NASDAQ Puts Screws to Chinese Firms

The NASDAQ is taking a hardline against Chinese companies listed on their exchange.

On June 4, 2020, the US Department of State put out the following press release entitled, “New NASDAQ Restrictions Affecting Listing of Chinese Companies.”

“The Trump Administration is committed to ensuring that all American businesses and investors can operate on a level playing field with the rest of the world. As part of this ongoing effort, I applaud Nasdaq for requiring auditing firms to ensure all listed companies comply with international reporting and inspection standards.

“Nasdaq’s announcement is particularly important given a pattern of fraudulent accounting practices in China-based companies. To protect American investors and U.S. national security, President Trump moved to stop the investment of U.S. federal employee retirement funds into Chinese companies. The President also instructed the Presidential Working Group on Financial Markets to study the differing practices of Chinese companies listed on the U.S. financial markets.

American investors should not be subjected to hidden and undue risks associated with companies that do not abide by the same rules as U.S. firms. Nasdaq’s action should serve as a model for other exchanges in the United States, and around the world.

CNBC provided even more context on the new rule. “Nasdaq Inc is set to unveil new restrictions on initial public offerings (IPOs), a move that will make it harder for some Chinese companies to debut on its stock exchange, people familiar with the matter said on Monday.

“While Nasdaq will not cite Chinese companies specifically in the changes, the move is being driven largely by concerns about some of the Chinese IPO hopefuls’ lack of accounting transparency and close ties to powerful insiders, the sources said.

“At a time of escalating tensions between the United States and China over trade, technology and the spread of the novel coronavirus, Nasdaq’s new curbs on Chinese IPOs represent the latest flashpoint in the financial relationship between the world’s two largest economies.”

The President, Donald Trump, may be looking to expand beyond that. In May 2020, he told Maria Bartiroma of Fox Business that he was looking at making all Chinese companies follow American standards.

“Will you go one step further and force that Chinese companies have to follow accounting rules if they want to be listed on the New York Stock Exchange and the NASDAQ?” Bartiromo asked.

“We’re looking at that very strongly,” Trump answered.

Bartiromo further noted, “because Chinese companies like an Alibaba- any Chinese company- they’re listed on the New York Stock Exchangel they don’t have to report their earnings like an American company does.”

In response, Trump cautioned that getting tough is fraught with potential pitfalls, “Let’s say we do that right. So, what are they going to do? They’re going to move their listing to London or someplace else,” Trump said in response in his interview in May, “What happens is, we’re going to say you’re going to do

this and you’re going to follow the rules of the New York Stock Exchange or NASDAQ. What do they? They say we’re going to move to London or to Hong Kong.”

Remarkably, the current Securities and Exchange rules only require American companies to follow American accounting standards, according to a story in China Banking News, which also wrote about Trump’s interview.

“The US Securities and Exchange Commission (SEC) currently requires that US companies abide by GAAP when listing on US exchanges,” the story noted, “yet allows foreign companies to employ international accounting rules.

“While some Chinese companies listed in America do follow GAAP, such as Alibaba, state-owned enter-prises are more inclined abide by international accounting rules.”

According to that story many Chinese companies threatened to do exactly what Trump said they might do in response to his answer.

“Chinese state-media says that more Chinese companies could pursue IPO’s on bourses outside the United States if the Trump administration decides to push ahead with a requirement that they abide by US accounting standards,” the story stated.