Yesterday, the House passed — unanimously — a new law imposing United States accounting standards on all foreign companies that are listed on US stock exchanges.

The Senate has already passed the bill — also unanimously — and Pres. Trump is expected to sign it into law without delay.

The bill, the “Holding Foreign Companies Accountable Act,” requires that any foreign companies traded on US stock exchanges must prepare financial disclosures and audits in compliance with US accounting standards.  The consequence of a failure to comply is that the company will be delisted by the exchanges.  Compliance is to be enforced by the SEC in the same manner that it enforces accounting and audit standards on US companies.

It is no secret that the legislation is aimed squarely at Chinese companies that have listed themselves on US stock exchanges in order to access US capital markets.  One provision in the new statute requires Chinese companies specifically to identify any Directors who are members of the Chinese Communist Party.

Most foreign companies traded on US exchanges already comply with US accounting standards, as most have operations inside the United States.

But Chinese owned companies operate under Chinese laws that prevent corporate records and audit papers from leaving China.  In most respects, this leaves investors who purchase shares in the companies largely in the dark as to whether the company’s publicly reported financial condition is a true reflection of its actual financial condition. //

According to a government report, there are 217 Chinese companies listed on NASDAQ, the New York Stock Exchange (NYSE), and NYSE American, with a total market capitalization of $2.2 trillion. Some are also traded on foreign exchanges, and may simply allow themselves to be delisted in the United States while remaining on those foreign exchanges.

But the US stock exchange markets have one significant difference from most foreign exchanges — companies are allowed to become publicly traded before they show net profitability, unlike in many foreign stock exchange markets. This allows start-up companies — often companies with cutting-edge technology advances — to go into the equities markets to raise money from investors for development and advancement based on projected future earnings.

Taking this action will likely result in greater Chinese government financing of developing companies in China — with the risk of failure to rest on the Chinese government rather than investors in United States equities markets. The Chinese had adamantly worked to prevent the passage of this legislation, and there is much uncertainty about how China might react — especially in response to a Biden Administration (maybe).