Audit deal will leave traders with China dregs

DiDi Global

29/08/2022 04:24

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Pete Sweeney
    HONG KONG, Aug 29 (Reuters Breakingviews) - Beijing has
conceded to U.S. demands which could theoretically let $1.5
trillion of New York equities skip delisting. However, a large
swathe of Chinese companies will still leave New York, willingly
or otherwise. The remaining constituents could be an uninspiring
lot.  
    This squabble has been underway since 2007, but the issue
gained wider investor attention in 2011 when multiple mainland
companies were booted out over fraud. The most notable was
Longtop Financial Technologies, underwritten by Goldman Sachs
 GS.N  and Deutsche Bank  DBKGn.DE  and audited by Deloitte’s
Chinese unit. Chinese security law blocked Deloitte China and
other auditors from cooperating with investigations even as
owners of U.S. stocks lost their shirts, with little recourse. 
    In 2020, U.S. legislators passed a law to evict any foreign
firm whose auditor does not allow the Public Company Accounting
Oversight Board (PCAOB) to double-check its books by 2024. The
overwhelming majority of violators are Chinese. State-owned
firms began to proactively exit this month while some private
companies like Alibaba  BABA.N   9988.HK  have already set up
additional listings that could serve as a backup, or have gone
private. 
    On Friday Beijing conceded, allowing full access to Chinese
audit working papers, the right to take testimony inside China,
and discretion to select companies to inspect. China did have
some good reasons https://www.reuters.com/article/us-china-usa-listings-breakingviews-idDEKBN28307Y
 to accommodate the PCAOB, but its bureaucracy, in which
multiple agencies seek influence over offshore capital raisings,
will struggle to deliver genuine cooperation. In addition to
strategic concerns, they are highly worried about data, which
bodes ill for the continued tenancy of fintech firms like Lufax
 LU.N , insurer Waterdrop  WDH.N , Kingsoft Cloud  KC.O ,
ride-sharer Didi and so on.  
    The average Chinese company on U.S. bourses is down roughly
three quarters from its IPO price, per Refinitiv data, and many
are lightly traded. Some are yesterday’s theme stocks like
Renren  RENN.N , once touted as China’s Facebook. Others, like
the cluster of online tutoring providers, are victims of
regulatory change that make their business models unviable.
There is also a crowd of names most Americans have never heard
of. Many have small free floats making them prone to abuse. 
    The profile of the average company Beijing is likely to
leave on American boards will have no key technology, no
strategic role to play, and minimal user data. Chinese investors
won’t want for them.  
    Follow @petesweeneypro https://twitter.com/petesweeneypro on
Twitter
    
    CONTEXT NEWS
  Beijing and Washington on Aug. 26 signed a pact to allow U.S.
regulators to vet accounting firms in China and Hong Kong. 
    Regulators in the United States have for more than a decade
demanded access to audit papers of U.S.-listed Chinese
companies, but Beijing has been reluctant to let overseas
regulators inspect its accounting firms, citing national
security concerns.

 (Editing by Una Galani and Thomas Shum)
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