United States imposes new financial market sanctions on Chinese firms

At the beginning of December, the US House of Representatives unanimously approved the Holding Foreign Companies Accountable Act, paving the way for delisting from American stock exchanges any foreign firm that fails to comply with US accounting rules. The act was unanimously passed in May by the US Senate, and now moves to the desk of president Donald Trump for signing.

Even if written with Chinese firms in mind due to years of various accounting scandals, the act applies in principle to any foreign firm. The law requires firms to submit to audits by the US Public Company Accounting Oversight Board (PCAOB). Firms will also have a duty to report whether they are owned by a foreign power or if a foreign power holds a controlling stake in the business. If a firm has been out of compliance for three years in a row, it will be delisted from all US stock exchanges. The law includes a three-year transition period.

China has generally frowned on the idea of external audits, citing national security as the concern. The US Congress reports that as of October, US stock exchanges listed 217 firms that are domiciled in China. The market capitalisation of such firms was $2.2 trillion, or about 6 % of the total market cap of US exchange-traded firms.

In November, president Trump also signed an executive order forbidding ownership or trading in the shares of firms involved with the Chinese military. The order currently affects 35 firms that appear on lists published by the US Defense Department over the year. These listed firms are considered to be involved in the development and modernisation of the Chinese military and thereby pose a direct threat to US national security.

When the order goes into effect on January 11, 2021, investors will have ten months to divest completely of their shares in companies on the list. The order will also cause changes for global stock exchange indices that include the listed Chinese firms. Global index provider MSCI announced it would begin to establish the necessary steps to remove them, while FTSE Russell said it would just drop the listed Chinese firms from its own indices on December 21, 2020.