US

Chinese firms avert delisting as U.S. audit watchdog gets full inspection access

NEW YORK/HONG KONG/WASHINGTON, Dec 15 (Reuters) – The US accounting regulator said on Thursday that for the first time ever it will have full access to inspect and investigate companies in China, removing the risk that some 200 Chinese companies could be delisted from US stock exchanges.

The statement by the Public Company Accounting Oversight Board (PCAOB) marks a victory for US regulators and relief for Chinese companies, including Alibaba, which face delisting amid troubled relations between the world’s largest economies. Washington and Beijing are locked in a heated trade and technology war.

“For the first time in history, we are able to conduct full and thorough inspections and investigations to root out potential issues and hold companies accountable for fixing them,” said PCAOB Chair Erica Williams.

“This falls into the category of a groundbreaking view of Chinese companies as the threat of their delisting appears to have been eliminated,” said Art Hogan, chief market strategist at B. Riley Financial.

The relief, however, was not seen in trading in US-listed Chinese companies on Thursday, which were higher amid the news but gave up gains and some ended sharply lower.

US-traded shares in e-commerce giants Alibaba (BABA.N), , JD.com (9618.HK) and internet giant Baidu (9888.HK) fell between 3% and 5% amid music streaming Provider Tencent Music fell 3.5%, more than the broader market, where the S&P 500 Index (.SPX) fell 2.5%. The iShares MSCI China ETF (MCHI.O) lost 2.2%.

Some concerns were raised about what issues the audits might reveal.

Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder, said the move should “remove one of the risks theoretically associated with investing in them.”

However, any issues uncovered as a result of tighter accounting oversight “could be very bad for the sector, particularly if no efforts are then made to correct them or come clean,” he said.

In its statement, the PCAOB said it used its discretion to select firms for the audit and chose two, KPMG Huazhen LLP in China and PricewaterhouseCoopers in Hong Kong.

PCAOB staff have identified “numerous potential deficiencies” in their inspection work, said PCAOB’s Williams, saying inspection reports will be finalized and released over the next year.

“Today’s announcement should in no way be misconstrued as a clean bill of health for companies in Mainland China and Hong Kong,” she said.

She declined to specify the types of deficiencies but said they are consistent with those audit inspectors have seen during first-time inspections elsewhere.

WAY TO THE TEST

The PCAOB, which oversees registered accounting firms around the world, said late last year that Chinese authorities had blocked the watchdog from fully inspecting and probing mainland China and Hong Kong.

Washington and Beijing reached a landmark agreement in August to settle a long-standing dispute over compliance testing by US-listed Chinese companies. Authorities in China have long been reluctant to allow foreign regulators to inspect local accounting firms, citing national security concerns.

US lawmakers approved legislation in 2020 that would force Chinese companies off US stock exchanges if they fail to comply with American auditing standards.

The agreement granted PCAOB full access to Chinese audit work papers without redactions, the right to solicit testimony from audit firm staff in China, and sole discretion as to which companies it inspects.

Investors and lawyers have been waiting for news from the PCAOB on whether US inspectors have been granted the access they promised.

Sources previously told Reuters US officials were given “good access” to any information they requested during the seven-week inspection.

The decision, announced Thursday, resets a three-year clock for compliance, said Gary Gensler, the chair of the Securities and Exchange Commission, which oversees the PCAOB.

In a statement, he said: “Chinese authorities must grant PCAOB “full access for inspections and investigations in 2023 and beyond.”

NEW COLLABORATION

In separate news on Thursday, the Biden government blacklisted Chinese memory chipmaker YMTC and 21 “big” Chinese players in the artificial intelligence chip industry, expanding its crackdown on China’s chip industry.

But in a decision signaling renewed cooperation between Washington and Beijing, the Commerce Department also removed a subsidiary of Wuxi Biologics (2269.HK), a company that makes ingredients for AstraZeneca’s (AZN.L) COVID-19 vaccine , and 25 other Chinese entities from the so-called unconfirmed list, thanks to successful website visits.

The United States and China have attempted to mend ties following a visit by US House Speaker Nancy Pelosi to Taiwan in August, sparking a new rift in ties and prompting China to seek cooperation with the United States set in a number of areas.

Since then, the two countries have gradually restored communications, first with a meeting between US President Joe Biden and Chinese President Xi Jinping, followed by lower-level meetings and a resumption of talks on climate change and other issues.

Reporting by Xie Yu, Chris Prentice, and Susan Heavey, Additional reporting by Bansari Mayur Kamdar, Alex Alper Don Durfee, and Chuck Mikolajczak, Editing by Megan Davies, Nick Zieminski, and Chizu Nomiyama

Our standards: The Thomson Reuters Trust Principles.

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