On April 2, for the first time in 13 years, the China Securities Regulatory Commission (CSRC) revised the confidentiality clauses related to the listing of Chinese enterprises (China Concepts Stock) abroad, a rare concession by the Chinese Communist Party (CCP).
According to experts, the CCP’s adjustment strategy is to obtain more foreign exchange from out-of-country financing of Chinese Concept Stocks, but the CCP will also introduce new policies to control the so-called national security risks.
“Chinese Stock” is the abbreviation of China Concepts Stock, while Chinese companies listed outside China are collectively referred to as Chinese stocks. At present, the main destinations for listing abroad include the United States (NYSE, NASDAQ, AMEX), London Stock Exchange, Euronext, Tokyo Stock Exchange, Frankfurt Stock Exchange, and Hong Kong Stock Exchange.
The CSRC, the Ministry of Finance, the National Administration of State Secret Protection (NASSP), and the National Archives Administration revised the “Provisions on Strengthening the Management of Confidentiality and Archives Related to the Issuance of Securities Abroad and Listing” (hereinafter referred to as the “Provisions”) and issued a corresponding “Exposure Draft” on April 2 for public comment.
Following the international practice of cross-border audit and regulatory cooperation, the Exposure Draft deletes the expression in the original Provisions that “on-site inspections should be mainly carried out by China’s regulatory authorities or the inspection results of China’s regulatory authorities.” In addition, the CSRC said that it supports enterprises choosing the place of listing according to their own wishes.
The Exposure Draft was issued in the context of the U.S. Securities and Exchange Commission (SEC) passing the Holding Foreign Company Accountability Act (HFCAA) on December 2, 2021. HFCAA stipulates that if the U.S. Public Company Accounting Oversight Board fails to audit the required accounting reports for three consecutive years, the SEC can ban the company’s stock trading and remove it from U.S. exchanges.
The HFCAA also requires U.S.-listed companies to disclose whether they are controlled by any foreign government and to provide their audit papers.
On April 5, Albert Song, a political and economic researcher at Tianjun, told the Epoch Times that “This can be said to be a concession by the CCP, mainly to allow Chinese stocks in the United States to retain their listing status because the role of overseas financing of Chinese companies is crucial. The CCP hopes that there will be more foreign exchange, and after the Chinese stocks raise funds abroad, they will likely be forced to settle foreign exchange when they take the money back to China, that is, to leave foreign exchange and give the enterprise renminbi.” Song Weijun has 27 years of experience in China’s financial industry, focusing on China’s political and economic fields.
The size of China’s foreign exchange reserves (as of February 2022) released by the State Administration of Foreign Exchange of the CCP on March 22 was $3,213.8 billion, relative to a decrease of $7.8 billion from the end of January; on March 27, China’s full-caliber foreign debt at the end of 2021 stood equivalent to $2,746.6 billion (excluding the external liabilities of Hong Kong and Macao), making China’s net foreign exchange reserves, after deducting external debt, only $467.2 billion.
Besides paying for foreign debt and current account expenditures, foreign exchange reserves also need to deal with the foreign exchange required for divestment; so the more foreign investment accumulates, the greater the demand for potential foreign investors to withdraw foreign exchange. By the end of 2021, direct investment in China amounted to $3,623.8 billion, which exceeded the value of China’s foreign exchange reserves. This means that if foreign investors withdraw from the Chinese market on a large scale, and the Chinese government allows foreign investors to withdraw, China’s foreign exchange reserves will face enormous pressure.
In addition to the financing function, China Concepts Stock represents the image of Chinese companies outside China. If the audit manuscripts are submitted to the United States for auditing, they can serve as a model for Chinese companies to go public in the United States in the future. Therefore, the CCP has changed its strategy. However, for companies that are supposed to trigger national security risks, such as Alibaba, Song Weijun believes that the CCP will definitely introduce further policies.
China Fund News said on April 2 that throughout March, Chinese stock performed the worst globally. On March 30, five Chinese companies, including Baidu (NASDAQ:BIDU) and iQiyi (NASDAQ:IQ), were included in the pre-delisting list by the SEC. By the end of March, a total of 10 Chinese-stock listed companies were on the pre-delisting list.
On March 31 (Beijing time) the head of the International Department of the China Securities Regulatory Commission said that as understood by the U.S. SEC, this is a normal procedure for the U.S. regulatory authorities to implement the Holding Foreign Company Accountability Act and was included in the “pre-delisting list.” Whether or not the company will be delisted from the United States in the next two years ultimately depends on the progress and results of the Sino-U.S. audit and regulatory cooperation.
