By Humeyra Pamuk
WASHINGTON (Reuters) - U.S. Secretary of State Mike Pompeo on Thursday warned American investors against 'fraudulent' accounting practices of China-based companies and said the Nasdaq's recent decision to tighten listing rules for such players should be a model for all other exchanges around the world.
His remarks on the issue, reported first by Reuters before being delivered via a statement, illustrate the Trump administration's desire to make it harder for some Chinese companies to trade on exchanges outside of China.
It also represents the latest flashpoint in the relationship between Washington and Beijing at a time of escalating tensions between the world's two largest economies over trade, the coronavirus pandemic as well as a spat over Hong Kong.
"American investors should not be subjected to hidden and undue risks associated with companies that do not abide by the same rules as U.S. firms," Pompeo said in a statement. "Nasdaq’s action should serve as a model for other exchanges in the United States, and around the world."
"I applaud Nasdaq for requiring auditing firms to ensure all listed companies comply with international reporting and inspection standards," Pompeo said.
Nasdaq Inc (O:NDAQ) took action last month and tightened listing rules, in a bid to curb initial public offerings of Chinese companies closely held by insiders and with opaque accounting.
The exchange declined to comment on Thursday. Its tightening of listing standards came after Chinese coffeehouse chain Luckin Coffee Inc (O:LK), which had a U.S. IPO in early 2019, announced that an internal investigation showed its chief operating officer and other employees fabricated sales deals.
President Donald Trump on Friday said his administration would begin the process of eliminating special U.S. treatment for Hong Kong to punish China, saying Beijing's move to impose new national security legislation meant the territory no longer warranted U.S. economic privileges.
He also said he was instructing a presidential working group to study the differing practices of Chinese companies listed on the U.S. financial markets, with the goal of protecting American investors.
"The real issue is the lack of transparency and the lack of disclosure to the American investors," Keith Krach, undersecretary for economic growth, energy and the environment at the U.S. State Department, told Reuters on Wednesday.
"No country should be allowed to lie to the American investors to create an unfair advantage, especially when operating in American markets," Krach said, adding that there was a push within the administration to make U.S. investors more aware about China's opaque accounting practices.
As a result of the U.S. pressure, many U.S.-listed Chinese firms will likely list on the Hong Kong exchange this year in part because of U.S. political pressure, the head of the exchange said Thursday.
The U.S. Securities and Exchange Commission (SEC) has been locked in a decade-long struggle with the Chinese government to inspect audits of U.S.-listed Chinese companies. The regulator’s accounting oversight arm, the Public Company Accounting Oversight Board (PCAOB), is still unable to access those critical records, it has said.
In April, the head of the SEC, Jay Clayton, warned investors against putting money into Chinese companies due to ongoing problems with those companies’ disclosures.
A senior U.S. official said he hoped the SEC would review a 2013 memorandum of understanding signed with China to allow Chinese companies to not share information if their local laws forbid them from doing so.
"That waiver should probably be reviewed at this point in time as to whether it is still appropriate and if not be rescinded," he said, adding that the decision was up to the SEC.