As US Congress considers delisting Chinese companies, Wall Street looks to step in and police itself
- A market-driven approach, not legislation, is considered a more effective way to keep fraudulent companies from hurting US investors
- If bill becomes law, foreign companies will be required to hand over audits for US inspection or face delisting
Wall Street is scrambling to regulate Chinese companies listed on US equity markets to avoid intervention by US lawmakers, who have expressed bipartisan frustration over the lack of financial transparency the firms have offered even as they seek investors on American exchanges.
US securities watchdogs have been in a continuing struggle with China over inspecting the audits of the country’s US-listed companies, and Beijing has refused to comply, citing state secret laws.
A market-driven approach, industry participants said recently, would be a more effective way to stem fraudulent companies from hurting US investors. At the same time, it could help prevent an exodus of fast-growing Chinese companies from US capital markets and help US investors maintain desired exposure to China’s higher growth.
“The Chinese government really widened the moat with the revised securities law that went into effect this year,” which has made “the perpetrator of the frauds effectively beyond the reach of US law,” said Carson Block, founder and chief investment officer at Muddy Waters Capital, a California investment firm known for its short-selling strategy that profits from dropping stock prices by disclosing corporate wrongdoings.
Over the years, Muddy Waters has exposed accounting problems at several Chinese companies, most recently Luckin Coffee.
12:13
‘No winner’ amid rising US-China tensions, says Hong Kong’s commerce chief Edward Yau
What can be done, Block said, is to focus on “US arms of the auditors, of the investment banks, maybe even the lawyers” as they are “the enablers” and “look to hold them financially and materially responsible”.
