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US regulators have travelled to mainland China to discuss a potential compromise over audit disclosures that could stop around 270 Chinese companies from being delisted by New York exchanges, according to two people close to the matter.
The trip by officials from the Public Company Accounting Oversight Board is an attempt to settle a stand-off between the US and China over access to audit documents of Chinese companies listed in the US.
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 a bid to halt the escalating dispute with Washington, which if unresolved could result in about 270 companies with a combined market capitalisation of roughly $2tn being delisted in 2024.
Officials from the China Securities Regulatory Commission, Beijing’s top stock market watchdog, are discussing whether to permit US regulators to conduct on-site inspections of the audits of some Chinese companies, according to one of the people with knowledge of the matter. The talks have included details such as how long regulators would have to quarantine when entering China to carry out inspections, the person said.
Later on Friday, the PCAOB said it was “untrue” that PCAOB officials had visited China. “The PCAOB has not sent any personnel to China since 2017,” the regulator said, adding that “speculation about a final agreement remains premature”.
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 that 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”.
This week Goldman Sachs published a report citing a senior executive of consultancy China Moon Strategies, who said they believed there was a 90 per cent chance that China and the US would reach a compromise that would prevent any 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 that 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 per cent.
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.
Additional reporting by Tabby Kinder in Hong Kong and Edward White in Seoul
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