Chinese firms fend off delisting as US audit watchdog gets full inspection access

NEW YORK/HONG KONG/WASHINGTON, Dec 15 (Reuters) – The U.S. accounting watchdog said on Thursday it has full access to inspect and investigate firms in China for the first time ever, removing the risk that some 200 Chinese companies could be fired starting American stock exchanges.

The ruling by the Public Company Accounting Oversight Board (PCAOB) marks a victory for US regulators and a relief for Chinese firms, including Alibaba, which face delisting amid difficult relations between the world̵[ads1]7;s largest economies. Washington and Beijing have been 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 problems and hold firms accountable for fixing them,” said PCAOB Chair Erica Williams.

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

However, the relief was not seen in Thursday’s trade for US-listed shares of Chinese companies, which were higher amid the news but gave up gains and some ended sharply lower.

US-traded shares of e-commerce giants Alibaba ( BABA.N ), , JD.com ( 9618.HK ) as well as internet behemoth Baidu ( 9888.HK ) were down between 3-5% while music streaming provider Tencent Music was down 3.5 %, more than the broader market where the S&P 500 index (.SPX) was down 2.5%. The iShares MSCI China ETF ( MCHI.O ) fell 2.2%.

There were some concerns about what problems the audits might uncover.

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

But any problems uncovered by the tighter accounting controls “could be very bad for the sector, especially if there is no attempt to correct it or come clean,” he said.

In its statement, the PCAOB said it exercised discretion in selecting firms for audit and had selected two, KPMG Huazhen LLP in China and PricewaterhouseCoopers in Hong Kong.

PCAOB staff identified “many potential deficiencies” in their inspection efforts, the PCAOB’s Williams said, adding that the inspection reports will be finalized and released next year.

“Today’s announcement should not be misconstrued in any way as a clean bill of health for firms 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 initial inspections elsewhere.

ROAD TO REVISION

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

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

US lawmakers in 2020 agreed to legislation that would delist Chinese companies from US exchanges unless they comply with US auditing standards.

The agreement gave the PCAOB full access to Chinese audit working papers without redactions, the right to take testimony from the audit firm’s employees in China and discretion to choose which companies it inspects.

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

Sources previously told Reuters that US officials had been given “good access” to all the information they requested during the seven-week inspection.

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

In a statement, he said: “Chinese authorities will have to give the PCAOB ‘full access for inspections and investigations in 2023 and beyond.’

RENEWED COOPERATION

In separate news on Thursday, the Biden administration added Chinese memory chip maker YMTC and 21 “major” Chinese players in the artificial intelligence chip industry to a trade blacklist, expanding its crackdown on China’s chip industry.

But in a decision that signals 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 unverified list, thanks to successful site visits.

The US and China have been trying to mend ties after a visit to Taiwan in August by US House Speaker Nancy Pelosi caused another rift in relations and led to China canceling cooperation with the US 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 topics.

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

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