China moves to protect offshore tech company listings

Unusual move sees regulator open consultation on access to audit documents

China's Securities Regulatory Commission has opened a consultation on revised regulations aimed at avoiding trouble for local tech companies that list on US stock markets.

In recent weeks the NASDAQ stock exchange warned Chinese tech companies Baidu and Weibo – and more besides – that they face suspension from the bourse because they don't allow the US government to see audits of their finances.

Washington wants to see those audits under the Holding Foreign Companies Accountable Act (HFCAA) – a law that requires some companies that issue securities in the US to disclose how many of their shares are owned by governments, if governments exercise control over the company, and whether any officials or regulations are connected to the Chinese Communist Party.

The revised Provisions will further strengthen compliance and orderly overseas securities offering and listing

The US feels that companies controlled by the Party, or China’s government, could at any moment choose to act against American interests. Lawmakers also just don't care for US capital being employed to bolster Chinese companies that could compete against US outfits. China's reputation for paying scant regard to intellectual property law is another reason Washington seems reluctant about aiding the growth of Chinese businesses.

For its part, China worries that if it allows local tech companies to list in the US – especially companies that hold data describing Chinese citizens – doing so creates a privacy risk. China has therefore become more cautious about allowing local companies to list offshore.

The Saturday announcement that the Securities Regulatory Commission has floated rules to allow greater scrutiny of Chinese companies is therefore notable for its conciliatory tone. China often accuses offshore regulators of treating Chinese companies unfairly or applying laws unevenly.

On this occasion, the Commission's position is that it wants to help.

"China stays committed to supporting eligible companies of all types to list or offer securities in overseas markets," the Commission stated. "The revised Provisions will further strengthen the compliance of such companies and promote healthy and orderly overseas securities offering and listing."

The proposed regulations don't give carte blanche to offshore auditors, requiring that they sign a non-disclosure agreement that respects the law of the People's Republic of China on Guarding State Secrets. Failing to do so results in liability under Chinese law – although it is unclear how China would exercise its jurisdiction if NASDAQ or a US audit firm leaked information.

The Commission hasn't set a deadline for the consultation period, but stated it will act "as early as possible" once feedback has been received.

If the laws satisfy the US government, it will be a rare example of Chinese companies being cleared of suspicions. But that's a big if, because Beijing requires party representatives be present in leadership positions at large companies, and the HFCAA requires disclosure of Party connections and can use their presence as a reason for de-listing. ®

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