US May Be Forced To Use The Nuclear Option On Chinese Stocks - News and Current Events | futures trading

Go Back

> Futures Trading, News, Charts and Platforms > Traders Hideout > News and Current Events

US May Be Forced To Use The Nuclear Option On Chinese Stocks
Started:June 18th, 2012 (08:48 AM) by kbit Views / Replies:162 / 0
Last Reply:June 18th, 2012 (08:48 AM) Attachments:0

Welcome to

Welcome, Guest!

This forum was established to help traders (especially futures traders) by openly sharing indicators, strategies, methods, trading journals and discussing the psychology of trading.

We are fundamentally different than most other trading forums:
  • We work extremely hard to keep things positive on our forums.
  • We do not tolerate rude behavior, trolling, or vendor advertising in posts.
  • We firmly believe in openness and encourage sharing. The holy grail is within you, it is not something tangible you can download.
  • We expect our members to participate and become a part of the community. Help yourself by helping others.

You'll need to register in order to view the content of the threads and start contributing to our community. It's free and simple, and we will never resell your private information.

-- Big Mike

Thread Tools Search this Thread

US May Be Forced To Use The Nuclear Option On Chinese Stocks

Old June 18th, 2012, 08:48 AM   #1 (permalink)
Elite Member
Aurora, Il USA
Futures Experience: Advanced
Platform: TradeStation
Favorite Futures: futures
kbit's Avatar
Posts: 5,839 since Nov 2010
Thanks: 3,275 given, 3,321 received

US May Be Forced To Use The Nuclear Option On Chinese Stocks

China and the U.S. appear to be an a collision course over accounting. That’s a lot more serious than it sounds. By the end of this year, unless a compromise can be reached, there is a very real chance that U.S. securities regulators may end up employing the “nuclear option”: forcibly delisting every Chinese company currently listed on a U.S. stock exchange — such as Sinopec,, China Life, and China Unicom.

It’s a potential catastrophe-in-the-making that few investors or politicians have given any serious thought to.

Last year, the US-listed stocks of more than a few Chinese companies took a beating following accusations by short sellers and research shops like Muddy Waters that SinoForest and other companies — many of which had avoided IPO scrutiny by arranging reverse mergers with already-listed entities — were grossly exaggerating their real assets and business performance in their official financial statements. These accusations prompted the Securities and Exchange Commission (SEC) to launch several fraud investigations into the Chinese companies in question.

Rather than assisting the SEC in its cross-border probes — as other countries regularly do — the China Securities Regulatory Commission (CSRC) has actively blocked the SEC’s information requests, insisting that audit materials on Chinese firms fall under China’s ambiguous yet draconian State Secrets Law. This April, when the SEC issued a subpoena to the Chinese arm of Deloitte, demanding the audit records of Longtop Financial (which collapsed last May after Deloitte resigned as its auditor), Deloitte refused, noting that the CSRC directly ordered them not to turn over such papers.

The firm argued it could be dissolved and its partners jailed for life if they were to comply. In May, the SEC responded by initiating administrative proceedings to punish Deloitte China for violating its duties under the 2002 Sarbanes-Oxley Act. Penalties could include suspending the firm’s authority to perform audits for US-listed companies, which are required under U.S. securities laws. Apparently similar subpoenas have been issued to each of the other “Big Four” global audit firms (E&Y, KMPG, and PWC), and have met with similar replies.

There is a further complication. The Sarbanes-Oxley Act also established the Public Company Accounting Oversight Board (PCAOB), a five-person body appointed by the SEC. Public accounting firms that wish to perform audits on US-listed companies must register with PCAOB, and PCAOB is required, by law, to conduct inspections of those firms. So far, Chinese authorities have refused PCAOB permission to inspect auditors based in China, including the local arms of “Big Four” global audit firms.

Last month, it looked like PCAOB might have worked out a compromise that would let it observe Chinese regulators perform their own inspection, but the SEC action against Deloitte China appears to have derailed that plan. The stage is set for a deadlock with serious, potentially disastrous implications, as my fellow CPA and Peking University counterpart Paul Gillis describes in his blog:

The PCAOB faces a December deadline to complete inspections of Chinese accounting firms that are registered with the PCAOB. It seems highly unlikely that they will meet this deadline, since Chinese regulators will not let them come to China. While the PCAOB could extend the deadline, they have already been under political pressure to act … Without resolution, the only meaningful option for the SEC, and the PCAOB, is for the PCAOB to deregister the firms and for the SEC to ban them from practice before the SEC.

The consequence of those actions would be that U.S. listed Chinese companies would be without auditors and unable to find them. Having an auditor is a listing requirement of the exchanges, so under exchange rules the companies face delisting. The U.S. listed Chinese companies would be unable to file financial statements as required. That should lead the SEC to eventually deregister the companies with the SEC.

Paul notes that shareholders in the delisted Chinese companies would still own their shares, but would be unable to trade them on U.S. exchanges. The companies would probably try to list their stock on other non-U.S. exchanges such as Hong Kong, which could prove an expensive and cumbersome option. The effect on US-China relations, and on investor confidence in cross-border investments in either direction, would be devastating. Yet the alternative would be to allow Chinese companies to trade their shares on U.S. exchanges while openly flouting U.S. securities laws — not just Sarbanes-Oxley, which is somewhat controversial, but anti-fraud provisions dating back to the 1930s.

