Breakingviews - China’s SEC olive branch is sturdier than it looks

Jenny Qian Zhiya CEO of Luckin Coffee, exchanges high-five with an barista Andrea Lattuada during the company's IPO at the Nasdaq Market site in New York, U.S., May 17, 2019. REUTERS/Brendan McDermid

HONG KONG (Reuters Breakingviews) - Beijing’s latest olive branch extended to the United States may be sturdier than it looks. The China Securities Regulatory Commission said on Friday that it is seeking fresh discussions on plans to improve access for their American peers to audits of New York-listed Chinese companies. Given a history of empty talk, sceptics may snort. But Beijing is tiring of the constant stream of scandals. Washington, for its part, needs an excuse to walk back from its delisting threats.

The battle over access to China Inc’s books extends back at least to 2011, when the New York Stock Exchange delisted Longtop Financial Technologies, a software developer accused of accounting fraud. According to the U.S. Public Company Accounting Oversight Board, the overwhelming majority of auditors that deny it access hail from China.

This defensive attitude, combined with Chinese courts’ refusal to enforce American judgements, lets unscrupulous Chinese executives rip off American investors with relative impunity. Until recently, Beijing’s cooperation has been superficial, according to the PCAOB. In 2019, frustration led American politicians to call for mainland companies to get the boot, and Bloomberg reported last week that the Securities Regulatory Commission is mulling executing on that threat by 2022.

This might explain an unusually proactive CSRC comment seeking common ground with the SEC. Beijing has reason to offer genuine concessions. The June delisting of Luckin Coffee for inflating sales figures was a wakeup call in the People’s Republic. The company was originally held up as a homegrown rival to Starbucks and was lauded for its tech-savvy embrace of booming consumption. Instead it ended up reminding both domestic and foreign investors of endemic book-cooking in China’s private sector. Beijing has every reason to throw Luckin and others like it under PCAOB’s bus: Most Chinese frauds are not perpetrated by state-owned enterprises or firms in sensitive industries.

For Washington’s part, the threat to wipe companies with a market capitalisation of some $2 trillion off American boards, per Refinitiv data, would do more harm than good. If the incoming administration of President-elect Joe Biden can secure better audit access, with exceptions for state-firms, perhaps, it could improve protection for U.S. investors without wrecking their portfolios. Both sides have cause to compromise.


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