China's accounting concession could lead to exit of Chinese firms listed in US

China's stock regulator has removed a long-standing requirement that Chinese companies seeking to list on foreign exchanges primarily use Chinese auditors, a significant development in a decades-long dispute between Beijing and U.S. securities regulators.

U.S. regulators have demanded Chinese firms listed on American exchanges make their audits available for inspection to the U.S. Public Company Accounting Oversight Board (PCAOB) but have previously been rebuffed by China. In 2020, the U.S. passed a law requiring foreign companies that don't follow U.S. audit requirements to be expelled from U.S. exchanges, and the U.S. Securities and Exchange Commission finalized implementation guidelines for the law in December 2021. Beijing enacted its rule-change in response to fears Chinese firms would lose access to American capital markets if it did not act.

In the past decade, numerous Chinese companies have listed in the U.S., though they often trade at a discount to U.S. stocks due to the regulatory uncertainty caused by the riff. There are currently 261 Chinese companies listed on the New York Stock Exchange, Nasdaq Stock Exchange, and NYSE American Stock Exchange, the three largest U.S. exchanges, with a combined market value of USD 1.4 trillion (EUR 1.3 trillion), according to the U.S.-China Economic and Security Review Commission. The most-prominent Chinese seafood firm listed in the U.S is Pingtan Marine Enterprise, which is listed on the Nasdaq Stock Exchange.

American investor Peter Halesworth, the founder of Heng Ren Investments, a major shareholder in troubled Chinese aquaculture firm Sino Agro Food, a Chinese aquaculture firm listed on the U.S. Over-The-Counter Market, said the shift could be key to a compromise with the U.S.

“Access to Chinese auditing papers has been an issue for American regulators for the past decade due to worries that investors on U.S. exchanges could be defrauded. Some American legislators are also keen to prevent Chinese Communist Party-controlled entities using U.S. exchanges to raise cash,” he said.

Halesworth, who is also a plaintiff in a case before a federal district court in the U.S. state of New York seeking to appoint a receiver to Sino Agro Foods, predicted an agreement on the issue will be announced soon.

“I expect there will eventually be some resolution where there is a coordinated approach to allowing for offshore regulators to access audit working papers in China,” Halesworth said. “I also expect that some Chinese companies whose data is deemed to be too sensitive eventually will be delisted or not permitted by China to list overseas.”

Photo courtesy of Christopher Penler/Shutterstock