. I think that’s also a valid angle to look at this. It doesn’t change the ownership base, as you say, it’s just a medium that needs to be circumvented to continue on.

Hall: Yeah. I think that’s the big take for me. It really is.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


View more information: https://www.fool.com/investing/2021/02/04/heres-why-shareholders-of-chinese-stock-shouldnt-p/

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