Delistings from NYSE signal Beijing may be ready to compromise on US audit row – analysts

Delistings from NYSE signal Beijing may be ready to compromise on US audit row – analysts

A trader enters the trading floor at the New York Stock Exchange (NYSE) in New York City, U.S., June 14, 2022. Portal/Brendan McDermid

HONG KONG, Aug 15 (Portal) – The move to delist five Chinese state-owned enterprises (SOEs) from the New York Stock Exchange (NYSE) signals Beijing may be willing to compromise in order to secure an audit deal with the United States and end a dispute more than decades old, analysts and advisers said on Monday.

The five SOEs, including oil major Sinopec (600028.SS) and China Life Insurance (601628.SS), whose audits have been scrutinized by the US Securities and Exchange Commission said on Friday they would voluntarily withdraw from the NYSE. Continue reading

The US Securities and Exchange Commission (SEC) found in May that the five and many other companies failed to meet US auditing standards, and the delisting signals China could compromise when it comes to giving US auditors access to grant to the accounts of private Chinese companies listed in the United States, some analysts said.

Beijing and Washington have held talks to end a row that had threatened to delist hundreds of Chinese companies from their New York listings if China fails to meet Washington’s demand for full access to the books of US-listed Chinese companies .

“The fact that the state-owned companies are not listed in the US allows the Chinese side to compromise in the negotiations,” said a Hong Kong capital markets lawyer, who declined to be identified due to the sensitivity of the matter.

“They were more concerned about accessing SOEs’ accounts,” the lawyer said, referring to Beijing authorities. “Many private companies do not have as sensitive data as state-owned companies.”

However, some observers were less optimistic about the impact of the delistings.

“By taking state-owned enterprises off the table, it would theoretically give the Chinese more room to make some concessions,” said Paul Gillis, a professor emeritus at Peking University’s Guanghua School of Management.

“But I think it’s difficult to reach an agreement given the general political environment between the US and China.”

FULL ACCESS

US regulators have for years demanded full access to the audit working papers of New York-listed Chinese companies, but Chinese authorities have pushed back on national security grounds.

In May, an SEC official said China could agree to the voluntary delisting of companies deemed “too sensitive” to meet US requirements, which would ensure the remaining companies and accounting firms comply with US inspection and investigation procedures meet and avoid potential trade bans .

Since then, however, the US Public Company Accounting Oversight Board (PCAOB), which governs the audit of US-listed companies and is overseen by the SEC, has said delisting companies would not bring China into compliance, as the US -Regulations require the agency to have retrospective access to company audit records.

The PCAOB’s position on the matter has not changed, a PCAOB spokesman said Monday. A spokesman for the SEC did not immediately respond to a request for comment.

The China Securities Regulatory Commission did not respond to a query Monday afternoon.

More than 270 Chinese companies face a trade ban, with the PCAOB finding it did not have full access to their audit records.

Concerns about the future of these companies on New York stock exchanges have increased in recent months, with global fund managers holding US-listed Chinese stocks steadily shifting to their Hong Kong-traded peers. Continue reading

Alibaba Group Holding announced two weeks ago that it would convert its Hong Kong secondary listing to a dual primary listing, which analysts say would make it easier going forward if the e-commerce giant ever wanted to go public in the United States .

“Whether private companies listed in the U.S. are given more discretion to work with the PCAOB likely depends on the sensitivity of the data in their audit papers,” said Weiheng Chen, head of the Greater China Practice at law firm Wilson Sonsini.

Private companies that hold large amounts of geographic data and data tracking the location, movements and social behavior of individuals and companies are more likely to be considered sensitive, Chen said.

After the five SOEs are delisted, only two state-owned companies will remain listed in the United States – China Eastern Airlines (600115.SS) and China Southern Airlines (600029.SS).

“China should be motivated to work with the US SEC to ensure Chinese companies are not cut off from US capital markets without sensitive information,” Jefferies analysts wrote.

Reporting by Scott Murdoch, Kane Wu, Xie Yu, and Samuel Shen; Edited by Sumeet Chatterjee, David Holmes and Marguerita Choy

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Scott Murdoch

Scott Murdoch has been a journalist for more than two decades, working for and News Corp in Australia. He has specialized in financial journalism for most of his career, covering equity and debt markets across Asia from Hong Kong.