In the meantime, Chinese regulators have been moving to exert even greater secrecy and control over companies’ financial information. Local bureaus of the State Administration for Industry and Commerce (SAIC) have started restricting public access to domestic corporate filings, after short sellers and analysts used information gleaned from those filings to call company financial statements into question. Of more immediate concern, the Ministry of Finance is following through on plans to force the “Big Four” global audit firms to surrender majority control of their Chinese operations over to local CPAs, and dramatically reduce the number of foreign-certified CPAs they employ. As Paul Gillis notes on his blog:

One of the unintended outcomes of the restructuring of the Big Four in China will be that the firms will likely be required to re-register with the PCAOB. That could pose a problem, since the PCAOB has said they will accept no new audit firm registrations from China until the issue of inspections is resolved.

I was pondering the irresistible-force-meets-immovable-object dilemma here last night when I happened across a seemingly unrelated passage in Jim Fallows’ new book China Airborne, which offered a glimmer of hope.

In 1997, Jim relates, three Chinese airlines — Air China, China Eastern, and China Southern — had just been awarded or applied for very prestigious and strategically important routes to the United States, and had purchased brand-new state-of-the-art Boeing planes to fly those routes, with many further orders expected. However, the safety record of Chinese airlines in the 1990s was atrocious.

In order to actually fly those routes, the airlines required approval from the U.S. Department of Transportation (DOT), the parent body of the FAA. The DOT, at the FAA’s urging, demanded “confirmation that China’s regulatory standards, as applied by the CAAC, conformed to the worldwide guidelines laid out by international agreements.” Until then, it was no fly.

The Chinese were furious, believing the Americans had double-crossed them by selling the planes and then reneging on the routes. The whole thing could have concluded in respective chest-beating and a very ugly, damaging stand-off. Instead, Boeing took the initiative (since its future sales were on the line) through a series of seminars, tours, and training sessions to reconcile the two points of view. Key to its success was the way it handled Chinese sensitivities:

One [way] was to present all their recommendations in terms of meeting international standards for air safety and airline procedures, rather than seeming to say, This is how we do it in the U.S. of A. Presenting the challenge this way made it far more palatable to the Chinese side. Learning to comply with international standards was one more sign of modernization in China; doing things the “American way” could seem like a sign of continued subservience.

The examples were, of course, from American practices at the FAA or the operational details of Boeing and United Airlines, but the leitmotif was that Americans had learned how to make their practices meet international standards, and they could help the Chinese do the same thing.

Bridging the gap in securities regulation will surely be more difficult than fine-tuning some phrases — especially since Chinese companies that truly are fraudulent have a lot to hide. But Chinese aviation officials had a lot to hide too, back then. Many of them, once they realized how far they fell short of “international standards,” doubted whether they could ever make the grade, and feared losing face and making others lose face if they tried.

But working with their American partners, they succeeded: China’s airline industry today has an admirable safety record, which has laid the foundation for ambitious plans for China to claim a leading role in the global aviation industry. Caixin reports that at least some officials at CSRC are sympathetic to what the SEC is trying to achieve, and they certainly don’t want to seem too far out of step with their international (and much more cooperative) peers.

If China wants Shanghai to become a “global financial center,” or the Renminbi to develop into an “international currency,” it has to do the same thing in securities regulation that did in airline safety regulation. It has to win the confidence of global investors just as it successfully won the confidence of global travellers. China closing the windows and battening the hatches to avoid embarrassment is not a solution; but neither is Americans telling the Chinese “it’s our way or the highway.”

The U.S. has to make a forceful, compelling argument that adopting international norms of openness and cooperation will help China achieve its ambitions — but that until then, it’s “no fly” for unsafe stocks on U.S. markets.

The US May Be Forced To Use The Nuclear Option On Chinese Stocks - Business Insider

Reply With Quote

Reply > Futures Trading, News, Charts and Platforms > Traders Hideout > News and Current Events > US May Be Forced To Use The Nuclear Option On Chinese Stocks

Thread Tools Search this Thread
Search this Thread:

Advanced Search

Upcoming Webinars and Events (4:30PM ET unless noted)

NinjaTrader 8: Programming Profitable Trading Edges w/Scott Hodson

Elite only

Anthony Drager: Executing on Intermarket Correlations & Order Flow, Part 2

Elite only

Adam Grimes: Five critically important keys to professional trading

Elite only

Machine Learning Concepts w/FIO member NJAMC

Elite only

MarketDelta Cloud Platform: Announcing new mobile features

Dec 1

NinjaTrader 8: Features and Enhancements

Dec 6

Similar Threads
Thread Thread Starter Forum Replies Last Post
On Capital Flight and Forced Repatriation Quick Summary News and Current Events 0 November 19th, 2011 10:50 AM
Chinese Stocks Are Cheapest 'I've Ever Seen': Index Pioneer Quick Summary News and Current Events 0 October 27th, 2011 05:30 PM
European Stocks Seen Steadying After Chinese Data Quick Summary News and Current Events 0 June 14th, 2011 03:00 AM
US Stocks Join Global Selloff; Japan's Nuclear Crisis Deepens Quick Summary News and Current Events 0 March 15th, 2011 11:50 AM
Nuclear Option on Gulf Oil Spill? No Way, US Says Quick Summary News and Current Events 0 June 2nd, 2010 11:20 PM

All times are GMT -4. The time now is 09:45 AM.

Copyright © 2016 by All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts

Page generated 2016-10-26 in 0.10 seconds with 19 queries on phoenix via your IP