For years, Chinese companies have depended on access to American capital markets and were drawn to them due to its friendly regulatory environment. However, with the Securities and Exchange Commission (SEC) taking strict action against foreign companies with lax auditing standards, things are bound to change.
In December 2020, former President Donald Trump signed a law that would see foreign companies, which failed to conform to American auditing rules for three years in a row, be eventually removed from U.S. stock exchanges. Officials are now taking steps to expel such companies from accessing the capital markets.
American policymakers and the Public Company Accounting Oversight Board (PCAOB), the division in charge of overseeing the U.S. audit sector, have repeatedly been denied access to the accounts of Chinese firms. Beijing has been unwilling to let overseas regulators examine working papers from local accounting firms due to considerations over national security.
According to a map on the PCAOB website, China is the only jurisdiction that forbids “necessary access to conduct oversight” to the department. A Chinese regulatory official revealed on Nov. 25 that they were working with their counterparts in the U.S. to avoid the delisting of Chinese companies.
At a conference in Hong Kong, Shen Bing, director-general of the China Securities Regulatory Commission’s (CSRC) department of international affairs, said, “We don’t think that delisting of Chinese firms from the US market is a good thing either for the companies, for global investors or Chinese-US relations… We are working very hard to resolve the auditing issue with U.S. counterparts, the communication is currently smooth and open. There is a risk of delisting of these companies but we are working very hard to prevent it from happening.”
Around 248 Chinese companies worth $2.1 trillion in market capitalization face delisting from the U.S. markets. The only way to avoid it is if Trump’s executive order is reversed by President Joe Biden and Congress changes the Holding Foreign Companies Accountable Act.
Under current circumstances, such a course of action does not seem likely. “I don’t think this is going to change from the US side… The only way I see things changing is if Beijing blinks,” George Calhoun, founding director of the Quantitative Finance Program at the Stevens Institute of Technology, told Asia Financial.
The dispute between U.S. and China has ultimately turned favorable for Hong Kong, with a number of U.S.-listed Chinese companies executing secondary listings in the city. According to market insiders, companies view it as an alternative if they face delisting from the New York Stock Exchange (NYSE) or Nasdaq.
Meanwhile, the Hong Kong stock exchange declared last week that it would be amending its rules to make it simpler and smoother for Chinese companies listed overseas to carry out secondary listings.
The move will also benefit companies that are looking to convert a Hong Kong secondary listing to a primary one. When it came to accessing audit working papers from mainland China, even Hong Kong faced similar issues in the past. However, a 2019 agreement and the SFC’s mutual understanding with the CSRC resolved the problem.