Right here's how involved you ought to be about your stake in Alibaba now that the US is in search of Chinese language shares
President Donald Trump has a bill on his desk that could throw several Chinese companies off the US stock exchanges and spark an already strained relationship between Washington and Beijing.
The Holding Foreign Companies Accountable Act would force companies to ditch their Wall Street listings if they refuse to open their books to U.S. accounting authorities. It could also prevent them from raising money from American investors.
While the law technically applies to companies from any country, it is primarily aimed at Chinese companies.
"US policy is making China break the rules that American companies play by and that's dangerous," Senator John Neely Kennedy, R-La., Said in a statement.
Chinese Foreign Ministry spokeswoman Hua Chunying said at a press conference this week that the bill politically suppresses Chinese firms. "Rather than putting up layers of barriers, we hope the US can provide a fair and non-discriminatory environment for foreign companies to invest and operate in the US," said Hua.
Chinese companies that do business in the US are familiar with accounting scandals.
It wasn't until that year that Luckin, a Chinese coffee chain masquerading as Starbucks' rival, was delisted from the Nasdaq after the company posted sales of $ 300 million.
Why the US has more to lose
If the bill is passed, it could affect companies like Alibaba, oil giant PetroChina, JD.com, and more than 200 other names.
Chinese companies listed on US stock exchanges have a combined market capitalization of about $ 2.2 trillion, so mass delisting would mean large capital movements. Something experts say could backfire on American investors.
"If the bill becomes law, these companies will likely leave our exchanges and offer prices that don't make American investors better," said Jesse Fried, professor of law at Harvard Law School, in an interview on CNBC's Street Signs Asia .
US policy is making China break the rules by which American companies play, and that's dangerous.
And we're not just talking about big institutional names on Wall Street. It could also have a huge impact on retail investors who either directly own shares in Chinese companies or have retirement portfolios that contain ETFs that cover those companies.
Beijing could welcome the ban
Some say that the Chinese authorities would not mind if this law came into effect.
Let's say Alibaba is delisted. It actually accelerates something that Beijing is already trying to: build its own exchanges.
More big Chinese companies listing at home would be welcome news, and it wouldn't be too bad for those companies either.
The Chinese markets are far more sophisticated today than they were 10 years ago, so companies doing business and listing in China would no longer be as restrictive as they used to be.
In terms of logistics, many Chinese blue chip companies already have secondary listings in Hong Kong, which would make the transition a lot easier.
A company leaving the US like Alibaba is also appealing to Beijing for reducing the role of US regulators.
"When these companies do business in the US, there is friction with the Chinese authorities because the US authorities want to impose their rules on these companies," Fried said.
A shareholder observes the stock exchange in a securities hall. Nanjing, Jiangsu Province, China, July 6th, 2020.
Costfoto | Barcroft Media via Getty Images
Beijing does not allow audits of its companies doing business in the US to be inspected by US regulators, a major issue between the two countries.
Also controversial – keeping companies in check.
"While I think the Chinese government is very proud of Alibaba and what it has achieved, they are not interested in these private companies becoming so powerful," Fried continued. "This would be one way of making it smaller."
Why Chinese companies are unlikely to be delisted
However, analysts say that a delisting exodus is actually pretty unlikely.
""There is potential for a negotiated solution even if the legislation is incorporated into the law, "said Marc Iyeki, former head of Asia-Pacific listing on the New York Stock Exchange.
Companies have three years to complete, which means a lot of time.
"The three-year grace period shows that Congress is ready to give Chinese companies and their auditors not just one, not two, but three opportunities to comply," said Iyeki.
Iyeki said that Chinese regulators have also said they are ready to sit down to find a mutually acceptable solution and there are indications that the Securities and Exchange Commission is ready to negotiate.
""The SEC seems to be pushing the preparation of a co-audit solution based on the recommendations of the PWG [President & # 39; s Working Group]. So they too seem to be considering a possible solution, "said Iyeki
Ultimately, we are dealing with the two largest economies in the world, whose financial markets are becoming more and more intertwined.
Decoupling the two is complicated and not particularly beneficial for either country.