US and Chinese regulators in talks over audit deal sources

Chinese and American flags fly outside an American company building in Beijing, China, January 21, 2021. REUTERS/Tingshu Wang

HONG KONG (Reuters) – U.S. and Chinese regulators are in talks to settle a long-running dispute over audit compliance for Chinese companies listed in the United States, three people familiar with the matter told Reuters.

If the standoff is not resolved, it could lead to Chinese companies taking off on the New York stock exchanges.

The US Public Company Accountability Oversight Board (PCAOB) denied an earlier Reuters report that a team from the agency had arrived in Beijing for talks.

This week, the US Securities and Exchange Commission (SEC) added more than 80 companies, including e-commerce giant JD.com. (9618.HK) And China Petroleum and Chemical Corporation (600028.SS) to the list of companies facing possible expulsion. Read more

People said talks between officials from the PCAOB and their counterparts at the China Securities Regulatory Commission (CSRC) could be described as a “late stage” after China made concessions in recent months.

But a PCAOB spokesperson said, “Recent reports that PCAOB officials are currently in China, or that PCAOB officials were in China earlier this year for face-to-face negotiations, are incorrect. PCAOB has not sent any personnel to China since 2017. . . .

He said the council continues to communicate with the Chinese authorities, but “speculation about a final agreement is still premature.” As a result, PCAOB plans “for different scenarios”.

On Friday, the CSRC did not respond directly to the status of the discussions. Reuters referred to official statements from both sides, but did not specify which.

The sources requested anonymity due to the sensitivity of the issue.

Authorities in China have long been reluctant to allow foreign regulators to inspect domestic accounting firms, citing national security concerns.

But in a major concession, Chinese regulators last month proposed revising confidentiality rules for offshore listings and scrapping requirements that on-site inspections of Chinese companies listed overseas are primarily conducted by domestic regulators. Read more

Sources told Reuters last month that an initial framework for cooperation in overseeing audits between the two countries had been formed. Read more

The row over audit oversight of Chinese companies listed in New York, which has been going on for more than a decade, came to a head in December when the Securities and Exchange Commission ended rules for delisting Chinese companies under the Foreign Company Accountability Act. She said there were 273 companies at risk, but she did not name them.

As of Friday, PCAOB has identified 128 Chinese companies at risk of delisting.

The issue has been a major factor driving American Depositary Receipts (ADRs) issued by Chinese companies, with the Nasdaq Gold Dragon China Index down 57% over the past 12 months.

Goldman Sachs estimated in March that US institutional investors own $200 billion worth of Chinese ADRs.

In addition to concessions by Chinese regulators, there were other signs that a deal was imminent.

In late March, sources said the CSRC had asked some US companies listed in the US, including Alibaba Group Holdings Ltd. (9988.HK)Baidu Inc (9888.HK) and JD.com, to prepare for more audit disclosures. Late last month, Fang Xinghai, vice president of CSRC, said he expected a deal to be struck in the near future.

Reporting by Xie Yu; Additional reporting by Katanga Johnson in Washington, Selina Lee in Hong Kong and Jing Shuo in Beijing. Editing by Edwina Gibbs and William Mallard

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