US regulators have named five Chinese companies listed in New York as the first of up to 270 to be delisted if they do not provide detailed audit documents to back up their financial statements.
Yum China, biotechnology firms BeiGene, Zai Lab, and HutchMed, and technology firm ACM Research are all facing delisting, according to the US Securities and Exchange Commission. The news sparked a sell-off in Chinese stocks traded on US exchanges.
The move comes after the United States passed legislation in December 2020 requiring Chinese companies listed in the US to allow financial audits to be reviewed by watchdogs such as the Public Company Accounting Oversight Board.
Companies and their auditors were given three years to comply under the Holding Foreign Companies Accountable Act. The five companies' compliance clock starts ticking with the SEC's notice on Thursday.
If the US accounting oversight board is unable to inspect their audit records for three years, the companies named by the SEC, which are the first Chinese groups to file their 2021 annual reports, will be forced to delist from the New York Stock Exchange and Nasdaq.
Domestic companies and their Chinese auditors have been barred from complying with foreign regulators' requests. The rising tensions have effectively paralyzed a once-vibrant market for Chinese listings in New York, threatening trading of US-listed shares worth over $2 trillion.
On Thursday, China's securities regulator stated that it "opposes the politicization of securities regulation by some forces," but also stated that it has been in contact with the US audit regulator to resolve the impasse over foreign access to Chinese companies' documents.
"We believe the two sides can reach an agreement that aligns with the law and regulation of both countries . . . that protects global investors," the regulator continued.
Yum China, which owns the KFC and Pizza Hut brands and has a market capitalization of $21 billion, fell 15% on Thursday. ACM Research fell 27%, HutchMed 8%, and Zai Lab 9%.
Yum China announced in a US regulatory filing at the end of February that its shares would be delisted from the NYSE in early 2024 due to "factors outside of our control including the approval of Chinese authorities."
BeiGene, which has a market value of $22 billion and is the largest of the five companies, fell 12% on Thursday. Only about 54% of the company's listed shares are traded in New York; the rest are traded in Hong Kong and Shanghai.
As more companies publish their annual reports and provide details about their accounting standards, the SEC's list is likely to grow, according to Michael Yee, an analyst at Jefferies. He believes the SEC's decision to include three Chinese biotech companies will exacerbate investor concerns about a sector that is already under pressure.
This week, China's technology sector has been hit even harder. In the United States, iQiyi, a video-streaming platform, dropped 22%, while Bilibili, a competitor, dropped 14%. Alibaba's New York stock fell 9%.
"Investors recently have been nervous from many regulatory uncertainties in China, geopolitical risks involving China/US and multiple SEC-related inquiries involving Chinese stocks, all of which have increased uncertainty on China stocks," said Yee.
In the last three years, there has been a surge in secondary listings of Chinese companies in Hong Kong, including Alibaba, JD.com, and NetEase, owing to the uncertainty. Following Washington's decision to increase scrutiny of Nio's books, the electric carmaker began trading its stock in Hong Kong on Thursday.
BeiGene, Zai Lab, and ACM Research have all stated that they are working to comply with the law and expect to keep their listings. The SEC declined to comment, while Yum China and HutchMed did not immediately respond to requests for comment.
By fLEXI tEAM