Amid the Covid-19 pandemic and mounting voices of protectionism and deglobalization, the rising tensions between China and the U.S. have cast a cloud over the prospects of U.S.-listed Chinese companies and China’s opening-up of its capital market.
In an exclusive interview with Caixin, Yi Huiman, chairman of the China Securities Regulatory Commission (CSRC), pledged continued opening-up, called for cooperation with U.S. regulators and proposed joint investigations of financial frauds by some U.S.-listed Chinese companies.
Here’s a transcript of the interview:
Caixin: Since the Luckin Coffee financial reporting fraud scandal was exposed, Chinese and foreign investors have been wary of Chinese stocks, fearing that if the related problems could not be solved, U.S.-listed Chinese companies could face delisting. What is the CSRC’s view on this issue?
Yi: Cross-border listing is a win-win choice under the environment of capital globalization. Chinese companies choose listing in the U.S., which was originally an important reflection of New York’s role as a global financial center. These listings play a very good role in further expanding the asset selection in the destination market and improving the investment returns of global investors. It is an all-win for everyone.
Luckin’s financial fraud scandal can by no means represent all Chinese companies listed in the U.S. Amid the post-pandemic abundant or even flooding liquidity globally, major financial markets may all face shortages of quality assets, and competition for high-quality listing candidates will be even more intense. Some political forces in the U.S. push for delisting of Chinese stocks, which will inevitably lead to lose-lose or all-lose results. This is not only what we do not want to see, but also what U.S. financial regulators and Wall Street do not want to see.
Capital seeks profits and is the smartest. We believe America will value New York’s attraction to high-quality assets and global investors. International investors will make informed choices based on what suits their best interests; U.S.-listed Chinese companies will also assess the situation and make appropriate responses according to their own circumstances.
The sustainable development of any international financial center depends on the trust from global issuers and investors. International financial centers are formed in the course of capital globalization. The status of a financial center reflects the strong financial strength and superior financial ecology of these countries and regions and also represents the trust and recognition of global investors in the investment environment and the investment value of listed companies. As one of the international financial centers, New York’s sustainable development depends on the trust of global issuers and investors.
According to the World Federation of Exchanges, as of the end of April 2020, 507 of the 2,152 listed companies on the NYSE were foreign companies, accounting for 23.6% of the total. Of the 3,141 companies listed on Nasdaq, 457 were foreign companies, or 14.5%. Foreign investors held about 25% of the market value of stocks in the U.S. financial market at the end of 2019, data from U.S. Treasury Department showed. The market structures of other global financial centers such as London, Tokyo and Hong Kong are similar to the U.S.
Caixin: How to push forward effective cross-border regulatory cooperation?
Yi: The CSRC highly values cross-border regulatory cooperation and has always been open and cooperative. It is the common responsibility of securities regulatory authorities of all countries to improve the information disclosure of listed companies and protect the legitimate rights and interests of investors. In cross-border securities regulatory cooperation, we adhere to the basic principles of following international practices, showing mutual respect, conducting effective communication and seeking mutual trust and win-win results.
Over the years, the CSRC has maintained active communication with the U.S. Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB). There have been many successful cases of cooperation. Despite the current political noise in the U.S., the CSRC will continue to strengthen cooperation with American regulators. In joint investigations of financial fraud and other illegal activities and violations of listed companies, we follow the principles of earnestly fulfilling cross-border regulatory cooperation obligations, providing law enforcement assistance in accordance with multilateral law enforcement cooperation arrangements of international organizations, jointly safeguarding fair market order and protecting the legitimate rights and interests of investors.
We understand and respect the U.S. regulatory idea of “easy access and strict regulation.” As for the regulatory problems in some U.S.-listed foreign companies such as Luckin Coffee, we believe that strengthening cross-border cooperation is the right way to solve the problems. Arthur Levitt, former SEC chairman, recently wrote an article proposing to strengthen cross-border regulatory cooperation between China and the U.S. We strongly agree with his views.
Joint inspection is feasible
Caixin: Audit working papers are a key issue in the cooperation between China and the U.S. in audit supervision and regulation. Can China provide the U.S. with audit working papers and how to do it?
