A crisis looms in the dispute between China and the United States over delistings

Last week, Chinese tech giant Alibaba applied for a primary listing in Hong Kong. If you’re looking for a sign of how negotiations between Beijing and Washington over the latter’s plans to ban trade in Chinese companies are going, this is it. Read: bad.

Alibaba is one of about 200 companies that will be delisted from New York stock exchanges in 2024 because China has denied US regulators access to their financial audit records even though US law requires them to be examined every three years. The trading ban will also apply to dozens of other Chinese companies that have shares or debt that trade off stock exchanges in the United States.

Alibaba’s new Hong Kong listing will simplify the transition to trading in Hong Kong only if – or when US regulators force it to be delisted from Wall Street. Skinners in the game seem to be preparing for this possibility.

The embargo would end a two-decade bridge that had ensured a steady flow of capital between the world’s two largest superpowers. The listing would threaten companies with a market capitalization of about $1.4 trillion and prevent China from accessing the world’s largest pool of public capital when Chinese companies need access to international financing.

According to US and Chinese officials, negotiations are underway to resolve the impasse, but a solution is unlikely. Securities and Exchange Commission Chairman Gary Gensler said this month that he was “not particularly confident” of the deal.

Bypassing all of this is a bill currently under consideration in Washington that would speed up the timeline by a year.

The framework introduced to write off companies if their auditors do not make audit files available at least every three years for examination by the Public Company Accounting Oversight Board, the US audit watchdog, was introduced in 2021. It set a ticking clock for delisting. This means that the PCAOB’s determination of whether Chinese companies have complied with this rule at the end of 2023 will be critical.

But if Congress passes the current bill, PCAOB officials will have to complete the inspections a year earlier, by December of this year. If they can’t, any Chinese company trading in the US will be banned when it submits its next annual report, which usually happens in April. There is no room to wave.

In China, geopolitical risks have heightened national security concerns, making it unlikely that Beijing will allow US regulators to vet its largest companies. But the US market is too big to ignore. In April, Beijing revised a decade-old rule restricting data sharing by its companies operating abroad. Chinese regulators also explored the classification of companies with data deemed “sensitive” or “confidential”. This may result in voluntary removal from the list. But neither of them satisfied the US regulators.

The United States is currently inspecting corporate audit records from more than 50 jurisdictions. PCAOB’s supervision is designed to better protect cross-border investors. The $300 million Luckin Coffee fraud in 2020 showed why these protection measures were applied equally to investors in Chinese companies.

The auditors themselves were largely silent. Three-quarters of Chinese companies listed in the US are audited by the Chinese arms of Deloitte, PwC, EY and KPMG. The “Big Four” faced a rise in regulatory fines and shareholder lawsuits due to their work in Europe and the United States. If Chinese audits are opened to US regulators, the potential liability could increase even more.

Beijing has drawn up some contingency plans. In July, it launched a “share-link” scheme with the Swiss Stock Exchange. This will allow companies listed in Shanghai or Shenzhen to apply for a secondary listing in Switzerland.

Improving links with European capital markets is necessary because Hong Kong is too small to be a real alternative to New York for Chinese companies. It has high barriers to disclosure and profitability to entry, and its liquidity is much lower than that of New York.

Ultimately, any solution to class lifts must be both technical and political. There is “maximum willingness” on the Chinese side to find a concession that meets the technical terms of the US rules, according to a veteran investor in Hong Kong. But the meaning is that the United States wants to be able to announce to the world that China is following its rules. Political rhetoric is likely to undermine the already dwindling chances of reaching an agreement.

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