OPINION:
Everyone knows about the Chinese spy balloon that floated over the continental United States recently. But even before this glaring intrusion of U.S. airspace, the new 118th Congress was already gearing up to confront China’s growing belligerence. The House Financial Services Committee just held its first hearing on “the economic threat from China.” Since lawmakers are now tackling China’s widening ambitions, they must delve into the murky financial dealings that underpin much of Beijing’s agenda.
The House hearing came at a pivotal time since Beijing continues to use America’s capital markets as a stealth means to raise funds for state-controlled companies. Congress has already attempted to rein in such duplicity through the Holding Foreign Companies Accountable Act, or HFCAA. But Beijing is still bypassing this accountability — and continuing to fleece unsuspecting U.S. investors. If the House is serious about addressing the China threat, it needs to clamp down on Beijing’s financial shenanigans.
The HFCAA was passed in 2020 to help U.S. regulators better oversee companies based in China and Hong Kong. U.S. companies readily open their books to scrutiny by the Public Company Accounting Oversight Board, or PCAOB. But Beijing consistently blocks similar reviews of Chinese companies listed in U.S. markets. Chinese law requires that financial records remain in China, and Beijing also restricts access to accounting information by citing “national security” concerns. As a result, U.S. investors remain at risk of not only buying shares in fraudulent companies but also helping Beijing raise funds for its wider geopolitical goals.
Under the HFCAA, the PCAOB was specifically tasked by Congress with inspecting the books of overseas firms, particularly in China. The law mandates that if a company fails to provide proper financials for three years, it must be removed from U.S. securities exchanges.
That sort of oversight can help U.S. investors avoid the pitfalls of shady Chinese firms such as the ride-hailing giant Didi or the debt-ridden real estate company Evergrande. In fact, many of China’s largest firms can’t meet such transparency requirements. Five major Chinese companies — including PetroChina and Sinopec — preemptively delisted from the New York Stock Exchange last summer when it became clear they couldn’t comply with U.S. regulations.
Unfortunately, the PCAOB is now failing to meet the oversight goals of the HFCAA. Instead of conducting proper audit reviews, the agency is accepting China’s half-measures as “good enough” rather than insisting on the access necessary to conduct thorough oversight. As a result, U.S. investors lack confidence in the integrity of the approximately 260 Chinese companies publicly listed on U.S. exchanges via variable interest entities.
The answer is for PCAOB to finally establish an accurate assessment of the risks posed by the Chinese audit process — and not give its seal of approval to companies with questionable audit integrity. This may mean certifying noncompliance and eventual delisting, but that is the actual purpose of the law.
As Congress holds hearings to properly meet the increased threat posed by a rising China, lawmakers should insist that PCAOB provide more thorough information on its auditing procedures. Failing that, Congress should legislate the delisting of all Chinese- and Hong Kong-based companies due to substandard audits and the risks posed for American investors.
It’s worrying, however, that the HFCAA touches only a small subset of Chinese entities in U.S. capital markets. Americans have access to hundreds of other companies via the over-the-counter market — along with more than 4,500 Chinese companies via passive investment products such as exchange-traded funds. If Congress and U.S. regulators cannot ensure basic compliance for a mere 260 companies publicly listed on U.S. stock exchanges, what protection do America’s investors have to make informed choices regarding potentially duplicitous enterprises linked to the Chinese Communist Party?
Beijing has reaped enormous rewards by exploiting America’s financial markets. This is not the behavior of a friendly regime. It’s time to make clear that if Chinese companies want to be listed on U.S. exchanges, they must fully comply with America’s laws and regulations. Otherwise, it’s time to send them packing.
• Robby Stephany Saunders is vice president for national security at the Coalition for a Prosperous America.
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