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Audit deal will leave traders with China dregs

A specialist trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., June 30, 2022. REUTERS/Brendan McDermid

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HONG KONG, Aug 29 (Reuters Breakingviews) – Beijing has conceded to U.S. demands which could theoretically let $1.5 trillion of New York equities skip delisting. However, a large swathe of Chinese companies will still leave New York, willingly or otherwise. The remaining constituents could be an uninspiring lot.

This squabble has been underway since 2007, but the issue gained wider investor attention in 2011 when multiple mainland companies were booted out over fraud. The most notable was Longtop Financial Technologies, underwritten by Goldman Sachs (GS.N) and Deutsche Bank (DBKGn.DE) and audited by Deloitte’s Chinese unit. Chinese security law blocked Deloitte China and other auditors from cooperating with investigations even as owners of U.S. stocks lost their shirts, with little recourse.

In 2020, U.S. legislators passed a law to evict any foreign firm whose auditor does not allow the Public Company Accounting Oversight Board (PCAOB) to double-check its books by 2024. The overwhelming majority of violators are Chinese. State-owned firms began to proactively exit this month while some private companies like Alibaba (9988.HK) have already set up additional listings that could serve as a backup, or have gone private.

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On Friday Beijing conceded, allowing full access to Chinese audit working papers, the right to take testimony inside China, and discretion to select companies to inspect. China did have some good reasons to accommodate the PCAOB, but its bureaucracy, in which multiple agencies seek influence over offshore capital raisings, will struggle to deliver genuine cooperation. In addition to strategic concerns, they are highly worried about data, which bodes ill for the continued tenancy of fintech firms like Lufax (LU.N), insurer Waterdrop and Kingsoft Cloud (KC.O). Ride-sharer Didi Global has already delisted from New York.

The average Chinese company on U.S. bourses is down roughly three quarters from its IPO price, per Refinitiv data, and many are lightly traded. Some are yesterday’s theme stocks like Renren , once touted as China’s Facebook. Others, like the cluster of online tutoring providers, are victims of regulatory change that make their business models unviable. There is also a crowd of names most Americans have never heard of. Many have small free floats making them prone to abuse.

The profile of the average company Beijing is likely to leave on American boards will have no key technology, no strategic role to play, and minimal user data. Chinese investors won’t want for them.

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(Changes reference in fourth paragraph to reflect Didi has delisted from New York. The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

CONTEXT NEWS

Beijing and Washington on Aug. 26 signed a pact to allow U.S. regulators to vet accounting firms in China and Hong Kong.

Regulators in the United States have for more than a decade demanded access to audit papers of U.S.-listed Chinese companies, but Beijing has been reluctant to let overseas regulators inspect its accounting firms, citing national security concerns.

(This story corrects to change reference in fourth paragraph to reflect Didi has delisted from New York)

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Editing by Una Galani and Thomas Shum

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

Pete Sweeney

Thomson Reuters

Asia Economics Editor Pete Sweeney joined Reuters Breakingviews in Hong Kong in September 2016. Previously he served as Reuters’ chief correspondent for China Economy and Markets, running teams in Shanghai and Beijing; before that he was editor of China Economic Review, a monthly magazine focused on providing news and analysis on the mainland economy. Sweeney came to China as a Fulbright scholar in 2008, and in that role conducted research on the Chinese aviation industry and outbound M&A. In prior incarnations he helped resettle refugees in Atlanta, covered the European Union out of Brussels, and took a poorly timed swing at craft-beer entrepreneurship in Quito even as the Ecuadorean currency collapsed (not his fault). He speaks Mandarin Chinese, at the expense of his Spanish.

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