US accounting regulators are discussing a potential deal with their counterparts in Beijing that could pave the way for American officials to inspect audits of Chinese companies, according to people briefed on the matter, Financial Times reported.
A deal that would allow officials from the US Public Company Accounting Oversight Board access to the audits could help resolve a stand-off between Washington and Beijing and prevent about 270 Chinese companies from being delisted by New York exchanges. One of the options being discussed as part of the possible protocol would involve US officials travelling to China and inspecting some of the audits in person after a period of quarantine in the country, which has a zero-Covid policy, one of the people said. The PCAOB denied earlier reports by the Financial Times and Reuters that its personnel were already in China and said they had not travelled there since 2017, adding that “speculation about a final agreement remains premature”.
The tensions have hammered investor confidence in Chinese companies. A senior executive at a large investor in China said: “There has to be a solution or the US capital market will be closed to Chinese firms for good.”
It comes a month after Beijing revised some of its audit secrecy rules in an attempt to halt the escalating dispute with Washington, which if unresolved could result in companies with a combined market capitalisation of about $2 trillion being delisted in 2024. Companies including ecommerce giant JD.com, tech group Pinduoduo and state-owned oil company China Petroleum & Chemical Corp were added to a list of entities facing possible delisting this week.
The Securities and Exchange Commission started naming companies in March, kicking off a three-year countdown on delistings after years of simmering tensions over the issue, and prompting a sharp sell-off of Chinese stocks. Last month, Fang Xinghai, vice-chair of the CSRC, said he expected the two regulators would reach a compromise and that recent talks with the PCAOB had been “very smooth”, adding: “We have confidence to reach a deal in the near term and we believe this uncertainty will fade away soon.”
His comments were made after the CSRC said it would relax confidentiality laws that prevent its overseas-listed companies from providing sensitive financial information to foreign regulators. It was a significant concession to pressure from Washington over access to audit documents but left some areas of concern as the new draft rules explicitly prevented companies from sharing “state secrets”.
Last week Goldman Sachs published a report citing a senior executive of consultancy China Moon Strategies, who said they believed there was a 90 percent chance China and the US would reach a compromise that would prevent the delistings.
“China tends to wait until the last minute, but this time could be different as the market is pushing,” the Goldman report said. It added the Chinese companies were still “welcome” to raise capital in the US despite an effective halt to dealmaking since the calamitous initial public offering of ride-hailing app Didi Chuxing last June, when Beijing launched a regulatory crackdown that caused its share price to fall 90 percent.
Amid the tensions, some Chinese companies listed in New York have attempted to mitigate the delisting risk by switching auditors or launching secondary listings in Hong Kong. This week, KE Holdings, an online estate agent, was the latest to issue shares on the Hong Kong exchange. BeiGene, a biotech group, last month replaced its auditor — EY’s Chinese member firm — with EY in the US in an attempt to comply with audit access rules.