On Friday, the Trump administration unveiled what it called its America First Investment Policy, a series of measures meant to constrain China’s tech development and funnel that money back to the U.S. 

The policy includes ordering the Committee on Foreign Investment in the United States to restrict Chinese investment in the U.S., exploring whether to expand restrictions on U.S. entities investing in strategic technologies in China, and speeding approvals of projects from U.S. allies. 

The memo also included measures to “protect the savings of United States investors and channel them into American growth and prosperity.”

Trump ordered U.S. officials to “determine if adequate financial auditing standards are upheld for companies covered by the Holding Foreign Companies Accountable Act.” If their auditing standards are found deficient, the companies could be kicked off U.S. exchanges under the HFCAA, reviving a threat that’s loomed over hundreds of U.S.-listed Chinese companies. 

The Nasdaq Golden Dragon China Index, which tracks U.S.-listed Chinese companies, dropped by 5.2% in U.S. trading on Monday. Those worries extended across the Pacific to Asia trading hours: The Hang Seng Tech Index, which tracks Chinese tech companies traded in Hong Kong, dipped 1.6% on Tuesday.

Alibaba’s Hong Kong–traded shares dropped by as much as 8% on Tuesday, only to pare back losses as mainland Chinese traders bought the dip. The e-commerce company ended the Hong Kong trading day 3.8% below Monday’s close.

Delisting threats

Trump’s Friday memo could revive a dispute between China and the U.S. that stretches back decades. 

In principle, Chinese companies that list on U.S. exchanges are meant to show their books to U.S. regulators. Yet Beijing refused to grant access to inspectors, citing national-security concerns.

As U.S. exchanges wooed China’s rising companies, regulators turned a blind eye to this noncompliance. That ended with the revelation in 2020 that Chinese coffee chain Luckin Coffee had inflated its sales, sending its Nasdaq-listed shares into a free fall and eventually leading to its delisting. 

The U.S. Congress passed the Holding Foreign Companies Accountable Act that same year, which meant companies that did not comply with auditing regulations for three consecutive years would be delisted from U.S. markets. 

The SEC flagged some of the biggest names in China, such as e-commerce giant Alibaba, EV startup Nio, and even KFC operator Yum China, as noncompliant.

Both sides scrambled to find a solution. In August 2022, the U.S. and China agreed to let regulators review documents from Chinese companies in Hong Kong, the semi-autonomous Chinese city. By the end of the year, the Public Company Accounting Oversight Board concluded it had sufficient access to corporate documents to remove the threat of delisting. 

But unlike 2020, Chinese companies are now a bit more prepared for the possibility of delisting. Several have either pursued secondary listings in Hong Kong, or upgraded their existing listings to primary status. Upgrading to a primary listing—like what Alibaba did last year—allows companies to take advantage of Hong Kong’s Stock Connect system, which allows mainland Chinese to invest in Hong Kong–listed companies. 

The variable interest entity

In its Friday memo, the White House suggested it might also investigate the ownership structures that allow Chinese companies to list in the U.S. On Friday, the Trump administration said such structures could “limit the ownership rights and protections for United States investors.”

Beijing bars foreign investment in strategic sectors of the Chinese economy, including the internet. To get around this problem, Chinese tech companies turned to a structure called a “variable interest entity.”

A Chinese company that wants to list in the U.S. first creates a shell company in a third jurisdiction, such as the Cayman Islands. Through a complicated contractual relationship, this shell company has a claim on the original firm’s profits.

When a U.S.-based shareholder buys shares in a Chinese company, they are actually buying shares in the shell company. That also means they don’t possess ownership rights over a Chinese company, unlike what’s conferred by owning shares in a U.S. company.

VIEs have been scrutinized before—by Beijing. In 2021, in the wake of ride-hailing firm Didi Chuxing’s IPO fiasco, regulators reportedly considered forcing companies to get approval to set up a VIE before going public. Beijing eventually gave its assent to the VIE structure, yet still tightened its scrutiny over overseas IPOs.

These concerns have helped to hold up IPOs from the next crop of Chinese tech giants, including Shein, ByteDance and Didi’s re-debut.

Last year, Beijing decided to start encouraging overseas IPOs again, particularly in Hong Kong, as part of its measures to bolster the private sector amid a flagging economy. Overseas IPOs are starting to pick up again. Appliance company Midea raised $4.6 billion last year in a Hong Kong IPO in September, while self-driving startup WeRide braved geopolitical headwinds to debut on the Nasdaq last October.