America is doing it again!

On Wednesday, May 21, the US Senate passed a bill to strengthen the supervision of foreign enterprises. The bill, called the Foreign Company Accountability Act, stipulates that any foreign company that fails to comply with the audit requirements of the US listed companies Accounting Supervisory Board (PCAOB) for three consecutive years will prohibit the listing of its securities on the US stock exchange. The bill will also require listed companies to disclose whether they are owned or controlled by foreign governments.

In fact, as early as April 21, five senior executives of the Securities and Exchange Commission (SEC) and the Accounting Oversight Board of listed companies (PCAOB) issued a statement reminding US domestic investors to pay attention to the risks of the quality of financial reports and information disclosure when investing in companies headquartered in emerging markets or with significant business in emerging markets. Recently, Trump ordered the withdrawal of pensions from US-listed stocks. This plate is facing more and more pressure, where will it go in the future?

The killing tactics of the United States

On Wednesday, local time, the U.S. Senate passed a bill to strengthen the regulation of foreign companies. The bill, called the Foreign Company Accountability Act, stipulates that any foreign company that fails to comply with the audit requirements of the US listed companies Accounting Supervisory Board (PCAOB) for three consecutive years will prohibit the listing of its securities on the US stock exchange. The bill will also require listed companies to disclose whether they are owned or controlled by foreign governments.

In fact, on 5 June last year, a bipartisan corporation in the United States introduced a draft bill called "Equitable Act", which is a fair bill. The bill, introduced by US Senator Marco Rubio, requires Chinese companies listed on US stock exchanges to provide audit transcripts and be subject to stricter regulation-forcing more than 150Chinese companies trading on the US stock market (with a total market capitalization of more than $1.2 trillion) to comply with US accounting standards or be delisted. The bill has been supported by the Alliance for Prosperity of America (CPA), America's leading bipartisan organization.

Another separate bill, called the TSP Act, would prevent the main Federal Retirement savings Investment Board from participating in any audit of an accounting body that is not supported by the PCAOB or that has been sanctioned by the US government for various reasons.

On April 21st, five senior executives of the Securities and Exchange Commission (SEC) and the Accounting Oversight Board of listed companies (PCAOB) issued a statement reminding US domestic investors to pay attention to the risks of the quality of financial reports and information disclosure when investing in companies headquartered in or with significant business in emerging markets. PCAOB has limited ability to obtain the basic working documents needed to audit U.S.-listed Chinese companies, the statement said. On April 23, SEC Chairman Jay Clayton said publicly on the television program: "from the perspective of financial reporting, the supervision of China in the United States is different from that in most other parts of the world; SEC has been fighting with PCAOB for a long time to obtain audit working papers, and the committee still does not have access."

On the evening of May 19th, LUCKN COFFEE DRC disclosed that the company had received a notice from the NASDAQ market on the 15th to start the delisting process, and Ruixing planned to apply to NASDAQ for a reconsideration hearing.

The Federal Committee on Retirement savings and Investment (FRTIB) said in mid-May that it would postpone indefinitely its plans for international funds to adjust their portfolios. The thrift savings plan (TSP) managed by FRTIB is a retirement savings fund for working and retired federal employees and military personnel, similar to a corporate retirement savings fund called 401 (K). The original portfolio adjustment plan will put some money into some Chinese companies.

What is the impact and where are the Chinese stocks going?

After the passage of the above-mentioned bill, Chinese stocks such as BABA ushered in a wave of diving.

By the end of the day, Chinese stocks had fallen against the market as a whole. Judging from the recent trend, the overall trend of Chinese stocks is much weaker than that of NASDAQ.

There has been a lot of turmoil in Chinese stocks since 2020. As early as January 31, Muddy Waters announced that it had received a short report that LUCKN COFFEE DRC had falsified financial and operating data since the third quarter of 1919, when LUCKN COFFEE DRC's share price fell by more than 20 per cent.

On April 2, LUCKN COFFEE DRC revealed in an announcement that he admitted that the company's COO was suspected of falsifying 2.2 billion yuan in sales, causing LUCKN COFFEE DRC's share price to plunge more than 85% before trading and triggered a circuit breaker. After LUCKN COFFEE DRC's thunderstorm, Chinese stocks are facing a new round of confidence crisis. WolfpackResearch, an international market research institution, released a report on April 7, saying that iQIYI, Inc. had the problem of falsely increasing the number of users and income, and that he had committed fraud before IPO in 2018.

There has been a lot of turmoil in Chinese stocks since 2020. As early as January 31, Muddy Waters announced that it had received a short report that LUCKN COFFEE DRC had falsified financial and operating data since the third quarter of 1919, when LUCKN COFFEE DRC's share price fell by more than 20 per cent.

On April 2, LUCKN COFFEE DRC revealed in an announcement that he admitted that the company's COO was suspected of falsifying 2.2 billion yuan in sales, causing LUCKN COFFEE DRC's share price to plunge more than 85% before trading and triggered a circuit breaker. After LUCKN COFFEE DRC's thunderstorm, Chinese stocks are facing a new round of confidence crisis. WolfpackResearch, an international market research institution, released a report on April 7, saying that iQIYI, Inc. had the problem of falsely increasing the number of users and income, and that he had committed fraud before IPO in 2018.

Haitong believes that with the arrival of a new round of trust crisis in overseas Chinese stocks, Chinese companies with operational problems are facing the risk of elimination. In the case of overseas investors wearing "tinted glasses", high-quality Chinese stocks in overseas markets may also face the risk of being "mistakenly killed", valuations are under pressure. This will force high-quality Chinese companies to return to A-shares with the help of the east wind of policy reform.

China Merchants Xie Yaxuan said that senior officials of the US Securities and Exchange Commission (SEC) and the US listed companies Accounting Supervisory Board (PCAOB) issued warnings about the quality of financial reporting and disclosure of emerging markets and Chinese listed companies in the US. It is true that the financial problems exposed by Ruixing and other Chinese stocks are the trigger for SEC to declare its position, but combined with the past situation, the change in Sino-US relations is also an important background factor for SEC voice, so we should continue to pay attention to the potential political risks implied in it.

Audit manuscript is a core issue in SEC's warning for Chinese stocks. As China's law stipulates that domestic accounting firms are not allowed to provide audit manuscripts directly to overseas, the problem of cross-border supervision of the audit of Chinese companies has existed for a long time. Generally speaking, China and the United States have made some progress in cross-border regulatory cooperation in recent years, but to a limited extent.

The performance of short-term IPO stocks is negatively affected; auditors may conduct strict audits in order to deal with regulatory pressure and reduce inspection risks, which may lead to more explosion risks of US-listed stocks; and the number of US-listed Chinese companies will further decline in the short term. In the long run, the grey area of supervision will be compressed, and there may be a "wave of homecoming" of US-listed stocks.