Chinese firms face delisting threat

China and the U.S. have signed an agreement that could prevent mass stock-pulling

The Public Company Accounting Oversight Board (PCAOB) said it was the most detailed and strict agreement the regulator had ever reached with China.

US regulators have long demanded access to audit documents of Chinese companies listed in the United States, but Beijing has been reluctant to let overseas regulators inspect accounting firms, citing security concerns.

The decision marks a sea change in US-China trade relations and will come as a huge relief to hundreds of Chinese companies and investors who have invested billions of dollars in firms that have a chance to maintain access to the world’s deepest capital markets.

By Friday, 163 companies, inclusive Ali Baba (BABA), (JD)and Nope (NIO) have been identified by a US regulator as being at risk of being banned from trading due to non-compliance with audit requirements.

In a statement, the PCAOB said the agreement would allow it to “solely choose, at its discretion, the firms, audit engagements and potential violations it reviews and investigates — without consultation with or input from Chinese authorities.”

The U.S. regulator added that its inspectors will be able to “review the complete audit working papers with all information contained and the PCAOB retain the information as needed.”

“The PCAOB has direct access to interview and take testimony from all employees associated with audits that the PCAOB reviews or investigates,” it said.

The China Securities Regulatory Commission (CSRC) said the agreement was an important step to address the audit issue.

He added that keeping Chinese companies listed in the United States has benefited investors, companies and both countries.

The signing of the protocol between China and the United States signals that the two sides have “taken a major step to resolve the regulatory issue of auditing Chinese companies listed in the US through enhanced cooperation,” the CSRC said in a statement.

“This is in line with the hopes and expectations of the markets … if the collaboration subsequently satisfies each party’s regulatory needs, there is hope that the audit issue will be resolved and passive decommissioning will be avoided.”

Current U.S. rules stipulate that Chinese companies that fail to comply with the audit’s working paper requirements will be suspended from trading in the U.S. in early 2024, but that deadline could be pushed back.

Securities and Exchange Commission (SEC) Chairman Gary Gensler said Chinese companies still face delisting if their accounts are not accessed by US authorities.

“But make no mistake: The proof will be in the pudding,” he said.

“This deal will only make sense if the PCAOB is actually able to inspect and investigate fully the audit firms in China.”

Major U.S.-listed Chinese companies rose in premarket trading, with Alibaba up 2.6%, Pinduoduo up nearly 6% and Baidu up 3.3%.

“This is seen as a positive first step. However, things are not yet fully set in stone, as can be seen from the various sudden reversals in the past,” said Samuel Siew, market specialist at CGS-CIMB.

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