Despite the rapidly deteriorating relations between China and the U.S., Chinese companies continue to seek out America’s financial markets as a space for initial public offerings. But a new proposal issued by the White House on Thursday could put a stop to that by requiring hopeful Chinese firms to provide documents that Beijing prohibits them from sharing.
“The United States is the premier jurisdiction in the world for raising capital, and we will not compromise on the core principles that underpin investor confidence in our capital markets,” Treasury Secretary Steven Mnuchin said in a statement Thursday, as the White House released recommendations related to Chinese company listings.
The group’s recommendations build on a bill passed by the Senate in May that is currently awaiting review by the House. The legislation calls for foreign firms that fail to provide the Security and Exchange Commission with audit documents for three years to be delisted from U.S. stock exchanges. The bill was introduced after more than $300 million in fraudulent sales were uncovered at then–Nasdaq-listed Luckin Coffee, prompting the Chinese coffee shop’s forced delisting.
Thursday’s proposal brings that timeline forward slightly, suggesting that noncompliant firms be delisted as early as 2022. Notably, the proposal also recommends the SEC prohibit new companies from listing at all—even prior to 2022—unless they are already able to turn over audit materials. Many of them won’t be.
“Because of the law in China, companies cannot simply hand out the required information to the U.S. regulator,” Clement Chan, managing director of BDO, told Fortune in June, when the Senate passed its legislation. Under Chinese law, it is illegal for companies to submit audit information to foreign governments without Beijing’s consent, which it never gives. Beijing often claims company audits are state secrets that can’t be shared.
The SEC has complained about Beijing’s stance for at least a decade but has taken few definitive actions against it. Chinese companies continue to list on U.S. stock markets—25 in 2019, down from 35 in 2018—and U.S. investors continue to pour in cash. Just last week, Li Auto, a Chinese EV company, made a stellar debut on the Nasdaq, raising $1.1 billion despite the political headwinds.
“U.S. investors want to take part in the growth of China’s new economy,” says Fan Bao, chairman and CEO of China Renaissance, an investment bank. Bao says that Li’s successful Nasdaq offering demonstrated that U.S. investors still welcome “quality Chinese assets.”
Experts argue that the rules proposed by the Senate and the President’s working group might not “protect” Americans who invest in Chinese firms as much as they will prevent U.S. stock markets from earning money off of Chinese listings.
Without Chinese firms, U.S. stock markets would lose a major revenue source. Market operators, like the NYSE, charge companies huge one-off listing fees as well as annual administrative fees and transaction fees on every trade. What’s more, the U.S.-listed Chinese companies covered by the Senate bill have a combined market cap of $1 trillion, equal to 3% of the U.S.’s total equity market cap. On average, they collectively trade around $8 billion per day—6% of total U.S. turnover, according to a China Renaissance report.
“These companies have many alternatives. Capital markets are global, and most investors are indifferent to where stocks are listed,” says Bob Bartell, global head of corporate finance at Duff & Phelps. Hong Kong has already emerged as a popular alternative for Chinese stocks seeking an IPO or a secondary listing. Retail and institutional U.S. investors can invest directly in Hong Kong–listed stocks, while there are more hurdles for foreign investors seeking stocks listed in mainland China.
China electric-car maker Xpeng has raised $900 million in private fundraising over the past month in preparation for a suspected IPO in the U.S. this year. But given the White House’s new proposal, the Chinese carmaker might have to change course. Chinese peer-to-peer financing firm Lufax is also preparing a U.S. IPO this year, while China’s WeWork alternative, Ucommune, has bailed on a planned IPO but is still eyeing a backdoor listing in the U.S.
For now, Chinese firms are still welcome to list in the U.S. For the working group’s proposals to go into effect, the SEC needs to release an official draft for a public comment period, which can last up to two months. The entire process might stretch beyond the November election, which could usher in a less hawkish administration.
“We think companies may have to wait for further clarification on the recent proposals of the U.S. administration. And we expect negative news flows around the 2020 U.S. election,” says Bruce Pang, head of macro and strategy research at China Renaissance. “The clouded uncertainties and regulatory risk would put companies to ponder long and deeply.”
More must-read international coverage from Fortune:
- Chinese factories’ COVID comeback defies the global downturn
- The U.K. lifted border controls just as COVID took off. Lawmakers call this “a serious error”
- China’s U.S. energy imports are 95% below what it promised in the phase 1 trade deal
- Google faces EU antitrust probe over the data implications of its Fitbit buy
- COVID-19 is killing journalists in prisons, compounding the threat of attacks on the press
