Reminder from FTChinese.com: If you are interested in the content of FTChinese.com, please search for “FTChinese.com” in the Apple App Store or Huawei App Store, download the official app of FTChinese.com, and pay for subscription. Happy using!
“China Concept Stock” refers to Chinese companies listed overseas. In my opinion, China Concept Stock is a major measure for Chinese enterprises to spontaneously break through the financing constraints of innovation-oriented new economic enterprises and realize the creative introduction and utilization of international capital. It is an international capital completed by Chinese entrepreneurs in the face of development financing difficulties. A major institutional innovation in market development; in the process of introducing foreign capital, China Concept Stock has also carried out active explorations in the design and innovation of corporate governance systems, which has promoted the reform of the Hong Kong Stock Exchange and the listing system of China’s A-share Science and Technology Innovation Board, and is the best way to list A-shares. The registration system reform of the system and the design of the corporate governance system that accepts “same shares with different rights” provide a useful reference; not only that, China Concept Stock is also a model of global capital market cooperation, and has become a unique phenomenon in the history of world capital market development. It will help to improve the openness of the global capital market and the formation of a global “unified” capital market.
However, since 2010, nearly 100 sub-China concept stocks have been questioned by short-selling agencies, concerned by regulatory authorities, and even investor collective lawsuits around issues such as financial fraud. In early 2020, after the sensational financial fraud scandal of Ruixing Coffee was exposed, the United States accelerated the legislative process to improve the quality requirements of accounting information disclosure of foreign companies listed in the United States, including Chinese stocks.
The Foreign Company Accountability Act, which came into effect in December 2021, stipulates that if a foreign company fails an audit by the U.S. Public Company Accounting Oversight Board (PCAOB) for three consecutive years, it will be barred from listing on any U.S. exchange. Although the Act applies to all foreign companies listed in the U.S., Mainland China, Hong Kong, France and Belgium are the only four countries and regions that the PCAOB cannot supervise and audit, of which companies from Mainland China and Hong Kong account for nearly 90% of the total. %.
On March 8, 2022, the U.S. securities regulatory authorities began to publish the “pre-delisting list” of overseas listed companies that do not meet the relevant requirements of audit papers under the authorization of the above-mentioned act. As of August 16, 2022, 162 US Chinese concept stocks have entered the pre-delisting list. The companies that were eventually included in the definitive list could theoretically be delisted if they fail to meet the PCAOB’s auditor inspection requirements within three years.
In November 2019, then-President Trump signed an executive order barring U.S. investors from investing in companies owned or controlled by the Chinese military. At the beginning of 2021, China Mobile, China Telecom, China Unicom and CNOOC were forced to delist by the New York Stock Exchange. On August 12, 2022, five Chinese companies, including Sinopec, PetroChina, China Life, Aluminum Corporation of China, and Shanghai Petrochemical, issued announcements one after another, announcing the voluntary delisting of their American depositary shares from the New York Stock Exchange.
So, in the face of delisting pressure, how will China Concept Stocks respond?
In general, Chinese concept stocks listed in the United States can be “classified and dealt with” based on corporate attributes and actual conditions in the future.
First, American depositary shares do not account for a high proportion of their total share capital, and state-owned enterprises among Chinese concept stocks that have cross-listed in multiple places can choose to delist directly from the United States.
The American depositary shares issued by the few Chinese state-owned enterprises in the United States account for a very small proportion of their total share capital. Let’s take five state-owned enterprises including Sinopec, which announced its voluntary delisting from the United States in August 2022, as examples. Except for Shanghai Petrochemical, the other four U.S. depositary shares account for no more than 1% of its total share capital.
In addition to audit papers, the Foreign Company Accountability Act imposes additional disclosure requirements on U.S.-listed foreign companies. These additional disclosures include the percentage of shares held by government entities in the foreign jurisdiction where the company was established or incorporated; Controlling property interests; information on members of the Communist Party of China on the board of directors of the company or the board of directors of the actual operating entity; and whether the articles of association (or equivalent organizational documents) contain the articles of the Communist Party of China (if so, the relevant content of the articles of the party must be attached). The above additional requirements for information disclosure are as declared in the delisting announcement of the five state-owned enterprises, “Maintain the listing of depositary shares on the New York Stock Exchange and the registration of such depositary shares and corresponding H shares with the US Securities and Exchange Commission and compliance with the Securities and Exchange Act. the significant administrative burden and costs involved in the required periodic reporting and related obligations”.
It is also important that these state-owned Chinese concept stocks listed in the United States are simultaneously cross-listed in the United States, Hong Kong, and even mainland A shares in my country. Among them, Sinopec even cross-listed in China A shares, the United States, Hong Kong and the United Kingdom. This not only reduces the dependence of these state-owned enterprises on the US capital market, but also provides a convenient way for these state-owned enterprises to directly delist from the United States.
With reference to China Mobile, which will be forcibly delisted in 2021, state-owned enterprises that announce direct delisting in the future can choose the following three delisting options: First, exchange American depositary shares for the company’s common shares, and continue to cross-list Second, the company’s ordinary shares represented by American depositary shares that have not been exchanged for the company’s ordinary shares will be sold for cash back; third, for non-mandatory delisting China concept shares, you can also choose to deposit The shares are traded in the U.S. over-the-counter market.
