Chinese stocks fall after SEC warns Baidu of potential delisting for failing to comply with US financial audit

• Chinese stocks moved lower on Thursday after the SEC flagged Baidu for a potential delisting.
• Chinese companies listed on US exchanges have until 2024 to comply with a new law that requires them to be audited by US-based accountants.
• "If we're in the same place two years from now," many companies "would be suspended," SEC Chairman Gary Gensler said.

Chinese stocks edged lower on Thursday after the Securities and Exchange Commission identified a new batch of Chinese companies that could be subject to delisting from US exchanges if they don't comply with a new law.

The Holding Foreign Companies Accountable Act took effect on December 18, 2020. It requires the SEC to identify publicly traded foreign companies on US exchanges that will not allow a US auditor to fully inspect their financial books. The SEC ultimately has the power to delist the Chinese stocks if for three straight years they do not allow a US accounting firm to conduct an audit of its financial statements.

Chinese internet giant Baidu is the latest high-profile Chinese company to be flagged by the SEC about their current deficiencies in complying with the law. Baidu stock fell 3% in early Thursday trades following the SEC notice, while the MSCI China ETF fell more than 1%.

But Baidu plans to comply with the new law, according to a statement from the company. "Baidu will continue to comply with applicable laws and regulations in both China and the United States, and strive to maintain its listing status on both Nasdaq and the HKEx," Baidu said in a statement.

Other Chinese firms flagged by the SEC for not complying with the new law include Futu Holdings, Nocera, iQIYI, and CASI Pharmaceuticals. Futu stock dropped 7% Thursday, iQiyi sank 9%, and Casi lost 2%.

Whether China-based companies will comply with the new law remains to be seen, according to SEC Chairman Gary Gensler. "If we're in the same place two years from now," many companies "would be suspended," Gensler told Bloomberg in a Tuesday interview.

China has reportedly made some overtures to the US in recent weeks that it would allow some US audit reviews to prevent the delistings. That may not be enough, though, as the law requires all companies to be subject to an audit by a US-based accounting firm.

"There have been thoughtful, respectful, productive conversations, but I don't know where this is going to end up. It's up to the Chinese authorities, and it could be frankly a hard set of choices for them," Gensler said.