Delist to D-List?

Sinopec, China Life Insurance, Aluminium Corp. of China (Chalco), PetroChina and a separate Sinopec entity, Sinopec Shanghai Petrochemical Co. Ltd. on August 12 announced they would be applying for the voluntary delisting of their American depositary shares (ADS) from the New York Stock Exchange (NYSE).

Some read the delisting announcement as a symbol of accelerated China-U.S. decoupling. The China Securities Regulatory Commission has denied this, pointing out that listing and delisting are normal movements in the capital market and China respects their choice based on their respective situations.

Labeling the delisting from the NYSE as decoupling is a stretch too far, but the fact is that these five are only a handful of the Chinese stocks listed on American exchanges that have been forced to delist since 2020 due to pressures from U.S. securities regulators.

That year, the U.S. House of Representatives passed the Holding Foreign Company Accountable Act (HFCAA), which requires foreign issuers and their accounting firms to release their audit papers for inspection, proving they are not under any foreign government ownership or control. Foreign companies risk being delisted if they fail to submit their audit papers to the Public Company Accounting Oversight Board for three consecutive years.

Although the HFCAA is applied to all foreign companies listed in the U.S., the act is widely believed to mainly target Chinese companies. By late July this year, 159 Chinese stocks listed in the U.S. had been put on the provisional list. The e-commerce giant Alibaba is also on the provisional list. It could end up being the biggest Chinese firm to be delisted in the U.S. if it does not meet the legal requirement.

Chinese companies have managed to get listed on American exchanges by conforming to all the rules and regulations of the U.S. capital market. But since the Donald Trump administration adopted an array of policies to contain China’s economic growth through the trade war, the U.S. has doubled down on these regulations. The HFCAA’s politicization of economic issues serves to recruit it as yet another pawn in the U.S.’ strategic game to contain China.

China respects all efforts by foreign regulators to strengthen inspection to improve the quality of audit papers but opposes the politicizing of securities inspection.

The Chinese Government, in the spirit of openness and cooperation, always stands ready to conduct an open dialogue with the related accounting oversight bodies on auditing inspection cooperation.

However, the voluntary delisting of five Chinese companies reveals that cooperation in auditing inspection leaves much to be desired. A large number of audit papers of U.S.-listed Chinese companies contain classified information related to China’s business environment and even national security, for example, basic Internet infrastructure. Consequently, this U.S. requirement for disclosure is unacceptable. If no consensus is achieved on the inspection of auditing firms in 2022, Chinese companies on the provisional list may have to delist from American exchanges in 2023.

Yet the five companies voluntarily delisting do not represent the prevailing sentiment among Chinese corporations. Given many of them are only listed on U.S. stock exchanges and nowhere else, they aren’t eager to jump ship just yet. What’s more, the U.S. market still has the upper hand when it comes to supporting startups, particularly tech startups, and so many companies are trying to raise funds there.

As the biggest capital market in the world, the U.S. is generally still hailed as the most welcoming and tolerant A-lister of all, but its reputation is slowly being tarnished by political interference in the capital arena. If Chinese companies are forced to delist under the HFCAA, that may land the market on the D-list.