A bill that threatens to delist Alibaba stock, JD.com (JD), Nio (NIO) and other China stocks from U.S. exchanges within three years cleared the House with a unanimous voice vote Wednesday evening. President Donald Trump, who has no desire to make nice with China in his final weeks, is expected to sign the Holding Foreign Companies Accountable Act, which cleared the Senate in May.To get more
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China stocks have been under a cloud since Monday. Alibaba (BABA) fell 1% in Wednesday's stock market trading, bringing its loss to 5.5% for the week. E-commerce rival JD.com stock is down 5.6% this week, but Pinduoduo (PDD) is now even, after rallying 5.5% on Wednesday. Nio stock is down 11.2% this week, despite rebounding 5.8% Wednesday amid strong November EV sales numbers in China. But Nio has been on a huge tear for months. The biggest loser, by far, is electric-vehicle maker Kandi Technologies (KNDI), which has tumbled 38.6% since getting hit by fraud allegations on Monday. Those allegations come at an especially sensitive time, as the U.S. decides how firm of a stand to take on Chinese accounting transparency.
Wall Street stands to lose billions in investment banking and trading revenue if China stocks are sent packing. Under the Holding Foreign Companies Accountable bill, China stocks would face delisting within three years, unless their auditors come under supervision of the Public Company Accounting Oversight Board. Yet Beijing has made it illegal for Chinese auditors to submit to such scrutiny from an overseas regulator, seeing it as an impingement of national sovereignty. China's hard line would seem to doom the U.S. listings of China stocks with a combined value of more than $2 trillion. However, Congress may not have the last word, says Derrick Scissors, resident scholar at the American Enterprise Institute.
"Treasury controls implementing regulations for whatever Congress passes," Scissors told IBD.In August, a policy group led by Treasury Secretary Steven Mnuchin offered a more lenient approach. To get around Beijing's refusal to let the PCAOB review the work of Chinese auditors, Mnuchin would permit Chinese firms to engage a U.S. accounting firm to do the job. Critics of Mnuchin's approach argue that U.S. accounting firms couldn't vouch for the accuracy of the secondhand data they would get to review.
In coming weeks, Securities and Exchange Commission Chair Jay Clayton may bring Mnuchin's more flexible approach up for a commission vote.But the big question is what Janet Yellen, the incoming Treasury secretary, and President-elect Joe Biden think. Mnuchin "would have attempted to strike a 2021 deal with China" to avoid the scheduled delisting, according to Scissors. "I don't know how Yellen and Biden view this," he said.To the extent that Yellen and Biden are still weighing the issue, Kandi fraud allegations may help make a case against half measures. On Monday, Hindenburg Research published a detailed report on alleged self-dealing by the EV company: Kandi: How This China-based Nasdaq-Listed Company Used Fake Sales, EV Hype to Nab $160 Million From U.S. Investors.