Yi: China has never prohibited or prevented accounting firms from providing audit working papers to overseas regulators. We understand that the essence of Chinese laws and regulations is that information such as audit working papers should be exchanged through channels of regulatory cooperation and in accordance with relevant provisions on security and confidentiality. This is also in line with international practice.
So far, the CSRC has provided the SEC and the PCAOB with audit working papers of 14 U.S.-listed Chinese companies, including three in 2019. We have long been in close communication with the PCAOB and have worked hard to find an effective path for cooperation on audit supervision. From the PCAOB’s visit in China in 2012 to our assistance in PCAOB’s pilot inspection of a Chinese accounting firm in 2017, both parties have tried many ways. During the pilot inspection, we also provided the PCAOB with the working papers of some audit projects. I would say that the cooperation was pretty smooth.
Caixin: The U.S. has signed regulatory cooperation agreements with many other countries in the world. Is there any global practice that China and the U.S. can learn from?
Yi: After years of practice and adjustment, we believe that “joint inspection” in accordance with international practice should be a feasible path. We hope we can continue cooperation with the U.S. in this direction on the basis of previous pilot programs.
Since 2019, we have told the PCAOB that we have agreed to carry out consultations on the “joint inspection” approach and have provided specific proposals to the PCAOB on many occasions. However, the U.S. has never given any positive feedback.
I think the PCAOB may be under some pressure in the current political climate in the U.S. The key to moving forward, then, is whether the U.S. really wants to solve the problem. We welcome the PCAOB to sit down for talks with us at any time. We believe that the basis of cooperation between us is greater than the differences. As long as the two sides proceed with the goal of resolving the issue and carry out consultations on an equal footing and in a professional manner, we will surely find a satisfactory and appropriate path for cooperation. We have full confidence to resolve our differences through cooperation.
Caixin: Will providing audit working papers solve all kinds of violation problems in cross-border supervision all at once?
Yi: Joint inspection and audit working papers are of course important in combating crimes in global capital markets, but they are only an important part or vehicle in cross-border regulatory cooperation. More importantly, a high degree of mutual trust between regulators should be built through full communication and collaboration, and on this basis, a joint law enforcement alliance should be established to combat cross-border securities crimes. Lack of trust and cooperation cannot solve the problem of effectively combating financial fraud.
Now, many professional issues in cross-border regulatory cooperation have been politicized by people with ulterior motives. In terms of professional supervision, China and the U.S. should first build mutual trust and convey confidence to the market. I always believe that given the current laws and regulations, there is no obstacle to cooperation, and we can certainly find a path for cooperation. As long as the U.S. is willing to sit down and talk, differences will surely be resolved.
Financial fraud is “a tumor”
Caixin: Is the current path clear for U.S-listed Chinese companies to return to the A-share market? Can those companies that fail to meet domestic listing requirements be allowed to list on the New Third Board? [The New Third Board is China’s over-the-counter market.]
Yi: Each country and region has its own set of listing standards and requirements. Recently, the CSRC issued the “Notice on Relevant Arrangements for the Listing of Innovative Pilot Red-Chip Enterprises in China.” [Red-chip companies are mainland companies incorporated outside the Chinese mainland and listed in Hong Kong.] The Shanghai and Shenzhen stock exchanges also issued regulatory arrangements and information disclosure guidelines for the listing of red-chip enterprises on the STAR Market and the ChiNext. From the current situation of U.S.-listed Chinese companies, some may not meet the domestic listing requirements.
Companies must have a profit model. If a company operates by burning money, telling stories, fueling speculation, but has no capability for continuity of operations and incurs long-term losses, it is not suitable to go public. This is a consensus among all regulators.
Caixin: Financial fraud by some foreign-listed Chinese companies has damaged the reputation of Chinese companies. What is your comment?
Yi: Such behavior is a tumor on the capital markets and is the target of both Chinese and foreign regulators. We should strengthen regulatory cooperation and work together to remove the tumor and hold those responsible for the fraud accountable. For Chinese companies that choose to list overseas, such as the U.S. and Hong Kong, their listing process does not need to go through any procedure required by the Chinese regulator. It is very difficult for us to know in advance which companies plan to go public overseas. Foreign investors should have taken this into account when trading these stocks and factored this into the pricing. Even so, we will strengthen cross-border regulatory cooperation with the destination’s regulators to jointly safeguard the legitimate rights and interests of investors from all countries.