Based on the observation of stock price performance before and after China Mobile’s delisting, we can preliminarily judge that although the delisting of state-owned Chinese concept stocks from the United States may have some negative impact on the stock price, the impact is relatively limited, and the possibility that the stock price will rebound later cannot be ruled out. On August 12, 2022, after five state-owned enterprises including PetroChina announced their voluntary delisting, they all closed down slightly as expected, with a drop of around 1%.
After five state-owned enterprises including PetroChina recently announced the delisting of U.S. stocks, among the state-owned enterprises currently listed in the U.S., only China Eastern Airlines and China Southern Airlines have not yet announced their delisting plans.
Second, Chinese concept stocks with private capital background can choose Hong Kong or Singapore, or even A-shares for secondary listing or dual primary listing, or even three-place listing.
The experience of state-owned Chinese concept stocks shows that cross-listing in multiple places not only broadens the financing channels of Chinese concept stocks, but also provides a possible exit path to deal with the pressure of delisting, and minimizes the risk of listing on a single market. Since the U.S. Senate passed the Foreign Company Accountability Act in May 2020, as of July 2022, 24 U.S.-based Chinese stock companies including NetEase have returned to Hong Kong for cross-listing.
Chinese concept stocks with private capital background listed in the United States can choose to introduce listing, secondary listing and dual main listing to achieve cross listing in multiple places. Introduced listing in the new market cannot issue local ordinary shares, but shares issued in the main listing place can be traded, thus broadening the circulation channels of the original issued shares, and it is the realization form of cross-listing with the lowest threshold. In 2022, Weilai will achieve cross-listing in Hong Kong, Singapore and the United States by way of introduction and listing.
The secondary listing allows the issuance of local ordinary shares in addition to the circulation of ordinary shares issued by the main listing and issuance place in the newly listed place. In 2019, Alibaba achieved its return to the Hong Kong market through a secondary listing. However, since it cannot guarantee the continuity of the circulation of the stocks issued by the company after the stocks of the main listed companies are delisted, Ali applied for upgrading the secondary listing to the dual main listing of New York and Hong Kong in August 2022.
Dual primary listing is expected to become a more popular form of cross-listing to avoid the risk of delisting in the United States in the future. Previously, 9 Chinese stock companies including Zhihu, Shell, Xiaopeng, and Ideal have achieved dual main listings in New York and Hong Kong.
Third, Chinese concept stocks with private capital background can choose accounting firms that meet U.S. regulatory requirements and seek to continue listing in the United States.
On December 16, 2021, PCAOB issued the “Foreign Company Accountability Law” to identify “covered issuers”: if a Chinese company listed in the United States hires a certified public accounting firm listed in the “Determination Rules”, then the audit institution It does not meet PCAOB regulatory requirements. There are 35 accounting firms under the jurisdiction of mainland China and 28 accounting firms under the jurisdiction of Hong Kong, including some institutions established by the “Big Four” in mainland China and Hong Kong. We have noticed that in the first pre-delisting list of Chinese concept stocks announced by the US Securities Regulatory Commission on March 8, 2022, the audit institutions disclosed in the annual reports of five Chinese concept stocks including BeiGene were all listed in the “Recognition Rules” in the Chinese mainland ruling list , does not meet the PCAOB’s relevant requirements for audit institutions.
Despite China’s objection to the PCAOB’s ability to directly inspect accounting firms in mainland China and Hong Kong to obtain audit working papers, China has never prohibited or prevented relevant accounting firms from providing audit working papers to overseas regulators. This provides a choice for some Chinese stock companies to continue to remain listed in the United States by submitting audit work papers in the future. In theory, the most direct way to not be recognized as a “covered issuer” by the SEC is to choose a certified public accounting firm that meets PCAOB regulatory requirements as the new auditor.
A study we completed showed that in fiscal year 2020, 35.8% of U.S. Chinese concept stocks chose an auditor that met PCAOB regulatory requirements, and 12.2% of U.S. Chinese concept stocks underwent changes in auditors to meet PCAOB regulations Require. In the fiscal year of 2021, 39.7% of U.S. Chinese concept stocks have chosen audit institutions that meet PCAOB regulatory requirements, while 14.6% of U.S.-listed Chinese concept stocks have changed audit institutions to meet PCAOB regulatory requirements.
We expect that those Chinese concept stocks that are privately funded and have not yet cross-listed outside the United States will choose to change their auditors to deal with the pressure of delisting.
Fourth, it does not rule out the possibility that some Chinese concept stocks with private capital background will leave the US market by way of privatization and delisting.
Since the passage of the “Foreign Company Accountability Act” in the United States, a total of 28 Chinese concept stocks have completed privatization and delisting or have issued privatization invitations. On the one hand, this is due to the crisis of confidence in Chinese concept stocks brought about by the exposure of the financial fraud scandal of Ruixing Coffee, which led to the continued slump in the stock price and low valuation of Chinese concept stocks; This has exacerbated the uncertainty of Chinese stock companies listing in the United States. The Sci-Tech Innovation Board and the ChiNext Board piloted the registration-based reform, lowered the threshold for IPOs, and began to accept dual-class A shares in my country and flexible and pragmatic Hong Kong stocks, providing these companies with more diversified options for delisting from the United States and relisting.
