KEY POINTS

  • U.S. officials and regulators have long criticized the lack of transparency of Chinese companies
  • In June,  Luckin Coffee was delisted from Nasdaq after massive fraud was uncovered
  • Chinese companies that are already listed on NYSE and Nasdaq would have to adhere to U.S. audits by Jan. 1, 2022

The Trump administration has proposed to ban Chinese companies from U.S. stock exchanges if they fail to comply with U.S. auditing standards.

U.S. officials and regulators have long criticized the lack of transparency of Chinese companies and their refusal to have their books inspected by U.S.-based auditing firms.

In May, the U.S. Senate approved legislation that would give Chinese companies that don’t comply with auditing requirements within three years to delist in the U.S.

In June, Chinese coffeehouse chain Luckin Coffee was delisted from Nasdaq after massive fraud was uncovered in the company’s financial statements. Employees at the firm had fabricated more than $300 million in sales.

But under the new Trump proposal, Chinese companies that are already listed on the New York Stock Exchange and Nasdaq would have to adhere to U.S. audits by Jan. 1, 2022 – or relinquish their listings on the exchanges.

Compliance would require Chinese auditors to show their financial documents to the Public Company Accounting Oversight Board, an audit regulator overseen by the U.S. government.

In addition, Chinese firms seeking listings on U.S. exchange would have to comply prior to going public.

The proposal is just one of  a slew of actions contemplated by the White House against China -- on Thursday Trump signed an executive order to ban Chinese-owned appa WeChat and TikTok.

The President’s Working Group on Financial Markets, or PWG, recommended that Trump make these changes in order to protect U.S. investors.

“The PWG unanimously recommends that the Securities and Exchange Commission take steps to enhance the listing standards on U.S. exchanges for access to audit work papers, among other recommendations,” said Treasury Secretary Steven Mnuchin, chairman of the PWG. “The recommendations … will increase investor protection and level the playing field for all companies listed on U.S. exchanges. 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.”

The plan would require rulemaking change by the SEC.

However, complicating matters is a law imposed by China that prohibits its citizens and companies from complying with foreign securities regulators without the permission of China’s own market supervisor and government.

In response to the proposal, Bloomberg reported, China said on Friday that delisting would only hurt U.S. investors.

“The Chinese government always holds that wherever a company is listed, it must comply with the laws and regulations there and disclose its information as obliged and protect the investors’ interests,” said Chinese Foreign Ministry spokesman Wang Wenbin. “They are trying to force Chinese companies to delist from U.S. markets. We hope the U.S. side will show sincerity and follow international common practice in cross-border monitoring and through equal and sincere consultation to solve the problem and protect investors’ interests.”

The Wall Street Journal reported that a NYSE spokesman said its listing standards “have long represented the industry’s gold standard because they balance investor protections with providing the broadest possible range of public-market investments and any new regulations should aim to maintain that balance.”