The US and China have taken an important first step towards keeping US-listed Chinese stocks like Alibaba from being forced off US stock exchanges.
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BEIJING – The United States and China have recently taken an important first step to keep Chinese stocks listed in the United States as Alibaba from being forced out of American stock exchanges.
What needs to happen next is a smooth field test in China with full support from the Chinese authorities, analysts say.
“Many implementation details can probably only be found out by audit firms and [Ministry of Finance] – with [the China Securities Regulatory Commission] — through the trial of actual case audits under this unprecedented agreement,” said Winston Ma, adjunct professor of law at New York University.
The US Public Company Accounting Oversight Committee says its inspectors are plan to arrive in Hong Kong in mid-September immediately after that “all audit work papers required by the PCAOB must be made available to them.”
Audit work papers are different from actual information about companies collected by accounting firms.
Working papers documenting the evaluation procedure, the tests, the collection of information and the conclusion of the review, according to the PCAOB website. It is not clear how much sensitive information, if any, will be included in the working document.
The ability of the US to check such working papers on Chinese companies listed in the US has been a years-long dispute. U.S. legal and political developments over the past two years have accelerated the threat that Chinese companies may need to delist on U.S. stock exchanges.
A turning point came at the end of August when PCAOB and China Securities Regulatory Commission signed a cooperation agreement that lays the legal basis for the United States to inspect auditing firms within China’s borders.
That’s according to statements from both government agencies, which also said China’s Ministry of Finance had signed the agreement.
“I see this as a ‘big progress,’ which means both sides are willing to take steps,” said Stephanie Tang, head of private equity for Greater China and a partner at Hogan Lovells. to get to this point.
“The subject or subject of this PCAOB investigation will be audit firms,” she said, emphasizing that she is not an accountant.
Need more clarity on implementation
Ming Liao, founding partner of Beijing-based Prospect Avenue Capital, said China’s registered accounting firms are overseen by the Ministry of Finance, making it a leader on the Chinese side. in the next steps.
However, there is uncertainty around the deal’s implementation as it only establishes a framework, analysts said.
“Our accounting firms still don’t know how to proceed,” said Peter Tsui, president of the Hong Kong-based China Association of Internal Auditors. That’s according to CNBC’s translation of his Mandarin-language remarks on Thursday.
The question remains, he said, as to what information companies should share to remain compliant with Chinese regulations.
“Give [us] some instructions,” Tsui said.
Tsui said the inspections would go smoothly if it was just a matter of accountants on both sides and there was no political interference on the part of the United States. He said four major accounting firms – KPMG, PwC, Deloitte and EY – are members of the association.
China’s Ministry of Finance has yet to make a public statement on the audit cooperation agreement. The department did not immediately respond to CNBC’s request for comment.
One development that Capital Prospects Avenue’s Liao is watching is whether US President Joe Biden and Chinese President Xi Jinping will meet in person for the first time this fall under the Biden administration. That could hasten a final agreement on the audit dispute, he said.
“Ultimately, the settlement of the audit paper issue relies on the political interaction between China and the US,” Liao said in Chinese, according to a translation by CNBC. “With trust, this problem can very easily be solved.”
A decision at the end of the year
The PCAOB said it will make a decision in December on whether China will still hinder access to audit information.
US regulators will likely “start to know in October or November” what decision PCAOB will make on whether US-listed Chinese companies can be delisted, Gary Gensler, Chairman of the US Securities and Exchange Commission, told CNBC’s David Faber. August.
Alibaba and many other US-listed Chinese companies have begun issuing shares in Hong Kong in recent years – partly seen as a way to hedge against possible delisting on exchanges. US stocks. Since American Chinese ride-hailing company Didi went public in the summer of 2021, Beijing has also stepped up scrutiny of Chinese companies looking to list abroad.
The combined political turmoil has slowed the flow of Chinese IPOs in the US, especially of larger companies.
As of July 1, 2021, 16 Chinese companies have listed in the US, excluding special-purpose acquisitions, according to Renaissance Capital. Back in 2020, 30 companies based in China was listed in the US, the company said later.
By value, the five largest US institutions holding Chinese shares listed in the US are: Alibaba, JD.com, Pinduoduo, NetEase and Baidu. That’s according to research by Morgan Stanley on Aug.
