Photo credit: Xpeng Motor Technology Ltd.

U.S. President Donald Trump has signed a bill calling for the delisting of foreign companies that don't adhere to the same accounting transparency standards that securities regulators impose on public U.S. firms.

Why It Matters

The Holding Foreign Companies Accountable Act takes aim at Chinese companies and drew rare, strong, bipartisan support in the U.S. Congress before arriving on Trump's desk. The act says delisting could happen if a given company doesn't comply with audit inspections three years in a row.

China's government does not allow the board to perform audit inspections of Chinese companies listed in the US. Audit inspections are performed on other U.S.-listed companies by the Public Company Accounting Oversight Board, set up after accounting scandals such as the one that blew up Enron in the early 2000's.

Chinese companies listed in the U.S. have been embroiled in financial scandals in the past — including Luckin Coffee Inc - ADR (LKNCY) this year, which led to a Nasdaq delisting. Sixteen Chinese companies have delisted since February 2019, according to a government report in October.

Carson Block, who has made himself a short-selling star through his investigations into Chinese companies, has called for the delisting of Chinese firms, saying to Bloomberg last month: "This is China and the Chinese stock promotion, manipulation fraud machine laughing in the face of the SEC."

What's Next

Markets now await any news on specific delistings. The bill could affect 217 Chinese companies, including popular stocks such as Alibaba Group Holding Ltd - ADR (BABA), JD.Com Inc. (JD), Nio Inc. - ADR (NIO), Xpeng Inc. - ADR (XPEV), and Li Auto Inc. (LI). But because of the three-year compliance timeline in the act, delistings may not be imminent.