Title: U.S.-China Agreement Paves Way for Enhanced Oversight of Chinese Companies on Wall Street
Friday saw the announcement of an agreement between regulatory bodies from both sides, granting U.S. officials access to the books of Chinese corporations. This allows them to assess whether these companies meet long-term requirements in the U.S. market, easing the burden on businesses and investors in both nations.
This breakthrough means that around 160 Chinese firms may have steered clear of being ousted from the global stock market titan. Regulators seem intent on testing new protocols, as reported by Reuters on Wednesday based on unnamed sources. U.S. authorities allegedly selected Alibaba, Yum China, and other corporations for an initial round of on-site inspections commencing soon. The companies have yet to respond with comments upon request.
However, regulators caution that this agreement marks a mere preliminary step in addressing the lingering issue. Despite this move, Chinese companies are still far from clearing hurdles before gaining access and closing more comprehensive deals. Experts also argue that it is improbable that other contentious problems in U.S.-China commercial relations will be easily resolved.
What's happening?
The agreement enables U.S. regulatory bodies to inspect and scrutinize domestic and Hong Kong-registered accounting firms responsible for auditing Chinese corporations.
According to the Public Company Accounting Oversight Board, this is the most extensive agreement of its kind ever implemented between the U.S. and China. It is anticipated that U.S. inspectors might make trips to China and Hong Kong by mid-September, as per SEC Chair Gary Gensler's statement.
Lauren Gloudeman, Director of China for Eurasia Group, said to CNN Business that the agreement on these pilot inspections represents a significant trial to determine whether the two sides can negotiate a more extensive agreement to prevent Chinese companies from ultimately being delisted from U.S. exchanges.
Drew Bernstein, Co-Chairman of Marcum Asia CPAs, a firm providing audit, tax, and advisory services to Asian companies intending to enter the U.S. market, concurs.
"China has made it quite clear that it sees it in its best interests to grant some of its companies ongoing access to U.S. capital markets, and regulatory authorities have made substantial concessions to reach an agreement," he stated.
Who's affected?
A lengthy list of companies threatened includes prominent Chinese tech giants like Alibaba, Baidu, and JD.com.
U.S. regulations mandate that corporations failing to meet full disclosure requirements for their financial records may be delisted from the U.S. market by early 2024. This deadline can be extended.
In recent months, the pressure has intensified: The SEC has added more Chinese companies to a list of corporations potentially facing delisting, while U.S. lawmakers have enhanced requirements and imposed ultimatums on these companies.
Since security concerns, previous tensions have delayed China's willingness to allow foreign regulatory bodies to assess its audit firms. Rising tensions have even led some Chinese companies to withdraw from the U.S. market.
This month, five state-owned companies announced their decision to withdraw from the New York Stock Exchange, attributing their withdrawal to minimal trading volumes and high costs. Among the state-owned companies withdrawing voluntarily from the exchange are China Life, PetroChina, Sinopec, Chalco, and Sinopec Shanghai Petrochemical.
Other companies are exploring options to maintain their flexibility.
Alibaba, perhaps the most well-known Chinese corporation among western investors, presented plans in July to uplist its Hong Kong stock exchange listing to a premier status, expectedly by the end of the year.
The company, whose shares have been listed in New York since 2014, aims for a dual primary listing as soon as alterations are complete.
Hong Kong has evolved into a popular destination for companies looking to allay their concerns about exiting Wall Street.
"With the collaboration" [of the new agreement], "the delisting risk for Chinese concept stocks, listed in the U.S., may be temporarily lessened, but cannot be fully eliminated in the short term," analysts from BoCom International Communications stated.
A dual primary or secondary listing in Hong Kong could initially remain an attractive option, they noted on Monday in a statement.
Why it's crucial
This situation compels firms to reconsider their strategies and leads to a slowdown in stock emissions.
Data from Dealogic illustrates that the number of Chinese company IPOs in the U.S. has significantly decreased, with a mere eight IPOs this year compared to 37 during the same period last year. Additionally, the value these transactions have generated is substantially lower. Data from Dealogic reveal that companies have amassed only $332 million through U.S. IPOs this year, in contrast to nearly $13 billion in 2021. Factors other than this deal contribute to the weak economic performance, an overall sluggish IPO market impacting all sorts of firms.
For some Chinese corporations, stringent regulatory measures are concerning.
The previous year, Didi, China's largest ride-hailing company, became a cautionary tale. After listing in New York in 2021, the company was later delisted following the implementation of domestic probes.
If the U.S. Congress perceives China maintains its commitment to this inspection agreement, the likelihood of Chinese IPOs resurging may increase.
"Our experience suggests that Chinese management teams remain highly interested and active in a U.S. listing, despite the relatively rationalized listing process," Bernstein said.
"If the IPO market recovers next year, we anticipate an increase in Chinese IPOs in 2023."
Will this deal be successful?
Analysts remain cautious about whether the new inspection protocol will shield companies from their problems.
The analysts from Goldman Sachs predict that the probability of Chinese stocks being delisted remains approximately 50%.
Last week, SEC Chair Gary Gensler also warned that companies still face the risk of delisting if their documents cannot be obtained by U.S. regulators.
"The evidence is clear," he stated in a statement.
The impending confirmation of the inspections suggests a 90% probability that both sides will reach a broad agreement on inspections by the end of the year or shortly thereafter, as per Eurasia Group experts in a report.
"Major US regulatory authorities would not make the effort to travel to Hong Kong if they did not trust China's commitment to negotiating a comprehensive agreement," they wrote.
Lu Xiaomeng, Eurasia's Director for Energy Technology, suggested that China might instruct more state-owned companies to list first in Hong Kong, "as these companies handle sensitive information regarded as crucial for national security."
China might elect to take this approach rather than subjecting itself to annual inspections.
Will this contribute to better U.S.-China relations?
Despite the progress, the two world superpowers are likely to continue disagreeing on various issues.
"Though the agreement is a constructive signal, it has no significant impact on the broader bilateral relations," Graudman, Eurasia's Director, said.
"Given the geopolitical tensions surrounding Taiwan politics and the separation between China and Russia, it's difficult to discern the possibility of a shift in the overall relationship."
Bernstein, the Audit Chair, noted that the deal reflects the boundary of decoupling.
"The relationship between the U.S. and China resembles a contentious relationship, in which they ultimately realize they cannot afford to divorce," he said.
Meanwhile, the geopolitical tensions surrounding Taiwan politics and the separation between China and Russia continue to escalate, making it challenging to determine if there will be any significant shifts in the overall relationship.
Sources: , [S&P Global Market Intelligence], [Financial Times]
Enrichment Data:
The U.S. regulatory bodies' visit to Chinese audit firms is a component of broader tensions between the U.S. and China. Recent examples include tariffs imposed by the Trump administration on Chinese goods beginning February 4, 2025, with a 10% tariff imposed on all imports of Chinese goods. China retaliated with measures including export controls on critical minerals, tariffs on U.S. coal, liquefied natural gas, crude oil, agriculture machinery, and certain cars and pickup trucks.
Implications of U.S.-China tensions on Chinese companies in the U.S. market include market performance and investor skepticism in the stability of the Chinese economy. Despite tensions, Chinese technology stocks, such as Alibaba and Xiaomi, have shown resilience, with companies like Alibaba experiencing gains in their stock prices and Xiaomi's stock prices reaching new highs in 2021. However, the overall economic situation in China, including weak GDP growth, rising youth unemployment, and declining foreign investment, has led to investor skepticism concerning the stability of the Chinese economy.
