Holding Foreign Companies Accountable Act could delist some Chinese companies from U.S. marketsDecember 21, 2020
President Trump has signed into law a new measure designed to force Chinese companies linked to the military out of U.S. capital markets in a measure opposed by some in the administration who favor close business ties with Beijing.
The Holding Foreign Companies Accountable Act prevents securities of foreign companies from being listed on any U.S. exchange if the firms fail to comply with federal Public Accounting Oversight Board (PAOB) audits. The companies must also prove to the board they are not owned or controlled by foreign government, something most Chinese companies are unable to do.
Under the law, if the board cannot audit reports from Chinese companies, the companies must be delisted from capital markets.
Chinese companies have refused to provide audit reports in the past, claiming their audits are conducted by non-U.S. public accounting firms and cannot be shared with American regulators.
Administration officials familiar with the legislation said several senior officials opposed the new law and urged Mr. Trump to veto the bill, arguing that keeping Chinese companies inside U.S. markets could prevent them from investing in other foreign markets.
One of those who opposed enacting the legislation was Treasury Secretary Steven T. Mnuchin, a former Goldman Sachs investment banker.
Two officials said Mr. Mnuchin has been a frequent critic of Mr. Trump’s hardline policies toward China and in the past has sought to soften new policies toward Beijing over concerns they would upset trade and financial relations.
A Treasury spokesman did not respond to an email request for comment.
Secretary of State Mike Pompeo, a leader behind many of the administration’s tougher approaches to China, said he and Mr. Mnuchin are not at odds.
“There is no clash between Secretary [Mnuchin] and me,” he tweeted. “We are simply working to resolve interagency mechanics of an important executive order.”
The Wall Street Journal reported Friday that the two Cabinet secretaries clashed over a recent executive order that blocked Americans from investing in Chinese companies tied to Beijing’s military.
The new law is the latest step by the Trump administration designed to prevent China from exploiting U.S. capital markets for building up its military. Mr. Trump in November signed an executive order the blocks U.S. investors from holding shares in companies linked to the Chinese military.
The law applies to all companies but mentions Chinese companies in particular that would be restricted under its provision.
A senior State Department official said the law was the result of a whole-of-government approach to shady accounting practices by Chinese companies.
“This act is long overdue,” the official said. “The Trump administration should be given credit for fighting vested interests in American society that are addicted to the Chinese Communist Party (CCP) financial sugar high.”
The official said the CCP has been making money by skirting standard international accounting practices and creating false records. “They have basically cheated for years,” the official said.
Passage of the law followed a high-profile accounting scandal in April involving China’s Luckin Coffee, a Starbucks competitor, that admitted to reporting $310 million in fabricated sales.
The company was forced to leave the Nasdaq Stock Market in June.
The legislation passed with rare bipartisan support in both the House and Senate earlier this month. Its main sponsors were Sens. John Kennedy, Louisiana Republican, and Chris Van Hollen, Maryland Democrat.
“This law will protect American retail investors and pensioners from risky investments in fraudulent, opaque Chinese companies that are listed on U.S. exchanges and trade on over-the-counter markets,” said Sen. Marco Rubio, Florida Republican and a key proponent of restricting Chinese access to U.S. capital markets.
“I was proud to work with Sen. Kennedy on this important legislation that sends a strong message to the Chinese Communist Party: if Chinese companies want access to U.S. capital markets, they must comply with American laws and regulations for financial transparency and accountability,” Mr. Rubio told The Washington Times.
A State Department fact sheet made public earlier this month stated that U.S. investors were funding malign Chinese companies on major indices, such as the Morgan Stanley Capital International (MSCI), a major stock market index, and the Financial Times Stock Exchange Group, known as FTSE.
“The money flowing into these index funds — often passively, by U.S. retail investors — supports Chinese companies involved in both civilian and military production,” the State Department said
Some of the Chinese companies on the indices produce technology in China that has been used in repression of ethnic Uighurs, where over 1 million people have been put in concentration camps. The companies also are providing surveillance gear to repressive regimes such as Iran and Venezuela.
The State Department fact sheet identifies over 70 companies or subsidiaries listed on five difference MSCI and FSE indices that are involved in Chinese military activities.
Also, 22 of the 31 companies identified by the Pentagon as part of the Communist Chinese military buildup are invested in U.S. financial markets.
Thirteen Chinese companies are listed on the Commerce Department’s Entities List that is designed to block exports of U.S. goods deemed valuable for military programs. The companies include major Chinese military contractors, telecommunications firms and high-technology companies.
According to the State Department, Chinese stocks directly affect pension funds of American workers and retirees.
“Some of the Chinese companies [on MSCI Index] present significant national security and humanitarian concerns for the United States which increases the risk that they could be subject to sanctions, public protests, trade restrictions, boycotts, and other punitive measures that jeopardize their business and profitability,” White House National Security Adviser Robert C. O’Brien and National Economic Council Chairman Lawrence Kudlow stated in May.
Former White House National Security Council official Roger W. Robinson Jr., was among the first experts to identify how China was using U.S. capital markets to finance military projects.
Mr. Robinson believes Chinese investment in U.S. capital markets is a stalking horse for China’s stealth financial warfare and part of a strategy to compromise U.S. policy toward China.
If Americans’ pension funds and other investment portfolios became filled with Chinese securities, scores of millions of Americans would have a vested financial interest in lobbying to thwart U.S. sanctions or penalties on Beijing for fear that their retirement accounts and other investments would lose value.
“This unanimously passed legislation is a historic achievement as it is the first investor protection bill of its kind directed at America’s foremost adversary,” said Mr. Robinson, president of RWR Advisory Group.
“It’s only a shame that Chinese companies were given three full years to comply with PAOB audits after almost 20 years of not doing so — and receiving completely unjustified preferential treatment over American firms as a consequence.”
Mr. Robinson first disclosed that in 2018, China Shipbuilding announced plans to build the Chinese navy’s first nuclear-powered aircraft carrier. Shortly after the announcement, China Shipbuilding issued a $1 billion bond in the German bond market in Frankfurt, part of efforts to fund the naval construction.