After the recent saga involving Chinese company Didi, which was subject to investigations by Chinese regulatory authorities only a couple of days after going public in the United States, the U.S. Securities and Exchange Commission (SEC) is tightening rules for Chinese companies who try to raise money in the U.S. stock market. This creates more uncertainty in the financial markets as U.S.-China relations continue to deteriorate.
Referring to new guidance from the Chinese government involving restrictions on companies raising capital overseas, including “government-led cybersecurity reviews,” SEC Chairman Gary Gensler recently said the agency will ask Chinese companies that want to raise money in the U.S. to “prominently and clearly disclose” whether they “received or were denied permission from Chinese authorities to list on U.S. exchanges; the risks that such approval could be denied or rescinded; and a duty to disclose if approval was rescinded.” Chinese companies are also requested to disclose details of their financial information. In addition, there will be “targeted additional reviews of filings for companies with significant China-based operations.”
In response to the SEC statement, the spokesperson of the China Securities Regulatory Commission (CSRC) said (link in Chinese) during a press conference that “[s]trengthening regulatory cooperation is an inevitable choice” and called for efforts by agencies in both countries to “strengthen communication on supervising Chinese stocks and find proper solutions.” The spokesperson also noted that China will “enhance the transparency and predictability of policy measures'' and “increasingly open its financial market.” (The full translation of the statement is in Annex I)
Recently, the Chairman of the CSRC, Yi Huiman, said (link in Chinese) at a forum that it is normal for companies to choose the place to raise money and the CSRC supports companies’ decisions in this regard. Before companies go public overseas, however, they need to comply with Chinese laws and regulatory requirements.
A series of recent policies in China seems to curb the use of capital markets. At the end of 2020, China’s Politburo said the country needs to prevent “disordered expansion of capital.” In addition to putting Didi under scrutiny for its handling of data and cybersecurity, China also recently cracked down on private tutoring institutions with the goal of easing burdens on students and parents. The rules (link in Chinese) bar these institutions from raising money through listing of shares, and prohibit listed companies or foreign investors from investing in these entities through various means, including mergers, acquisitions, and variable interest entity (VIEs) arrangements.
The SEC’s tighter grip on Chinese firms is not only a reaction to China’s recent moves though. It has been under pressure from members of Congress to take a tougher stance on Chinese companies. Congress passed the Holding Foreign Companies Accountable Act last December, which requires, among other things, the removal of Chinese companies from U.S. exchanges if they fail to comply with American auditing requirements for three consecutive years, and proof that the companies are not owned or controlled by a foreign government. In March, the SEC issued interim final rules to implement the law but has not finalized them.
Although the law applies to all foreign companies, it clearly targets China. Currently, Chinese law (Article 177 of China’s Securities Law (link in Chinese)) prohibits Chinese companies from providing financial information to foreign securities regulators without the approval of the Chinese government. The U.S. Public Company Accounting Oversight Board, which oversees the audits of public companies, reported that its ability to inspect the financial reports of Chinese companies has been impaired.
Hua Chunying, a Chinese Foreign Ministry spokesperson, responded to the SEC interim rules by stating that it “contains discriminatory provisions against Chinese enterprises, is nothing but an unjustified political crackdown on Chinese enterprises listed in the US. It has severely distorted the basic norms of the market economy that the US has always touted, and deprived US investors and the public of the opportunities to share the development dividends of Chinese enterprises. At the end of the day, it will only damage the international standing and reputation of the US capital market. It is just another move by the US to oppress Chinese companies, to which China is firm[ly] opposed.”
As important markets in the world, the capital markets of China and the United States have become increasingly interconnected. More and more companies, investors, and financial institutions are participating in each other’s markets. Strengthening regulatory cooperation is an inevitable choice. We have taken note of the statements of the U.S. Securities and Exchange Commission, especially the new requirements for information disclosure regarding listings. The regulatory authorities of the two countries should continue to strengthen communication on supervising Chinese stocks and find proper solutions in the spirit of mutual respect and win-win cooperation, so we can create predictable policies and a good environment for the market.
We have always been open to companies in choosing places to go public, and support companies in choosing international and domestic markets in accordance with laws and regulations. No matter where an enterprise is listed, it should comply with the laws, regulations and regulatory requirements of the place of listing and the place of business operation. Right now, the Chinese authorities are regulating relevant industries for the purposes of development and security, and promoting the sustainable and healthy development of market entities. In the process of formulating and implementing the rules, the China Securities Regulatory Commission will communicate closely with relevant agencies to improve the relationship between investors, enterprises, and regulators, and further enhance the transparency and predictability of policy measures.
China's basic national policy of reform and opening-up is unswerving, and will increasingly open its financial market. In the next step, we will continue to have more pragmatic opening-up measures to promote the high-quality development of China's capital market.
Since the beginning of this year, China's economy has continued to recover steadily. A large number of outstanding enterprises have flourished, and the number of high-quality investment targets has continued to rise in the capital market. Listed companies will attract investors as long as their business operations remain well, quality remains high, and the ecosystem continues to improve. Our anticipation for China's capital market is that it is predictable, sustainable and healthy.