(Yicai) March 3 -- The latest ‘America First Investment Policy’ memorandum released by the White House emphasizes stricter oversight of Chinese companies listed in the US, particularly with regard to audit standards and the use of Variable Interest Entity structures. A legal expert is advising companies to take early preventative action so as not to be caught unprepared.

Although the measures mentioned in the memorandum aren’t entirely new, they signal a tightening of regulations, Li Shoushuang, senior partner at Beijing Dacheng Law Offices, said in a recent interview.

The involvement of the US Department of Justice and the Federal Bureau of Investigation suggests that the scrutiny of VIE structures, which are legal entities whose control is determined by something other than majority voting rights, could go beyond technical details, he added.

Since the release of the memorandum, the Nasdaq Golden Dragon China Index, which tracks Chinese companies listed in the US, has tumbled nearly 4 percent.

Stricter rules might cause smaller audit firms to choose to no longer provide services to Chinese stocks in the US, raising the cost for companies looking to go public, Li said. What’s more concerning is that law enforcement agencies might classify the VIE structure itself as a fraudulent arrangement.

Li suggested two courses of action for companies. One is to spin off businesses that are restricted or banned from foreign investment and adopt a standard red-chip structure to list, thereby reducing policy risks. The other option is to prepare a settlement plan in advance, to be ready for any potential enforcement actions.

In recent years, progress has been made in China-US cooperation on audit supervision, an area that has been a sticking point between the two nations. In August 2022, China’s securities regulator and Ministry of Finance, and the US Public Company Accounting Oversight Board signed an audit regulatory cooperation agreement. However, the new outlook coming from the White House could mean stricter enforcement of these standards.

The Nasdaq Golden Dragon China Index had risen by 15.1 percent already this year and by 26.5 percent over the past year. But the uncertainty surrounding US policies could continue to exert pressure on Chinese stocks listed in the US.

China’s Ministry of Commerce has expressed concerns about the actions taken by the US, arguing that such practices generalize the concept of national security, are discriminatory in nature, and do not align with market principles. They could severely impact normal economic and trade exchanges between the two countries, it added.

Editor: Kim Taylor