China changes audit secrecy rules to stop US delistings

Beijing has revised its audit secrecy laws to prevent some 270 Chinese companies from being delisted from US stock exchanges, a significant concession to pressure from Washington.

The China Securities Regulatory Commission, Beijing’s top financial watchdog, said Saturday it would amend confidentiality laws that prevent its overseas-listed companies from sharing sensitive financial information with foreign regulators.

The CSRC said its existing rules, which were last updated in 2009, are outdated.

It is Beijing’s most significant move yet to prevent Chinese companies from being delisted in New York in 2024. The Securities and Exchange Commission said last month that China’s biggest companies, including Baidu and Yum China, had three years to submit detailed audit documents, prompting a sharp sell-off in their shares.

Around 270 Chinese companies are listed in the US with a combined market capitalization of over US$2 trillion. The Nasdaq Golden Dragon China Index, which tracks blue-chip Chinese stocks, has lost around half its value over the past year.

Beijing’s unusual about-face is expected to create a framework for US regulators to gain access to companies’ audit files and is China’s first major rule change allowing financial information disclosures outside the country. the The Financial Times reports that regulators in Beijing discussed the proposals in March.

The latest draft legislation, open for public consultation until April 17, removes a requirement for the audit of financial statements of overseas-listed Chinese companies to be carried out by mainly Chinese regulators.

The changes will “facilitate cross-border regulatory cooperation, including joint inspections. . . to protect global investors,” the CSRC said.

Months of negotiations ensued between regulators in China and the US to settle the long-simmering dispute over access to audits.

Chinese authorities are trying to do this improve investor confidence after a series of government crackdowns and disastrous stock sales — including by the Chinese ride-hailing app I have – have shaken global markets.

The CSRC said its chairman Yi Huiman and SEC chairman Gary Gensler had held three meetings on “cooperation on audit oversight” since August and had made “positive progress.”

However, US regulators have dismissed the suggestion of an imminent deal that would halt the countdown to the delistings. Gensler said last week that only full compliance with US audit inspections would allow Chinese companies to continue trading in New York markets.

Geopolitical tensions between the US and China, including most recently over the Russian invasion of Ukraine, have led to fears that a compromise on audit access is unlikely. A Hong Kong finance executive close to some of the regulatory discussions said the delisting of Chinese companies is “a weapon the US has in this broader fight”. He added: “The US needs to be careful if they continue to pressure China, they will end up hurting themselves.”

According to regulations enacted in 2009, audit papers prepared when Chinese companies are listed overseas cannot be shared with foreign companies. That clashes with the US Holding Foreign Companies Accountable Act, passed in 2020, which forces Chinese and Hong Kong companies to allow the US Public Company Accounting Oversight Board to audit their audits.

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