Fifth, China and the U.S. regulators are optimistic about the prospect of reaching an agreement on the supervision of audit papers in the future.
According to the “Foreign Company Accountability Law”, PCAOB can enter and inspect Chinese accounting firms registered with PCAOB and obtain audit papers. However, this regulation is in line with Article 177 of the new Securities Law revised and implemented in my country on March 1, 2020, which stipulates that “foreign securities regulatory agencies shall not directly conduct investigation and evidence collection within China; It is agreed that no one shall provide overseas documents and materials related to securities business activities”.
In April 2022, the China Securities Regulatory Commission, together with the Ministry of Finance, the State Secrecy Administration, and the State Archives Administration, publicly solicited opinions on the “Provisions on Strengthening the Confidentiality and Archives Management Work Related to the Overseas Issuance and Listing of Securities by Domestic Enterprises (Draft for Comment)”. Among them, the statement in the original “Regulations” that “on-site inspections should be mainly conducted by Chinese regulatory agencies, or rely on the inspection results of Chinese regulatory agencies” is deleted, and it is further clarified that overseas regulatory agencies conducting investigation and evidence collection or conducting inspections in China should pass the The cross-border supervision cooperation mechanism shall be carried out, and the CSRC and relevant competent authorities shall provide necessary assistance in accordance with the bilateral and multilateral cooperation mechanism.
It is easy to understand that China’s concept stocks will remain listed in the United States. For the United States, the development of China’s concept stocks will help American investors to share the dividends of China’s economic development. Long-term economic cooperation and win-win situation. “China concept stocks” have not only become one of the components of the US capital market, but also become a clear proof of the openness and internationality of the US capital market.
For China, financial fraud will not find support in any country that hopes for the long-term health of its capital markets. If China’s A-shares hope to become a global corporate listing target like Hong Kong in the United States one day, in order to protect A-share investors from Ruixing Coffee-style financial fraud, it may also be reasonable to require companies listed on A-shares to provide reliable audit papers. among.
A brief review of cross-border audit supervision practices in the United States shows that although the PCAOB has been trying to advance its inbound investigations of overseas accounting firms, most of them have ended with the signing of joint inspection agreements for cooperation. Since 2010, PCAOB took the lead in signing joint inspection agreements with the United Kingdom, Norway, Japan, the Netherlands, Dubai, Germany and Finland. As of the end of 2021, the PCAOB has conducted cross-border audit investigations in 54 overseas regions.
It is worth noting that before the Foreign Companies Accountability Act came into effect, France and Belgium, which had not reached a cooperation agreement before, had also reached an audit cooperation agreement with the PCAOB. So far, the only regions marked as rejecting PCAOB’s audit investigation on PCAOB’s official website are Mainland China and Hong Kong, China.
Therefore, we optimistically expect that the securities regulators of China and the United States will not rule out the possibility of following the established practice and reaching a joint inspection agreement.
Sixth, continue to retain the prospect of Chinese concept stocks listed in the United States.
In the era of the registration system, although the capital market cannot completely prevent problem companies from listing through fraud, it can ensure that the financial fraud of these problem companies is exposed in a relatively short period of time and pay a heavy price for this. For the assurance of the quality of accounting information disclosure of listed companies and the protection of investors’ rights and interests, we should rely more on market choices, rather than determining whether a company remains in the market by means of supervision under the review system of preset listing standards. Ruixing Coffee, which was listed in the shortest time and delisted in the shortest time, has become the best case for the market to “judgment” whether a company should stay in the market in the era of registration. In the above sense, the Foreign Company Accountability Act’s regulatory rather than market-based determination of whether a company remains in the market is a “regression” from the registration-based era.
For a mature capital market that strictly adheres to the registration system, and for Chinese concept stocks that continue to be listed in the United States, I understand that what the U.S. regulatory authorities need to do, perhaps still, is to introduce and cultivate short-selling agencies and shareholder voting agencies to make these subjective Profit-seeking market institutions are objectively monitoring financial fraud and improving corporate governance; let the legal force of collective actions initiated by small shareholders become the leading force and powerful deterrent in the construction of capital market systems, including combating financial fraud; The jointly implemented trading rules guide the major exchanges to conduct orderly competition in providing high-quality trading services, and continuously promote the improvement of the service level of the capital market. Of course, for Chinese stock companies suspected of financial fraud, the Chinese and US regulators will conduct joint inspections around the audit manuscripts.
We firmly believe that, with the joint efforts of Chinese and American regulatory authorities, capital market investors and China Concept Stock itself, China Concept Stock will continue to write the glory of the previous capital market system innovation and entrepreneurial spirit, and make steady progress in the face of difficulties.
(Jin Tian and Cai Maoen also contributed to the writing of this article. I only represent the author’s point of view. Responsible editor email: [email protected])