China-us Audit Deal to Avoid Delisting Risk
On August 26, Chinese and US securities regulators reached a landmark deal on cross-border audit oversight. It allows regulators of both sides to conduct inspections and investigations into audit firms in the other’s jurisdiction. Thanks to the deal, about 200 Chinese companies listed in New York, including leading Chinese internet companies like Alibaba, JD and Baidu, avoided imminent risk of being booted off the US capital market.
The US has been demanding access to work papers of audit firms in China that conduct audits of Us-listed Chinese companies. Under Chinese rules governing securities and data security, foreign regulators are not allowed to conduct inspections and investigations in China, unless there is a cooperation mechanism between Chinese regulators and their foreign counterparts. Nor should any institutions or individuals in China provide papers and information related to securities business to any overseas parties without permission from the central government.
It has become more urgent and difficult for the two sides to solve the dispute amid rising tension between China and the US and the tightening of Chinese companies’ listing by both sides. Under the US’S Holding Foreign Companies Accountable Act, from 2021, if a company listed in the US fails to have its audit papers reviewed by US regulators for three consecutive years, the company will be banned from being traded on the US capital market.
Both Chinese and US regulators said the new deal is just the first step toward solving the dispute over cross-border audit inspection and investigation. The US inspectors are scheduled be in Hong Kong in mid-september. Audit firms that have received notifications will provide required documents through the CSRC.
More and more Chinese companies have chosen to be relisted in other markets. Hong Kong is their favorite choice. The rules to list on the Chinese mainland and Hong Kong have been relaxed in the past few years to attract Chinese companies.
European bourses are gaining more attention from Chinese companies this year. According to the CSRC, five Chinese companies listed on the A-share market in Shanghai and Shenzhen issued global depository receipts (GDR), a bank certificate representing shares of a foreign company, on the London Stock Exchange or the SIX Swiss Stock Exchange as of early September 2022, raising US$2.23 billion. A report by Shanghai Securities News, a leading Chinese paper on the securities market, said that 12 more are preparing to do so. Most of them chose Switzerland, where major international institutional investors are located. In 2018, the Shanghai and London stock exchanges launched a connect program allowing Chinese public companies in Shanghai to get listed in London by issuing GDR. The scheme expanded to the Shenzhen Stock Exchange in China and stock markets in Switzerland and Germany this year. The connect to the SIX Swiss Stock Exchange was launched at the end of July.