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May 27, 2020, 11:07 a.m. EDT

America’s threat to delist Chinese companies could make everybody better off

Chinese firms might submit to greater scrutiny by the U.S. auditing agency to gain credibility with investors

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By Shang-Jin Wei

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While one can see how delisting Chinese companies could reduce these U.S. entities’ profits or global competitiveness, the potential impact on American investor interests is less clear-cut.

On one hand, excluding firms that commit accounting fraud is obviously good for U.S. investors. On the other hand, accounting fraud is rather rare, and the risk of it tends to be outweighed by the sustained, sometimes market-beating returns that many U.S.-listed Chinese firms offer investors. Delisting them therefore could mean foregoing sound investment opportunities for U.S. investors.

Moreover, PCAOB oversight is not the only way to discover accounting problems. Many short-selling companies specialize in investigating and uncovering fake profits or bogus growth figures, and they sometimes are more thorough and creative than the PCAOB.

For example, the short seller Muddy Waters recently uncovered accounting fraud committed by Luckin Coffee  , a U.S.-listed Chinese company, by sending investigators to visit its physical stores. Luckin’s bosses are now under criminal investigation in both China and the United States.

Strengthen PCAOB’s bargaining position

Given that the U.S. has a vibrant short-selling industry to keep listed companies in line, it is understandable that some observers would object to a forceful and disorderly delisting that could inflict big losses on those holding U.S.-traded shares. But the choice is not between doing nothing and delisting all Chinese firms. The more likely outcome of the new U.S. law is that it will strengthen the PCAOB’s bargaining position vis-à-vis foreign authorities.

Because many U.S.-listed Chinese firms are a dynamic part of China’s economy, one should not discount the possibility that the country’s regulators will accede to their U.S. counterparts’ requests for accounting documents sometime over the next three years, before the first delisting under the law could begin.

China may withdraw its majority state-owned firms from the U.S. market, but many private-sector companies would likely remain. Better yet, many more Chinese firms may opt for a U.S. listing precisely because it enables them to signal the credibility of their financial disclosures.

A U.S. listing has always been attractive to firms seeking visibility and foreign currency. The new law won’t diminish this. By enhancing the perceived quality of financial disclosures, listed firms may command a higher stock price, thereby reducing their costs of capital. When that happens, U.S. investors, financial institutions, and Chinese private-sector firms will all stand to gain.

Shang-Jin Wei, a former chief economist at the Asian Development Bank, is professor of finance and economics at Columbia Business School and Columbia University’s School of International and Public Affairs.

This article was published with permission of Project Syndicate America’s Delisting Threat Could Pay Off.

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