China and U.S. Negotiate On-Site Audit Checks as Delistings Loom

  • Talks on bringing PCAOB inspection team to China are ongoing
  • On-site inspections are first step to complying with U.S. law

Beijing is discussing with American regulators the logistics of allowing on-site audit inspections of Chinese companies listed in New York, according to people familiar with the matter, a sign of progress in talks to keep U.S. stock markets open to issuers from Asia’s largest economy.

Regulators on both sides are negotiating how to let a team of inspectors from the Public Company Accounting Oversight Board visit China so they can scrutinize auditing procedures and access the reports of a majority of 261 U.S.-listed firms, the people said, requesting not to be named because the matter is private. The talks, aimed at preserving these listings and reviving fresh public offerings, include hammering out issues such as quarantine requirements, the people added.

The two countries have yet to reach a conclusive agreement on moving forward with the checks, the people said.

On-site inspections would kick off the process of satisfying the U.S. that its inspectors will get the full access to audit papers required by legislation passed during the Trump administration. The negotiations gained urgency after the Securities and Exchange Commission began publishing a provisional list of companies that face being kicked off the New York Stock Exchange and Nasdaq Stock Market unless China becomes compliant. SEC Chair Gary Gensler has stressed that the law gives him little room for compromise.

Progress on a standoff that’s festered for two decades would demonstrate Beijing is serious about bolstering market confidence, and balancing national security concerns with the needs of businesses.

Chinese markets have slumped this year, with the benchmark CSI 300 Index plunging 20% as a stringent Covid Zero policy and crackdowns on private enterprise combine to sap investor confidence. Worries about potential delistings have contributed to a 69% slide in the Nasdaq Golden Dragon Index of U.S.-traded Chinese shares since the gauge peaked in February 2021.

“We continue to meet and engage with PRC authorities in an effort to reach an agreement, but speculation about a final agreement remains premature,” the PCAOB said in a statement. It had earlier said that any deal would be a “first step” and that the PCAOB would then investigate to ensure it is being followed.

The China Securities Regulatory Commission didn’t immediately respond to a fax seeking comment, while the SEC declined to comment.

Dozens of countries permit U.S. audit inspections, giving American officials the go ahead to interview local accountants and scrutinize the documentation underlying their work. Mainland China and Hong Kong have refused, citing confidentiality laws and national security concerns.

The SEC is adding companies weekly to a provisional list that could face removal if a congressionally imposed deadline of 2024 isn’t met. They now include Baidu Inc., Weibo Corp. and Futu Holdings Ltd. It’s expected that the list will eventually cover all the Chinese stocks traded in the U.S. including the largest of them, Alibaba Group Holding Ltd.

China’s government is prepared to accept that some state-owned enterprises and private companies that hold sensitive data will be delisted, people familiar with the matter said previously.

The CSRC is confident of reaching a deal and is talking with the PCAOB every two weeks to resolve the dispute, Fang Xinghai, the Chinese regulator’s vice chairman, said last week.

China has also modified a decade-long rule that restricted how offshore-listed firms share financial data. The draft rules delete the requirement that on-site inspections should be mainly conducted by Chinese regulatory agencies or rely on their inspection results.

The CSRC earlier this month promised to provide assistance through a cross-border regulatory cooperation mechanism. All companies listed directly or indirectly overseas will be responsible for properly managing confidential and sensitive information, and protecting national information security, it said.

Under the rules issued in 2009, working papers drafted onshore during the process of overseas share sales couldn’t be shared with any foreign entities or individuals. Working papers that concern state secrets or national security were also prohibited from being stored, processed or transmitted in non-confidential computer systems.

The CSRC has said it’s rare in practice that companies need to provide documents containing confidential and sensitive information. However, if required during the auditing process, they must obtain approvals in accordance with related laws and regulations, the watchdog said.

Chinese authorities are trying to bolster investor confidence following a series of crackdowns that have rattled markets. Promising greater policy stability, China’s top financial regulator last month said it supports overseas listings, prospects for which have been clouded by a raft of new rules and the stand-off with the U.S.

China tightened scrutiny on overseas listings last year after the New York initial public offering of ride-hailing giant Didi Global Inc., which proceeded despite regulatory concerns. In December, it imposed new restrictions on offshore offerings by firms in sectors that are off-limits to foreign investment.

The tightening scrutiny prompted the SEC to halt IPOs of Chinese companies last year until they boosted disclosures of risks posed to shareholders. Only a few Chinese firms have listed in the U.S. following the additional restrictions on both sides.

There were 261 Chinese firms listed in the U.S. as American Depository shares, with a combined market capitalization of $1.4 trillion as of March 31, including eight national-level state-owned enterprises, according to a report from the U.S. government.

Source: Bloomberg

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