Chinese Firms’ New York Listings Face Heat in Senate Bill

  • Senators Scott and Van Hollen announced plan on Thursday
  • Variable interest entities already facing SEC scrutiny

The shell companies that Chinese companies often use to list shares in New York would face heightened scrutiny from American regulators under a new bill in the US Senate.

Rick Scott, a Florida Republican, and Chris Van Hollen, a Maryland Democrat, said on Thursday that they’d introduced legislation to crack down on so-called variable interest entities, or VIEs, that Chinese businesses commonly use for US listings. The bipartisan plan, which would need to clear several hurdles to become law, is the latest move in Washington to pressure companies based China to disclose more information to American investors.

Securities and Exchange Commission Chair Gary Gensler has repeatedly raised concerns with VIEs. He has said that people in the US who think they’re investing in a Chinese company by buying shares on the New York Stock Exchange or Nasdaq markets might not realize that they are actually putting money into shell companies, which are often based in the Cayman Islands and merely maintain service agreements with businesses based in China.

A representative for the SEC declined to comment on the legislation. Under the plan, which was announced in a statement by Scott’s office, the SEC would have to start requiring:

  • Stock symbols in the US to make clear to investors that they correspond to VIEs.
  • Brokers to provide warning labels on the legal hurdles that investors could face in recouping money when they invest in the shell companies.

In addition to a push for increased scrutiny around VIEs, US lawmakers and regulators have been pressing for Beijing to allow American inspectors to review the audit work papers of firms that trade in New York.

In what was billed as a major breakthrough, officials in Beijing and Washington on Aug. 26 said they had reached a preliminary deal to allow American officials to review audit documents of Chinese businesses that trade in the US — a first step toward avoiding the delisting of about 200 firms from New York exchanges.

Author: Lydia Beyoud, Bloomberg

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