Latest U.S. salvo against Chinese firms on PCAOB audits could benefit Hong Kong

A U.S. bill that proposes to delist Chinese firms that don’t open their audit books to American regulators could benefit Hong Kong Exchanges & Clearing Ltd. as companies instead turn to the city’s bourse.

Dubbed the ‘EQUITABLE Act’, the bipartisan bill’s sponsors include Marco Rubio, a long term critic of China’s governance and human rights record. While the measure covers all U.S.-listed firms, the focus is on China and on allowing the Public Company Accounting Oversight Board to view financial records, Rubio wrote in a Wall Street Journal opinion article this week to accompany the bill’s arrival.

Such audit and financial details are considered state secrets under Chinese law and the PCAOB and Securities and Exchange Commission were thwarted in earlier discussions over gaining full access to them. Firms that don’t comply with the proposed measure face delisting from U.S. exchanges if the bill passes.

Sen. Marco Rubio, R-Fla.
Marco Rubio Photographer: Andrew Harrer/Bloomberg

The move comes amid growing tensions between China and the U.S. over trade and geopolitical rivalries. New York-listed Alibaba Group Holding Ltd. is planning a secondary listing in Hong Kong, according to people familiar, a mega-deal that will bring one of China’s largest companies closer to friendlier investors at home as stresses escalate.

Many U.S. listed Chinese firms have weighted voting rights and will move their listings to Hong Kong because China exchanges aren’t ready for this share structure, Paul Gillis, a professor of accounting at Peking University’s Guanghua School of Management in Beijing, wrote on his China Accounting Blog.

“Hong Kong could speed the relocation process by allowing the companies to use SEC documents and U.S. GAAP financial statements for the initial listings,” Gillis said, adding there would likely be trading opportunities when listings are transferred.

The U.S.-China Economic and Security Review Commission identified 156 Chinese companies, including 11 state-owned enterprises, listed on America’s three largest exchanges, Rubio wrote in his article.

“The Rubio proposal is a full employment act for accountants and lawyers,” Gillis said.

Bloomberg News