(Bloomberg) – Chinese authorities are preparing to grant U.S. regulators full access to the audit reports of the majority of the 200+ New York-listed companies as soon as mid-year this year, making a rare concession to further decoupling between to prevent the two the two largest economies in the world.
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The China Securities Regulatory Commission and other national regulators are in the process of drafting a framework that will allow most Chinese firms to keep their listings, people familiar with the process said, asking not to be named if they are discussing a private matter to discuss. However, the government is willing to accept delisting some state-owned companies and private companies holding sensitive data, they said.
The framework aims to provide clarity on what data could trigger national security concerns, the people said. Regulators are debating whether companies that deal in consumer information, like Alibaba Group Holding Ltd, would automatically fall into this category, one of the people said, adding that processing large amounts of such information wouldn’t necessarily make a company a security concern .
If the plan goes ahead, it would mark an unusual reversal by Beijing, potentially ending a decades-long dispute that escalated when the US imposed a 2024 deadline for delisting non-compliant companies from the New York Stock Exchange and Nasdaq. The compromise would also show China’s willingness to balance national security concerns with the needs of investors and businesses at a time when its economy faces numerous challenges.
Shares of Chinese firms rallied in U.S. premarket trade Alibaba shares are up 5.8% in premarket trade, JD.com Inc. is up 4%, Pinduoduo Inc. is up 7.9%, while Didi Global Inc. increased by more than 18%. The Nasdaq Golden Dragon Index posted its worst first quarter since 2008 on concerns over audit disputes, regulatory intervention and economic growth.
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Details are still being discussed and could change, people said, adding that it would also need to be approved by top leadership. Chinese regulators hope to reach an agreement with the US in the summer, one of the people said.
Nonetheless, the CSRC has repeatedly struck a more optimistic note than its US counterpart on the possibility of an agreement. Securities and Exchange Commission Chairman Gary Gensler this week quashed speculation that a fix was imminent, signaling that only full compliance with audit inspections would allow companies to continue trading in U.S. markets.
China can simply move a company to an exchange outside the US if it wants to protect financial documents, Gensler said in an interview. He also pointed out that American law focuses on non-compliant countries rather than specific companies. So if a request is blocked, it means that the request is not fulfilled.
The CSRC said in a statement emailed to Bloomberg News that regulators on both sides are holding active discussions on exam cooperation and overall progress has been smooth, adding that full details of the negotiations correspond to the public statements both parties would be subject to.
Washington and Beijing have been at odds for two decades over the mandate that all companies that publicly trade in the United States provide access to audit working papers. The issue prompted action on Capitol Hill at the end of the Trump administration, when American lawmakers demanded that noncompliant companies be delisted. The law particularly threatens companies based in China and Hong Kong because Beijing has denied access to company audits, citing national security concerns.
China’s government has made overtures in recent years to allow some US audits, but the US has been adamant that American inspectors must be able to go into a foreign accounting firm and require audits of all companies that do trade in the United States
According to a US government report, more than 200 Chinese companies are listed in the US as American Depository Shares with a combined market capitalization of US$2.1 trillion (as of May 2021), including eight national-level SOEs. The Nasdaq Golden Dragon China Index of US-listed companies has fallen more than 50% over the past year.
The SEC last month released a “tentative list” of companies that could face removal. Though the move has long been telegraphed, it caused US stocks of China- and Hong Kong-based companies to fall sharply. The last update to the list included Baidu Inc., Futu Holdings Limited, Nocera Inc., iQIYI Inc. and CASI Pharmaceuticals Inc. All 200+ companies are expected to eventually make the list unless an agreement is reached between regulators.
The draft framework would also address the approval process for offshore listings, including rules for so-called Variable Interested Entities, or VIE structures, one of the people said.
China unveiled sweeping regulations governing the sale of shares overseas by its firms in December, in one of its biggest moves to tighten scrutiny of international debuts after Didi Global Inc.’s controversial listing of deals that ran virtually unchecked for two decades billions in profits for US investment banks.
(Updates with CSRC comment in ninth paragraph.)
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