U.S. moves to protect investors from China’s firms

The People’s Republic of China has long prohibited Chinese companies listed on U.S. stock exchanges from complying with U.S. regulatory requirements designed to protect investors, claiming compliance would violate PRC laws on national security information.

The failure to meet basic disclosure requirements has enabled companies like Luckin Coffee Inc. to mislead investors. In April, the Beijing-based coffee shop chain admitted to overstating revenues by more than $300 million, a scandal that cost investors when the company’s stock price collapsed, Reuters reports.

The Trump administration has proposed new requirements that would protect investors by ensuring that companies listed on U.S. exchanges disclose audit information with the Public Company Accounting Oversight Board. The U.S. Congress established the PCAOB, a nonprofit corporation, to promote accurate and independent auditing.

The recommendations “will increase investor protection and level the playing field for all companies listed on U.S. exchanges,” Treasury Secretary Steven T. Mnuchin said in an August 6 statement. “The United States is the premier jurisdiction in the world for raising capital, and we will not compromise on the core principles that underpin investor confidence in our capital markets.”

Woman and two children sitting inside a coffee shop underneath a round sign with a deer logo (© Mark Schiefelbein/AP Images)
Customers sit inside a Luckin Coffee shop at a Beijing shopping center. (© Mark Schiefelbein/AP Images)

The recommendations unveiled August 6 call for the U.S. Securities and Exchange Commission to ensure Chinese-based companies comply with the same disclosure requirements as other foreign firms listed on U.S. exchanges, including providing PCAOB with the access and information needed to perform audits as required by U.S. law.

The PCAOB establishes standards for public accounting firms and monitors audits for compliance with those standards. The board also investigates and takes action against companies that fail to comply.

The PCAOB conducts oversight of audits of companies based in the United States and numerous other countries, including Australia, Brazil, India, Japan, Mexico, Nigeria, Russia, Spain, the United Arab Emirates and the United Kingdom.

Yet the PRC has long prevented companies that are either based in China or have major operations there from following U.S. requirements for protecting investors, according to a June 4 presidential memo calling for U.S. officials to review and address the problem. The PRC recently passed a law forbidding companies from disclosing audit information without prior consent of Chinese regulators.

In the memo, President Trump says companies around the world list on U.S. stock exchanges to attract investors. But those investors trust that financial information on listed companies is accurate and that U.S. regulators will quickly address fraud.

“It is both wrong and dangerous for China to benefit from our capital markets without complying with critical protections that investors in those markets rightfully expect and deserve,” Trump said. “We must ensure that laws providing protections for investors in American financial markets are fully enforced for companies listed on United States stock exchanges.”