FPI / August 12, 2020
Commentary by Jason Orestes
The Trump administration has followed through on a key and far overdue promise to mandate stringent U.S. accounting rules for Chinese companies that trade in U.S. markets.
Treasury Secretary Steven Mnuchin made the recommendation to the Securities and Exchange Commission (SEC) last week, and it’s fully expected that the rules will be adopted. By the end of 2021, all companies from other countries that list on U.S. exchanges will be required to abide by the same accounting standards that American companies already must follow.
If it seems a little ridiculous that this already wasn’t a rule, that’s because it is. The SEC will begin enforcement of this measure next year and any companies that do not meet the requirements will have their stocks de-listed. The formal language encompasses all foreign companies (as it should), but this is very directly targeted at Chinese firms and their repeated violations of investor trust.
The rule change is part of a continued push by President Donald Trump to remedy major imbalances and a lack of reciprocal dealings with Chinese economic interactions.
However, this reform really doesn’t deserve to be considered part of the “trade war” between the world’s two largest economies. Even if things were relatively equitable and tranquil with Beijing, this absolutely still needed to be done, and there’s empirical evidence to support it beyond just a simple sense of fairness.
Investors have been getting defrauded for far too long by Chinese companies that not only don’t follow U.S. rules, they simply outright lie and obfuscate, and it’s cost investors dearly.
When I say “investors” I’m not referring to Wall Street banks or hedge funds, who often have access to research that allows them to avoid these frauds. I mean pension funds and retail investors. This accounting opacity has pillaged working-class Americans.
Chinese companies have been deceiving U.S. investors for quite awhile and through manifold means. For example, Reverse Merger scams are a process where a Chinese company buys a defunct American company still trading on a penny stock exchange, and then does a follow-on offering selling more shares. The private Chinese company that acquired the shell company is now publicly traded, and U.S. investors have access to their stock. The fraud is often not this complex though, sometimes they simply blatantly lie by way of cooking two sets of books or printing outright false numbers.
The most-recent and large-scale example occurring just this year from Luckin Coffee. It’s stock fell some 95 percent after it was unearthed that they fabricated over half of their sales.
This deception has harmed major U.S. firms too. Companies like Caterpillar acquired China’s ERA Mining Machinery and then had to take a half billion dollar write-down after they learned accounting malpractice had allowed them to lie about their inventories.
Stock exchanges like Nasdaq have taken steps to mitigate these issues by proposing rule changes that make it more difficult for deceptive practices to go unchecked. And the Trump administration has already instructed federal pension funds to halt any investment in Chinese companies. Both are sound proactive measures as we take meaningful steps to make all foreign companies play by the same rules as American ones.
China has saber rattled in response, threatening that Chinese listings will go to other exchanges and that compliance uniformity will somehow harm the reputation of markets.
The U.S. response to these nonsensical, self-interested threats should be: so what? Go have your companies list in London or elsewhere. Sophisticated investors can still access them if they want, and our markets really don’t need your circumspect ways of doing business.
Americans must start standing up for Western standards, and the actions taken by the Trump administration and the SEC to enforce universal rules for all participants should be vigorously applauded.
Jason Orestes (@market_noises) is a former Wall Street financial analyst who focuses on contemporary political developments affecting economics, markets, and culture. His commentary can be found on Washington Examiner, TheStreet, MSN Money, RealClearMarkets, and RealClearPolitics.
FPI, Free Press International