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Chinese tech giants may soon be expelled from the US stock market

Chinese tech giants may soon be expelled from the US stock market

A proposed new law will require companies listed on American stock exchanges to demonstrate that they are not owned or controlled by a foreign government

For the past two decades, China has exploited its presence as a major economic power within the technology arena. The Chinese government has kept big Western technology companies including Google and Facebook away from its borders by banning their services in the entire country or by restricting its operations in China.

The Chinese claim that it is to protect its national security, though there is clearly another reason why it does so: to support Chinese domestic technology companies.

China has the world’s second largest economy and is also the world’s most populous country.

As a result, a few Chinese technology companies have grown into giants thanks to the absence of global competition. Many of them though do not list their shares in China, but list their shares on major American stock exchanges such as NASDAQ and NYSE with the aim of attracting American investment.

However, their presence on the American stock exchange may now be at risk and some of them might even be forced to exit the US entirely.

Holding Foreign Companies Accountable Act

Last week, the US Senate passed the Holding Foreign Companies Accountable Act (HFCAA). Although it is still in the legislative stage and must be approved by the House of Representatives before it is signed by President Donald Trump, the act is a major concern for Chinese technology companies.

The law includes many different provisions, but the primary focus is on the requirement for foreign companies listed on US stock markets to demonstrate that they are not owned or controlled by a foreign government.

In addition, these companies must open their account books to the Public Company Accounting Oversight Board (PCAOB) of America.

In the past these rules applied only to American companies , but extending them to foreign companies will change several ground realities for many of them.

While the new act is not expected to impact most international companies, the matter will be more complicated for Chinese companies as they might not be open to the idea of opening their account books or disclosing their relationship with the Chinese government, a subject which has long been the subject of much suspicion and speculation despite repeated denials.

Why would Chinese technology companies be affected more by the decision?
For many international companies, listing on one of the American stock markets is an important step as the American market attracts many investment opportunities.

But while there are a few European or other global companies in the US market, there are in fact hundreds of Chinese companies whose shares are traded in the US. Tech companies are among the most important sector listed on these markets.

According to a report issued by the US government last year, there are 165 Chinese companies threatened with expulsion from the American market if the new law is signed by President Trump.

Among the tech giants that stand to be impacted form the decision include:

Alibaba: The largest e-commerce and cloud services company in China and the Chinese counterpart to the famous Amazon.

Baidu: A Chinese company specialised in search and cloud services, usually described as Google of China.

Tencent: A multi-service company active in the field of social networking and messaging. It also owns many game studios and stakes in other gaming companies.

In fact, all of these companies are suspected of being partially owned or controlled by the Communist Party that rules China, and therefore it will be difficult for any of them to remain in the US stock market should the law come into effect.

Significantly, the list does not include smartphone manufacturers such as Huawei, Xiaomi, and Oppo among others. That’s because these companies are not publicly traded companies, but rather owned by private entities and are not traded, and therefore they will not be affected by this new law.

Why are Chinese technology companies being targeted?
This new law includes any foreign company available for trading in the United States, but the reality here is that the biggest affected will be Chinese companies. The law appears to be a part of the economic war waged between the two countries, which includes many tariffs, in addition to the recent tightening of sanctions on Huawei.

According to US officials, the law is related to Chinese companies which have long benefited from the US investments without adhering to the same standards of transparency and legislation imposed on American companies, and which therefore pose a higher risk to American investors.

In April, fraud and manipulation of numbers and sales were discovered in the Chinese company Luckin Coffee that is traded in the United States. The company’s shares collapsed quickly from over $30 per share to only $2 in a matter of days.

At the turn of the millennium, the scandal over Enron and several other companies, caused a wave of criticism for the lack of regulation of the stock market. As a result, restrictions and measures to monitor the financial status of American companies traded on the markets were imposed.

This new law intends to apply those same standards of oversight uniformly across all companies listed on the American stock exchange.

How have Chinese tech companies reacted?
Now that the law is close to becoming a reality, Chinese companies are becoming increasingly aware of their position with regards to the law. Baidu’s CEO has said the company is weighing its options and is considering moving its listing from US equity markets to other equity markets closer to China.

For European companies , the new law is not expected to pose a problem as pre-existing European legislation already required them to adhere to high levels of transparency, sometimes more than those that are demanded of by American companies within the US.

A major contention for the Chinese companies beyond the regulation of financial transparency though seems to be the idea of investigating their associations with the Chinese government.

It appears that many Chinese technology companies will exit the US stock markets proactively.

Although forecasting the impact of this new law is very difficult, it may also prompt many American shareholders to sell their shares in Chinese companies which will impact them in the short term.

This story originally appeared on MENA Tech

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