The U.S. Senate approved legislation Wednesday that would require companies listed on stock exchanges to certify they aren’t under the control of a foreign government.
It specifically takes aim at companies based in China that could be working under the influence of the Communist government in Beijing.
The news sent shares of Chinese e-commerce giant Alibaba Group Holding Ltd. (NYSE: BABA) tumbling Wednesday. Shares were down another 3% through afternoon trading Thursday.
Lawmakers have expressed concern that American money is funding Chinese efforts to dominate fields from artificial intelligence to internet data collection.
“I do not want to get into a new Cold War,” Sen. John Kennedy, R-La., said on the Senate floor, adding that he wants “China to play by the rules.”
Companies will be delisted from American exchanges if they fail to complete the certification.
To investors with money in Chinese companies, that could generate fear.
However, adding the extra layer of scrutiny is actually a good thing — especially for investors.
A Silver Lining in the Threat of Delisting Chinese Companies
Banyan Hill Publishing Chartered Market Technician Michael Carr said the law, if passed by both chambers of Congress and signed by the president, should be viewed as good news for investors.
He said it adds an extra layer of security to protect us against potential fraudulent accounting practices by foreign companies.
“The Securities and Exchange Commission was basically set up to protect investors from themselves,” Carr, the Editor of One Trade said. “In the 1920s, companies weren’t required to provide financials and the market was manipulated. U.S.-based companies now follow strict rules to minimize the risk of fraud.”
Foreign companies can claim an exemption to regulations under certain circumstances.
“I don’t think individual investors realize that since the details are buried in SEC filings rather than available with one click on Robinhood,” Carr said.
What it Means for Chinese Companies
Companies must certify they aren’t under the control of a foreign government or be audited for three consecutive years by the Public Company Accounting Oversight Board, or be delisted.
The delisting of Chinese companies from American stock exchanges cuts off the supply of capital from the U.S.
It also impacts Chinese companies looking to have an initial public offering in the future. This includes TikTok parent ByteDance Ltd. and Alibaba’s Ant Financial.
If companies can’t follow the guidelines, it would push them to other markets, such as Hong Kong.
But Carr said any new regulation should not threaten the delisting of larger Chinese companies trading currently in the U.S.
“Big companies like BABA and Baidu Inc. (Nasdaq: BIDU) make required filings, following the U.S.’s generally accepted accounting principles, using reputable auditors and providing Sarbanes-Oxley certifications,” Carr said. “Smaller companies, or large companies that committed fraud, don’t do those things.”
The Huawei Connection
One big reason for the new push for added regulations comes from the fight over Huawei Technologies Co. Ltd.
President Donald Trump has taken aim at the telecommunications giant, barring any U.S. company from doing business with it, accusing it of espionage and intellectual property theft. The ban centers around Chinese law that force companies in China to work for the government.
Huawei has become a big player in developing and selling equipment to build out 5G networks globally.
Conventional wisdom is Huawei will use its equipment to spy on foreign governments, although it denies ever doing so.
Where the Regulation Stands
After being approved by unanimous consent by the Senate on Wednesday, there is a waiting game as the House of Representatives has a companion bill currently being discussed.
A joint committee will work out any differences between the two bills before final approval and Trump’s signature. But movement on the regulation is moving rapidly.
“We believe there will be a significant push for the legislation to be taken up in the coming weeks, and we believe it is only a matter of time before this bill (or something similar) is signed into law,” Washington policy analyst Ed Mills wrote, per CNBC.
Carr said this kind of measure, while it may be bad for some foreign companies, should make investors feel more confident.
“The bottom line is the rules will keep investors who don’t understand the rules a little safer,” Carr said. “Reputable companies will still be listed on U.S. exchanges. This is just a reminder that investing is hard and individual investors need to do more research before plunging into hot stocks.”