Beijing is preparing to make concessions on the disclosure of Chinese audit information to break the impasse that threatens more than $2 trillion in US-listed Chinese stocks.
The plans could result in some US-listed Chinese companies being able to provide some audit information to US accounting regulators, according to three people familiar with the matter. They will also clarify what information can and cannot be disclosed abroad, people say.
The move to resolve long-standing tensions over foreigners’ access to Chinese companies’ audit documents comes a week after the Securities and Exchange Commission threatened to delist some Chinese companies from US exchanges. The threat caused Chinese tech stocks to plummet.
Experts say Beijing is wary of allowing foreign regulators to dig into company accounts and documents because of the risk that they could gain access to sensitive intellectual property or national security data.
As part of the potential change, financial regulators in Beijing are finalizing plans that people close to the decision say will clear up a law currently barring foreign regulators from conducting investigations in China.
The statute – Article 177 of China’s revised securities law – also prohibits Chinese entities from providing information to foreign regulators without prior approval from the China Securities Regulatory Commission. The CSRC did not respond to a request for comment.
Laws in China can be written ambiguously, in which case the government has given no guidance as to the scope of Article 177 or has formally defined key terms to explain what materials or activities it covers.
Beijing intends to introduce a “red-green light” system for companies and auditors on what financial audit information can be disclosed overseas, the two sources said.
If implemented, it would be China’s first significant move to disclose financial information outside of its borders.
One person familiar with the matter said that a number of companies have been told that regulators in China are preparing a “finer approach” to defining confidential information available to foreign auditors.
Beijing has long banned foreign access to Chinese company files. This is contrary to the US Foreign Companies Liability Act of 2020, which requires Chinese and Hong Kong companies to allow the US Public Company Accounting Oversight Board to audit their audits.
The impasse came to a head last week when the SEC said five Chinese companies have three years to comply with audit requirements or be delisted from the New York exchanges. Hundreds more Chinese companies are expected to be delivered in the same period.
recommended
“No matter how optimistic or pessimistic you were two years ago or two months ago, over the past two weeks it has exceeded all expectations,” said the chief executive of a large international management company that owns shares in large Chinese companies. “Global and Chinese investors are working together. Everyone is injured.”
The same person said he expected “most” companies to claim a more “subtle approach,” but noted that the concessions were agreed in Beijing before the war in Ukraine escalated geopolitical tensions between the US and China. It is also not certain that the Securities and Exchange Commission will accept Beijing’s concessions on what information companies can provide and stop the delisting, he said.
The SEC did not respond to a request for comment.
China’s potential compromise comes after the country’s top economic official, Liu He, assured investors on Wednesday that Beijing would take action to support the economy and financial markets following a sharp selloff in Chinese stocks exacerbated by Russia’s invasion of Ukraine.
John Zoldis, president of New York-based market research firm Quo Vadis Capital, said more transparency to U.S. auditors “would boost investor confidence in U.S.-listed Chinese companies” after a tough year in which valuations of big internet giants including Alibaba and Tencent tumbled. . declined by more than 40 percent after Beijing’s regulatory moves to break their monopoly power.
The Hang Seng Index, which tracks Chinese tech stocks, fell to a six-year low after last week’s SEC threats. However, it has since retraced most of its losses and is up more than 20% on Wednesday.
“Chinese regulators have always felt [US-listed Chinese equities] The market has been mostly US investors, but now they are noticing how much Hong Kong is bleeding as a result and they need to rethink the strategy,” said a portfolio manager at a large property management company in the territory.