Equity

SEC Final Rule Affects Chinese Companies Listed on U.S. Exchanges

By Patricia Ribeiro, Nathan Chaudoin
JAN 21 | 2022
A cargo ship sailing under a bridge.

The U.S. Securities and Exchange Commission (SEC) recently finalized amendments that implement disclosure and submission requirements of the Holding Foreign Companies Accountable (HFCA) Act. Failure to comply with specific provisions of the law could result in the delisting of foreign companies on U.S. exchanges.

Such companies trade through bank-issued American depositary receipts (ADRs) representing shares of a non-U.S. company traded on a U.S. exchange. While the delisting of China ADRs is currently scheduled to occur by the first quarter of 2024, this timeline could shift to the first quarter of 2023.

U.S. regulatory bodies, such as the SEC, want to ensure Chinese companies employ accounting standards in line with other companies trading on U.S. exchanges. China ADRs that fail to submit financial audits for inspection will be forced to delist after three years of noncompliance.

The U.S. Senate has passed legislation to shorten the grace period for non-inspection to two years (i.e., first quarter 2023). The House of Representatives is expected to vote on this bill soon.

China’s securities regulator responded conciliatorily to the SEC final rule, highlighting its continued engagement with the SEC to “find a mutually acceptable path of cooperation.”{sup}1{/sup}  So, the possibility of compromise with Beijing remains, such as auditing supervision, but will be challenging. Chinese law prevents local audit companies from submitting data to foreign parties.

Most Affected Companies Can List in Hong Kong

SEC’s action is unlikely to significantly impact the trading of Chinese company stocks. Most China ADRs—69 companies, representing 98% of the total market capitalization of all U.S.-listed Chinese companies—can easily convert their ADRs to Hong Kong-listed shares. The companies that currently do not qualify for relisting are primarily small-cap firms.

Investors Can Still Gain Exposure to China-Based Stocks

The HFCA Act does not force U.S. investors to divest from China ADRs (versus companies on the U.S. Department of Defense sanctions list). Those at risk of forced liquidation include U.S. retail investors who buy securities through brokerage firms without global trading capabilities, though this situation would be rare. Institutions with mandates restricting investments to U.S. exchange-listed securities might also be forced to divest.

American Century Investments intends to continue trading China ADRs through Hong Kong and/or mainland China.

Authors
Patricia Ribeiro
Patricia Ribeiro

Senior Portfolio Manager

Senior Vice President

Nathan Chaudoin
Nathan Chaudoin

Sr. Client Portfolio Manager

Vice President

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“Chinese regulators respect companies’ independent choice of overseas listing venues,” Xinhuanet, December 5, 2021.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

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No offer of any security is made hereby. This material is provided for informational purposes only and does not constitute a recommendation of any investment strategy or product described herein. This material is directed to professional/institutional clients only and should not be relied upon by retail investors or the public. The content of this document has not been reviewed by any regulatory authority.