New law

The US House of Representatives has passed a new law according to which companies may be excluded from the US stock exchanges if the regulatory authorities are unable to verify their financial audit.

This week the US House of Representatives passed the Holding Foreign Companies Accountable Act which will require Chinese public companies to be more transparent in accounting and auditing on the US side, otherwise their shares will be exempted from the US stock exchanges.

The efforts to draft the law were made in the context of a tough approach to Chinese companies by President Donald Trump's administration.

Chinese companies receive a significant portion of their investment from American investment companies and private investors and legislators want to protect them from dishonest practices.

In May this year, the unanimous vote on the Foreign Company Liability Act was preceded by the notorious delisting of Chinese company Luckin Coffee.

Luckin is positioned as the largest competitor to the US chain of Starbucks in China and its IPO was one of the most anticipated in 2019. In April 2020, it was proved that Luckin had published misleading financial reports that misled investors.

Hindenburg Research also published a report accusing Kandi of publishing false sales figures to attract more investment from US investors. Kandi shares, which showed strong growth in November, fell sharply by 44.4% last week.

These precedents could affect the final US government decisions on future audit rules and investor protection from the fraudulent practices of Chinese public companies.

Changes could affect Chinese shares such as: Alibaba, JD, Pinduoduo and Nio, which have seen their shares grow more than tenfold this year.

Wall Street could lose billions in investment banking and trading if Chinese shares are excluded from stock exchanges.

A member of the House of Representatives Bradley Sherman said: "Chinese companies should not receive more simplified conditions for obtaining American capital than American companies".

SEC Chairman Jay Clayton supported the legislative measures in a written statement on Friday.