Shares in dual-listed Chinese companies fell sharply on Thursday in Asia after the U.S. securities regulator adopted measures that would kick foreign companies off American stock exchanges if they do not comply with U.S. auditing standards.
The move by the Securities and Exchange Commission (SEC) adds to the unprecedented regulatory crackdown in China on domestic technology companies, citing concerns that they have built market power that stifles competition.
The Holding Foreign Companies Accountable Act, signed into law by then-President Donald Trump in December, is aimed at removing Chinese companies from U.S. exchanges if they fail to comply with American auditing standards for three years in a row.
The rules also require firms prove to the SEC they are not owned or controlled by an entity of a foreign government and to name any board members who are Chinese Communist Party officials, the SEC said in a statement Wednesday.
The China Securities and Regulatory Commission (CSRC) did not immediately respond to a Reuters request for comment.
In Hong Kong, the news prompted a sharp sell-off of the U.S.-listed Chinese companies which have listed on the city’s exchange in the past two years.
Baidu Inc shares – which debuted on Tuesday – dropped 8.85% in early Thursday trade, Alibaba Group Holding Ltd slipped 4.2%, JD.Com Inc fell 4.45% and Netease Inc was down 3%.
The falls were in contrast to a 0.2% increase in the broader Hong Kong Hang Seng Index and a 1% fall in the Hang Seng Tech Index. The tech index has fallen 11.3% in March.
“A lot of investors thought the U.S. and the Biden administration would be more amicable towards China and things would be easier, but this news shows that it is going to be just as tough,” Wealthy Securities Managing Director Louis Tse said.
DailyFX strategist Margaret Yang said the Chinese-listed stocks were also under pressure after it was reported that China was considering creating a state-backed joint venture with domestic tech firms to oversee user data they collect.
“The latter probably marks a further tightening of government control over the technology sector,” she said.
But shares in Hong Kong Exchanges and Clearing Ltd, operator of the city’s stock exchange, rose 3.35% which Kingston Securities director Dickie Wong said was the result of investors expecting more homecoming listings from China’s U.S.-listed stocks.
“There’s never a dull moment in equity markets. There has been a major reaction in the American Depositary Receipts in the U.S., but I think it’s too early to tell what the exact impact will be,” a Hong Kong-based capital markets banker said. The banker declined to be identified because of the sensitive nature of the topic.
The SEC fast-tracked the rules around how companies should submit documentation because it was required to issue them within 90 days of the Act becoming law.
The SEC is now seeking public comments on a process for identifying companies that fail to meet the standards.
Some analysts said U.S.-listed Chinese firms may be unable to comply with U.S. accounting requirements because they could risk violating Chinese law.
“It is quite difficult for China to open the accounting of all U.S.-listed companies to U.S. regulatory agencies, especially for some listed companies that involve national security or national data,” Everbright Sun Hung Kai strategist Kenny Ng said.
“After the introduction of the final amendments, it is expected that China and the United States will continue to negotiate for a period of time, and the uncertainty during this period will continue to affect the share performance of U.S.-listing Chinese companies.”
The new rules come amid simmering tensions between the United States and China, with bipartisan support for a tough U.S. approach.
Last week in Alaska the two countries held their first high-level meeting under President Joe Biden’s administration, with both sides leveling sharp rebukes of the others’ policies.
A flurry of 11th-hour efforts under the Trump administration led to dozens of Chinese companies being delisted from U.S. exchanges and over-the-counter trading platforms in recent months due to allegations of Chinese military affiliations.
The SEC said it was still assessing how to roll out the rest of the law’s requirements, including the identification process and trading prohibition requirements.
Reporting by Katanga Johnson; Additional reporting by Scott Murdoch in Hong Kong, Tom Westbrook in Singapore, Chris Prentice in Washington and John McCrank in New York; Editing by Jonathan Oatis, Christopher Cushing and Kim Coghill