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Chinese enterprises seeking HFCAA replacements

Updated: Sep 2, 2022

Before being delisted from U.S. exchanges, Chinese companies designated as noncompliant with the Holding Foreign Companies Accountability Act (HFCAA) are employing a range of ways to bypass or comply with the legislation.

Some vulnerable companies are dual-listing on the Hong Kong Stock Exchange, hiring an independent U.S. accounting firm to examine their accounts, or even voluntarily delisting to avoid the possibility of being delisted in 2024.

On the negotiation front, it is doubtful that the United States and China would reach a deal before the deadline that would subject Chinese public businesses to the same audit scrutiny as other publicly traded corporations.

Gary Gensler, chairman of the U.S. Securities and Exchange Commission (SEC), told reporters during a rulemaking meeting on Wednesday that he is "not especially confident" that a resolution to the matter will be achieved.

“It’s quite possible that there’s no deal here,” Gensler said, according to the Wall Street Journal.

The Public Company Accounting Oversight Board (PCAOB) has classified more than 150 Chinese public businesses listed on U.S. stock exchanges as non-compliant with the HFCAA, which was approved by Congress in December 2020. Thursday added two more.

On the list are the social media giant Weibo, the restaurant chain Yum China Holdings, the technology company Baidu, the e-commerce company, the video game publisher NetEase, the video platform Bilibili, the e-commerce platform Pinduoduo, and the electric vehicle manufacturers Li Auto and NIO. Also included are enterprises that have been accused of accounting fraud, such as Luckin Coffee and the video streaming service iQIYI.

Based on an examination of registrants in 2020, the SEC predicted earlier that as many as 273 firms might be discovered as violating the law.

The PCAOB is meant to audit the records of Chinese public businesses listed on U.S. exchanges, but the Chinese government has consistently prevented this, alleging national security concerns.

In accordance with the statute, beginning in 2021, publicly traded businesses in nations that restrict audit inspections by U.S. regulators may be delisted after three years of noncompliance. A firm might be delisted no sooner than 2024.

Several Chinese public firms have suggested that they will not wait for a diplomatic conclusion. Companies like as and NIO are dual-listed on the Hong Kong Stock Exchange, offering a home for their listing should it be delisted from the New York Stock Exchange.

A biotechnology business highlighted by the PCAOB, Zai Lab Limited, declared in June that it had switched from a secondary listing to a primary listing on the Hong Kong Stock Exchange. It is now listed in both Hong Kong and Nasdaq, according to the business. In the press release, it was said that the action created "new opportunities to attract potential investors," although the HFCAA was not mentioned.

The Chinese ridesharing business DiDi Global, also on the list, revealed in May that its shareholders had chosen to voluntarily delist from the New York Stock Exchange. The corporation did not identify the HFCAA as a cause for their decision. A spokesperson for the China Securities Regulatory Commission, which has repeatedly stated that the United States and China are making progress in their negotiations, stated in April that DiDi's plan to voluntarily delist has "nothing to do with the ongoing negotiation between Chinese and U.S. regulators over audit oversight cooperation, nor will it affect the advancement of such cooperation."

Flagged firms also use the services of a U.S.-based independent accounting firm to audit their records.

ACM Research, a Chinese maker of semiconductor process equipment, said in May that it has chosen Armanino, an independent public accounting company located in the United States, to serve as its accounting firm. Armanino will audit the financial accounts of ACM for the fiscal year ending in December 2022.

"Upon issuance of consolidated financial statements for the fiscal year ended December 31, 2022, which have been audited by Armanino, ACM anticipates that it will no longer appear on the SEC's "conclusive list of issuers identified under the HFCAA" and will no longer be subject to the related delisting guidelines of the HFCAA," the company stated. The adjustment was intended to be formalised at the company's annual shareholder meeting on June 30.

BeiGene, a Chinese biotechnology business, employs the same strategy. According to an SEC filing, in March BeiGene chose U.S.-based Ernst & Young as its independent accounting firm for the fiscal year ending in December 2022, replacing an EY subsidiary located in China.



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