China modifies rule on listing abroad, giving US access to audit Chinese companies
On April 2, China’s SRC (Securities Regulatory Commission) issued a draft on “improving confidentiality and file management of issuing and listing of securities abroad”. The draft deletes a requirement issued in 2009, which states on-site inspections(of Chinese companies listing abroad) should be primarily done by Chinese regulatory agencies, or depend on Chinese regulators’ inspection results. In addition, the revision draft also expanded on the former rules to include “overseas indirect listing of domestic enterprises.” The draft is currently pending public feedback and will be officially published on April 17.
The revision is China’s reaction to the recent delisting scare as 11 US-listed Chinese companies have been put on a watchlist by the SEC. Of the 11, 5 were moved from the “provisional list” to the “conclusive list” on March 29. The SEC acted on the Holding Foreign Companies Accountable Act (HFCAA), which came into force in 2020, granting SEC with authority to “review company audits for three consecutive years,” otherwise they can be delisted.
According to a report by the U.S. government, there are currently more than 200 Chinese companies listed in the U.S. as ADS (American Depository Shares). Combined, they have a market capitalization of $2.1 trillion as of May 2021. Many have seen their share price affected as the SEC’s move rattles investors.
U.S.-listed Chinese stocks climbed on Friday following a Bloomberg News report that says “Chinese authorities are preparing to give U.S. regulators full access to auditing reports of the majority of the 200-plus companies listed in New York as soon as mid-this year.” In the same report, it was also mentioned that the Chinese government is “prepared to accept that some state-owned enterprises and private companies that hold sensitive data will be delisted,” said people familiar with the matter.
“This(recent modifications) reflects the consistent openness of Chinese regulators to cross-border audit and regulatory cooperation, and is also in line with relevant customary international practices, and will provide institutional safeguards for safe and efficient cross-border regulatory cooperation, including joint inspections,” said CSRC.
Other key points from CSRC’s revision draft include: regulators will further provide assistance to companies in managing sensitive information or information relating to national security, and regulators will work with foreign regulatory agencies in a safe and efficient manner to protect the rights and interests of global investors.