The Committee on Capital Markets Regulation (the “Committee”) is concerned with the potential impact on U.S. capital markets from recent policy developments in China and the United States indicating that Chinese companies may halt future listings on U.S. stock exchanges and that Chinese companies presently listed on U.S. stock exchanges may be delisted or will voluntarily delist in the near future.
The withdrawal of Chinese companies from U.S. stock exchanges would be a significant blow to the United States as an international financial center and could threaten the U.S. stock market’s role as the world’s deepest and most attractive capital market. The purpose of this report is to provide an overview of recent policy developments affecting U.S.-listed Chinese companies and call for a structured dialogue between U.S. and Chinese policymakers with the goal of avoiding a costly decoupling of Chinese companies from U.S. capital markets.
In Part I of this report, we describe the role of Chinese companies in U.S. capital markets. As of October 15, 2021, there were 247 Chinese companies listed in the United States with a total market capitalization of $1.6 trillion spanning a diverse range of business sectors. We then describe the unique legal structure—the variable interest entity (“VIE”)—employed by the majority of Chinese companies listed in the United States.
In Part II, we review the four policy issues that threaten Chinese companies’ ability to list or remain listed in the United States. First, we describe the Holding Foreign Companies Accountable Act (the “HFCAA”) that requires the Securities and Exchange Commission (the “SEC”) to delist Chinese companies from U.S. exchanges as soon as 2024 if Chinese officials continue to prevent U.S. regulators from reviewing the audits of U.S.-listed Chinese companies. Second, we describe U.S. Executive Orders issued by President Trump in 2020 and President Biden in 2021 banning trading by U.S. investors in firms with links to the Chinese military, including four large companies that have subsequently delisted from U.S. exchanges. And third, we review actions by Chinese regulators requiring that the Cyberspace Administration of China pre-approve foreign listings for certain Chinese companies. Finally, we examine recent indications that U.S. and Chinese regulators could restrict the ongoing use of the VIE structure.
In Part III, we briefly consider the market reaction to these policy developments. We find that the market valuation of U.S.-listed Chinese companies has fallen sharply suggesting that recent policy developments are materially harming U.S.-listed Chinese companies and their investors. We also note that the majority of Chinese companies listed in the United States by market capitalization have recently cross-listed in other jurisdictions to preserve their access to global pools of investment capital outside of China.
We recommend that U.S. and Chinese authorities form a high-level working group with participants from both sides, including the SEC and China Securities Regulatory Commission (“CSRC”), to systematically evaluate the full range of issues together and make joint recommendations for resolution. The goal should be to avoid a large-scale delisting of Chinese companies from U.S. stock exchanges that could lead to further restrictions on cross-border investment that would harm issuers and investors in both countries.
The full report is available here.