Despite big changes at the White House in 2021, the push to protect U.S. investors in Chinese companies is still on track, as regulators prepare to hold the companies to tougher accounting standards and some face an outright ban.
"There will continue to be tension between the U.S. and China — even with a new administration taking the reins — and national security considerations as well as accounting standards will remain important," said Christian McCormick, a director and senior ESG strategist with Allianz Global Investors in Denver.
"Every single discussion we have with institutional investors, the topic of investing in China comes up."
Earlier this month, a White House executive order banned investing in Chinese companies linked to its military. As of Jan. 1, individuals or companies can no longer own direct shares or funds holding shares in 31 Chinese companies identified as security risks.
Many more U.S. investors will be affected by accounting rules expected to be proposed next month by the Securities and Exchange Commission. The SEC has authority over shares traded on U.S. exchanges as American depository receipts, negotiable certificates issued by U.S. banks that represent shares in a foreign stock traded on a U.S. exchange.
The U.S.-China Economic and Security Review Commission identified 156 Chinese companies with a combined market capitalization of $1.2 trillion, including 11 state-owned enterprises, that are listed on America's three largest exchanges, Nasdaq, New York Stock Exchange and NYSE American.
Under the proposed rules that will first go through a public comment period, Chinese companies on the exchanges would have to use auditors supervised by the U.S.' Public Company Accounting Oversight Board, which has long been frustrated in gaining access to Chinese audits.
PCAOB was created by the Sarbanes-Oxley Act of 2002 to regulate public company audits following accounting scandals at Enron Corp. and WorldCom Inc. PCAOB standards apply to any company that taps U.S. markets, and more than 50 foreign jurisdictions permit PCOAB reviews with the notable exception of China.
Chinese companies refusing to follow the expected SEC rules, if finalized, would face being delisted by the exchanges, a move welcomed by many institutional investors as a matter of principle.