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SEC Chair: Roughly 250 Chinese companies could be delisted 'as early as 2024'

In early 2020, an accounting scandal at Luckin Coffee blindsided its American stockholders as the coffeehouse chain's stock price fell to the floor.

Luckin Coffee highlighted a problem: American investors knew little of Chinese company financials while the stocks trade freely on U.S. exchanges. The incident sparked questions regarding whether other crises involving U.S.-listed Chinese companies lurked around the corner.

Congress acted to stop the next Luckin by passing the Holding Foreign Companies Accountable Act that year. The law gave Chinese companies an ultimatum: Either be delisted or follow the accounting transparency provisions that other U.S.-listed foreign companies already comply with.

Jenny Qian Zhiya CEO of Luckin Coffee, and Charles Zhengyao Lu, non-executive chairman of Luckin Coffee, ring the Nasdaq opening bell with employees to celebrate the company's IPO at the Nasdaq Market site in New York, U.S., May 17, 2019. REUTERS/Brendan McDermid
Luckin Coffee joined the Nasdaq with an IPO in 2019 just one year before being embroiled in an accounting scandal. (REUTERS/Brendan McDermid) (Brendan McDermid / Reuters)

Now, the issue is in the hands of regulators and Securities and Exchange Commission Chair Gary Gensler, who in a new interview for Influencers with Andy Serwer this week, offered an update.

“We've had some good discussions with our counterparts from China,” Gensler said of the Public Company Accounting Oversight Board (PCAOB), the nonprofit corporation established by Congress that he oversees. “But it's really up to the officials in China.”

If China changes tack, he says, “then there's a path forward.” But otherwise "Congress has spoken: about 250 Chinese companies," would have to suspend trading here "potentially as early as 2024."

‘Audit the auditors’

In addition to accounting requirements, the 2020 law also requires companies to disclose whether a foreign government owns or controls them.

A group known as the U.S.-China Economic and Security Review Commission has compiled a list of 248 Chinese companies now listed on the biggest three U.S. stock exchanges — including massive companies like Alibaba (BABA), Baidu (BIDU) and JD.com (JD).

What needs to happen, Gensler and other officials say, is for China to allow the PCAOB to look inside the Chinese auditors. Gensler described this “a kind of simple idea — audit the auditors."

“There's some basic understandings that if you want to list in the U.S., you need to comply with our investor protection rules,” Gensler says.

The law essentially treats U.S.-listed foreign companies the same way it treats American companies. “We just want Chinese companies to play by the same rules as everybody else,” is how Sen. Chris Van Hollen (D-MD), one of the bill's lead sponsors, put it to Yahoo Finance after the bill passed the Senate.

The most recent law updated the landmark Sarbanes-Oxley Act of 2002, which created the PCAOB and established the set of rules that China has largely avoided.

The 2020 law detailed how long Chinese companies could avoid the rules before delisting is on the table.

Ben Werschkul is a writer and producer for Yahoo Finance in Washington, DC.

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