Chinese stock delisting threat eases as US gets access to audit data

Washington - United States officials said they gained sufficient access to audit documents on companies in China and Hong Kong for the first time, a breakthrough that removes the acute threat of delisting for about 200 companies on New York exchanges.

The US Public Company Accounting Oversight Board (PCAOB) said on Thursday that its inspectors have been able to sufficiently review audit documents from firms based in the two jurisdictions, after a decades-long stand-off on the issue between Washington and Beijing.

The determination diminishes the chances that companies including Alibaba Group Holding and JD.com will be delisted in the US, though the PCAOB must be able to fully inspect audit work papers for at least three consecutive years before the companies’ American Depositary Receipts will be in the clear.

Beijing’s willingness to make concessions on audits shows that China and the US can still work together on some tricky issues even as they clash over everything from semiconductors to national security to human rights. President Xi Jinping’s administration faces pressure to avoid unnecessary disruptions to China’s corporate sector at a time when the economy is struggling and

the country is navigating a turbulent exit from its zero-Covid strategy.

“It’s a great first step and an important victory and very significant to show that there are areas where the US and China can have meaningful dialogue in an otherwise very tense environment,” said Ms Sandra Hanna, who leads the securities enforcement practice for Miller & Chevalier. “We need to continue to have a long-term view and monitor progress closely.”

The China Securities Regulatory Commission said in a statement that it welcomed the PCAOB’s decision and will continue to promote audit supervision cooperation with the US. China and Hong Kong are the only places that historically have not allowed the reviews, with officials citing national-security and confidentiality concerns.

“Today’s announcement is about one question and one question only: is the PCAOB able to inspect and investigate firms in mainland China and Hong Kong completely at this time. The answer, following thorough and systematic testing, is yes,” PCAOB chair Erica Williams told reporters. The agency would reassess if access ebbed, she added.

Shares of US-listed China stocks initially jumped across the board on the news, pushing the Nasdaq Golden Dragon Index up as much as 2.5 per cent just after the open on Thursday. Large-cap tech companies Alibaba and JD.com rallied as much as 3.5 per cent each, while Pinduoduo rose 3.1 per cent, before they erased gains to track a broad market slump.

The Golden Dragon Index closed 2.3 per cent lower, while the Nasdaq 100 Index fell 3.4 per cent. Bloomberg News had reported in November that US officials completed their first on-site inspection round in Hong Kong ahead of schedule.

The PCAOB said in a report that its inspectors and investigators were able to view full audit work papers of eight companies audited by KPMG Huazhen in mainland China and PricewaterhouseCoopers in Hong Kong, and retain the information that they needed. The board will release a report on its inspections of each auditing firm in the first half of 2023, Ms Williams said.

The individual companies whose audits were inspected will not be identified in the reports. PCAOB inspections serve as an audit of the auditor, ensuring they meet basic standards and provide an effective check on corporate accounting.

The agency’s 32 staff sent to Hong Kong found myriad potential deficiencies, but Ms Williams said the type of lapses and their number are typical for jurisdictions that have never been scrutinised by the PCAOB before. “We look at this as a sign really that our inspection process worked,” she said.

The PCAOB said in its report that it “has not observed any instances of non-compliance” by the Chinese government with the terms of the inspection agreement between the two countries.

“This is the beginning – not the end – of our work to inspect and investigate completely,” Ms Williams said in an interview on Thursday with Bloomberg Markets: The Close.

“We already are making plans to have teams on the ground in 2023 in order to continue our regular inspections there,” she said. “And if China denies our access, if there are any impediments that they put in our way, we will not hesitate to make a determination immediately next year.” BLOOMBERG