China’s U.S. audit capitulation is rare win-win
NISEKO, Japan, Dec 16 (Reuters Breakingviews) - The history of Sino-American diplomatic relations is not replete with unequivocal U.S. negotiating victories. On Thursday, however, the Public Company Accounting Oversight Board logged one when it announced Beijing had granted it “unprecedented” access to double-check the onshore audits of New York-listed Chinese firms, a surrender by Beijing in a battle spanning over a decade.
The U.S. watchdog warned that the breakthrough “should not be misconstrued in any way as a clean bill of health” for Alibaba (BABA.N), and compatriots. Still, any sign of defrosting between the two rivals is welcome to investors. When the U.S. legislature passed the Holding Foreign Companies Accountable Act of 2020, which can delist firms with auditors that deny the PCAOB access, many assumed 2023 would result in a purge of Chinese tickers. State-owned giants including oil refiner Sinopec (600028.SS) voluntarily decamped while its peer CNOOC (0883.HK) was booted off on a separate government order. Their departure helped erase over half a trillion dollars from the collective value of Chinese companies there between June and September.
Foreign diplomats complain that Beijing refuses to make concessions without a quid-pro-quo. So it is striking that in this case, the United States conceded nothing. That says something about the depth of American frustration after financial frauds at companies like Longtop Financial and Luckin Coffee destroyed billions of dollars of shareholder value with no recourse. It also suggests Beijing sensibly concluded this was a battle worth losing.
In addition to the unnecessary embarrassment for Beijing, market regulators want domestic savers to reallocate more of their $17 trillion of deposits to equities. Scandals overseas do not help: many Chinese investors, for instance, had stakes in Luckin. For all its disdain for America, the People’s Republic still needs access to New York capital, particularly when local markets are soft. There are 900 firms currently queuing to list on mainland exchanges amid signs of accelerating capital flight. The only reason to fight the PCAOB is clannish nationalism.
Clannishness may have won out nevertheless, had Washington not proven itself willing to sacrifice Wall Street’s fees from Chinese offerings to protect shareholders. For their part, Chinese regulators tightened cybersecurity reviews of companies listing abroad, alleviating the concerns of officials who suspect American intentions.
The Golden Dragon index (.HXC) is up 50% from a nadir in late October. Beijing can console itself that even if it lost this round, everyone got a good bargain.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Refiles to add graphic and dropped word in final paragraph.)
The U.S. Public Company Accounting Oversight Board said on Dec. 15 that the Chinese government has granted it “unprecedented” access to inspect and investigate firms in China for the first time ever. “Investors are now more protected because Congress acted, giving the PCAOB leverage through the HFCAA [Holding Foreign Companies Accountable Act of 2020] to secure this unprecedented access.”
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