China is preparing a system to sort US-listed Chinese companies into groups based on the sensitivity of the data they hold, in a potential concession from Beijing to try to stop US regulators from removing hundreds of groups.
The system is designed to bring some Chinese companies into compliance with U.S. rules that require public companies to allow regulators to inspect their audit files, according to four people with knowledge of the situation.
Chinese companies listed in the U.S. will be divided into three broad categories, two people said. The groups will be companies with non-sensitive data, those with sensitive data and others with “secret”[ads1]; data that must be delisted.
One of the people said Beijing had discussed whether companies in the “sensitive data” category could restructure their operations to become compliant, including by outsourcing the information to a third party.
The category system would be the second significant concession from Beijing to remove obstacles giving the US full access to audits. In April, it changed a decade-long rule that limited the data-sharing practices of foreign companies.
The planning, which is under discussion and subject to change, follows months of deadlocked negotiations between Beijing and Washington over US demands that Chinese companies and their auditors make detailed audit documents available or be delisted by 2024.
A mass delisting would represent a significant step toward economic decoupling of the US and China and threaten $1.3 billion in shareholder value. About 260 of China’s biggest companies, including technology group Alibaba, fast food company Yum China and social media Weibo, could be delisted from New York exchanges if they fail to comply.
The China Securities Regulatory Commission, Beijing’s top securities watchdog, did not comment.
Beijing has typically resisted allowing Chinese companies to provide data to foreign regulators on national security grounds.
But under the tiered arrangement, “low-risk” computer companies can make their audit records available to the Public Company Accounting and Oversight Board, the U.S. accounting watchdog, two of the people said. The low-risk category will probably include retailers and restaurant chains.
“Anything that falls under the Didi category is clearly a no-go,” said the head of a major Hong Kong-based investment firm, referring to the ride-hailing group that was fined more than $1 billion by Beijing last week for cyber security breaches.
US officials are skeptical that Chinese companies will meet the full transparency standards required under the Holding Foreign Companies Accountable Act, the 2020 law that forced Chinese and Hong Kong companies to open their audit files.
“While there have been ongoing and productive discussions between the US and Chinese authorities . . . significant issues remain and time is running out quickly,” YJ Fischer, the SEC’s Office of International Affairs, said in a speech in May.
An agreement to provide access to audit files would “just be the start,” Fischer said. PCAOB officials must also travel to China and conduct an audit inspection of any US-listed Chinese issuer.
“I don’t know how we’re ever going to solve this,” the investment firm’s executive said. He added that Beijing and Washington were using the revision row for “political gains” and that relations were at their worst in 40 years.
“As an investor, I hope that both sides will be pragmatic enough.”
The PCAOB said in a statement that it “must have full access to audit working papers of any firm it chooses to inspect or investigate – no loopholes and no exceptions”.