The opening of China’s capital market has not slowed down
Caixin: Given the impact of the Covid-19 pandemic and the tension between China and the U.S., will the overall opening pace of China’s capital market be affected?
Yi: Since the beginning of this year, the opening of China’s capital market has not slowed down due to the pandemic and frictions between China and the U.S. Instead, it has accelerated. We lifted the restrictions on foreign ownership of futures, securities, and fund management companies in China ahead of schedule. The first phase of the China-U.S. economic and trade agreement was successfully implemented. So far, six global companies, including UBS, Nomura and JPMorgan Chase, have been approved for their majority-controlled securities joint ventures or fully owned units in China. This is a core part of the opening-up of the financial sector. Foreign securities, funds and futures companies enjoy equal treatment and fair competition with their domestic rivals in terms of market access and business scope, which is an important step forward in realizing national treatment in all respects.
Caixin: Despite the recent net inflow of foreign capital represented by northbound capital from Hong Kong, the proportion of foreign holdings in the total market value of the A-share market is still relatively low, far lower than that in other countries and regions. What further measures will the CSRC take to attract foreign investment?
Yi: The CSRC will unswervingly and steadily advance the high-level two-way opening-up of the capital market. First, we will continue to improve the basic system of the capital market. This includes not only the ongoing reform of the capital market itself but also the improvement of cross-border investment and financing, transaction settlement and other systems. Second, we will continue to deepen all-level international cooperation. We will further optimize the Shanghai and Shenzhen-Hong Kong Stock Connect mechanism. We will further improve the Shanghai-London Stock Connect mechanism, broaden the cross-border ETF exchange mechanism, and strengthen China-Europe financial cooperation. At the same time, we will comprehensively promote regulatory improvement and risk prevention, improve cross-border capital monitoring and early warning mechanisms, and strengthen coordination and cooperation of cross-border supervision and information and data sharing so as to ensure the sound operation of the capital market in an open environment.
The most important thing to attract foreign investment is the fundamentals of China’s economy and the long-term trend of development. Foreign investors will come to invest if they have confidence in China’s future economic development. As for the technical issues, including the transaction settlement system, risk management tools and trading habits, we will consider the demands of foreign capital to gradually improve them according to the overall market situation and development stage.
Hong Kong is “the world’s Hong Kong”
Caixin: The recent situation in Hong Kong has made people worry about the future. Some even worry that Hong Kong will eventually be replaced as a financial center. What do you think?
Yi: Over the past four decades, Hong Kong has played an irreplaceable and unique role in the reform and opening-up of the mainland capital market. Taking advantage of its unique geographical advantages, the “one country, two systems” institutional environment, and on the back of the rapid economic development of the mainland, Hong Kong’s status as an international financial center is increasingly consolidated.
We should see that Hong Kong is not only China’s Hong Kong, but also the world’s Hong Kong. In this sense, letting Hong Kong fully play its role as an international financial center is in the interests of China, the world and the new era. Under the principle of “one country, two systems,” the CSRC will further deepen cooperation in markets, institutional and product fields, jointly cope with various external disturbances, risks and challenges, and unswervingly safeguard Hong Kong’s status as an international financial center.
Caixin: How do you view the competition between Hong Kong and the Shanghai and Shenzhen stock exchanges?
Yi: We believe that moderate competition is conducive to development and innovation. If there is only one exchange, the quality of service will not improve. The three stock exchanges in the Chinese mainland and Hong Kong certainly compete with each other to a certain extent, but cooperation is still a mainstream trend. The development of the Shanghai and Shenzhen-Hong Kong Stock Connect is the best example. At the same time, each exchange has different characteristics. Which exchange companies choose to list is ultimately a market-based choice. It is a good thing that the three exchanges offer a wide range of options. As regulators, we are happy to see it happen, and we respect the market’s choice.
Caixin: How to strengthen investors’ confidence in Hong Kong?
Yi: Global investors’ confidence in Hong Kong depends largely on how they view the Chinese mainland. If they still value the huge market in the mainland and have confidence in our reform and opening-up, capital is profit-driven and will go wherever there is opportunity. There is no doubt about it.