Aug 30, 2022 - World

With audit deal, China delisting risk ebbs — for now

Illustration of a magnifying glass inspecting a briefcase that looks like the Chinese flag.

Illustration: Gabriella Turrisi/Axios

A deal signed by the U.S. and China last week allowing U.S. inspectors to review the audit records of U.S.-listed Chinese companies could prevent scores of firms from being booted off U.S. stock exchanges while ensuring the companies follow U.S. law.

Why it matters: There are more than 260 Chinese companies listed on U.S. exchanges, with a total worth of around $1.3 trillion. U.S. investors want access to those firms, but until now, Beijing has prioritized maintaining a tight domestic grip over company data.

Details: U.S. inspectors will be permitted to travel to Hong Kong and will have complete access to audit papers and the company personnel who conducted the audits, according to an announcement by the Public Company Accounting Oversight Board (PCAOB), the U.S. organization that oversees audits of companies listed on U.S. exchanges.

  • The language of the agreement has not been made public.

What they're saying: "On paper, the agreement signed ... grants the PCAOB complete access to the audit work papers, audit personnel, and other information we need to inspect and investigate any firm we choose, with no loopholes and no exceptions," PCAOB chair Erica Williams said in the statement.

  • "But the real test will be whether the words agreed to on paper translate into complete access in practice."
  • China's Securities Regulatory Commission called the deal a "crucial step to solve the audit regulatory issue of US-listed Chinese companies through enhanced cooperation" and expressed hope delisting can be averted.

Catch up quick: U.S. law requires that publicly listed companies provide access to their audits to U.S. regulators. But Chinese companies often haven't complied, citing Chinese national security law, which prohibits handing over data to foreign governments.

  • In 2013, the PCAOB and the Chinese securities regulator struck an agreement to make it easier for Chinese companies to comply with U.S. audit requests. But the U.S. said Chinese companies still didn't comply.
  • The 2013 agreement did not allow U.S. inspectors to travel to Hong Kong to inspect audit documents and interview company personnel directly.
  • In 2020, the U.S. passed the Holding Foreign Companies Accountable Act, which requires foreign companies to comply with U.S. audit requests or be removed from U.S. stock exchanges.
  • Around 200 U.S.-listed Chinese companies are at risk of being delisted due to the lack of compliance with U.S. transparency requirements, including e-commerce giant Alibaba.

Our thought bubble: Neither U.S. legislators nor the Chinese Communist Party is particularly happy that Chinese companies are listed on U.S. stock exchanges. But the financial imperatives on both sides are so enormous that the uneasy truce continues — for now.

Data: YCharts; Chart: Erin Davis/Axios Visuals
Data: YCharts; Chart: Erin Davis/Axios Visuals

The big picture: Chinese companies listed on U.S. exchanges are a rare bright spot in the market right now — up 7.7% over the past five sessions, compared to a 2.6% decline for the S&P 500.

How it works: The Nasdaq Golden Dragon Index comprises 72 Chinese companies, including Baidu, Tencent, PetroChina, and Weibo.

  • Fears that they might be delisted have weighed on share prices of late — but as those fears abated over the past week, the stocks gained ground.

China stocks are still out of favor, as the world's second-largest economy faces ongoing COVID-related clampdowns, an imploding housing market and a sputtering industrial sector.

  • As a result, Chinese stocks have significantly underperformed their U.S. counterparts over the past few years — and technical factors surrounding listing venues aren't going to change that.

What to watch: U.S. inspectors are expected to be in Hong Kong by mid-September.

Go deeper