Looming crisis in China-US radiation dispute
Last week, Chinese tech giant Alibaba applied for a primary listing in Hong Kong. If you were looking for a sign of how negotiations between Beijing and Washington are going over the latter’s plans to ban trade from Chinese companies, this is the one. Read: wrong.
Alibaba is one of about 200 companies to be delisted from the New York stock exchanges in 2024 because China blocked US regulators from accessing their financial audit records despite US law requiring them to be inspected every three years. The trade ban will also apply to dozens of other Chinese companies whose shares or debts are traded off exchanges in the United States.
Alibaba’s new Hong Kong listing will simplify the transition to Hong Kong-only trading if – or when – US regulators force it to pull out of Wall Street. Those with skin in the game seem to be preparing for this eventuality.
The ban will end a two-decade bridge that has ensured a steady flow of capital between the world’s two biggest superpowers. It will threaten the listings of companies with a market capitalization of around $1.4 billion and prevent China from accessing the world’s largest pool of public capital when Chinese companies need access to international finance.
Negotiations to resolve the standoff are underway, according to US and Chinese officials, but a resolution is unlikely. Securities and Exchange Commission Chairman Gary Gensler said this month that he was “not particularly confident” of a deal.
Overshadowing all of this is a bill currently pending in Washington that would speed up the deadline by one year.
The framework for delisting companies if their auditors do not make audit files available at least every three years for inspection by the Public Company Accounting Oversight Board, the US audit oversight body, was introduced in 2021. That set radiation ticking. This meant that the PCAOB’s determination of whether Chinese companies had complied with this rule by the end of 2023 would be crucial.
But if Congress passes its current bill, PCAOB officials should complete their inspections a year earlier, by December. If they cannot, any Chinese company listed in the United States will be banned when it files its next annual report, which usually takes place in April. There is no wiggle room.
In China, geopolitical risks have sparked heightened national security concerns, making it unlikely that Beijing will allow U.S. regulators to scrutinize its biggest companies. But the US market is too big to ignore. In April, Beijing changed a decade-old rule that limited data sharing by its companies operating overseas. Chinese regulators have also explored the categorization of companies whose data is considered “sensitive” or “secret”. This could lead to voluntary radiation. But neither has satisfied US regulators.
The United States currently inspects corporate audit records from more than 50 jurisdictions. PCAOB oversight is designed to enhance investor protection across borders. The $300 million Luckin Coffee fraud in 2020 showed why these protections should also apply to investors in Chinese companies.
The listeners themselves remained largely silent. Three quarters of Chinese companies listed in the United States are audited by the Chinese branches of Deloitte, PwC, EY and KPMG. The “Big Four” have faced increasing regulatory fines and shareholder lawsuits for their work in Europe and the United States. If their Chinese audits are open to US regulators, the potential liability could increase further.
Beijing has drawn up contingency plans. In July, it launched a “stock connect” program with the Swiss stock exchange. This will allow companies listed in Shanghai or Shenzhen to apply for a secondary listing in Switzerland.
Improving ties with European capital markets is necessary because Hong Kong is too small to be a real alternative to New York for Chinese companies. It has high disclosure and profitability barriers to entry, and its liquidity is far below that of New York.
Ultimately, any solution to the delisting line will have to be both technical and political. There is “maximum willingness” on the Chinese side to find a concession that meets the technical terms of US rules, according to a seasoned Hong Kong investor. But the meaning is that the United States wants to be able to declare to the world that China follows its rules. Political rhetoric is likely to undermine the already dim chances of a deal.