4 U.S. accounting watchdog now able to audit firms in China

The flags of the United States and China fly from a lamppost in the Chinatown neighborhood of Boston, Massachusetts, U.S., November 1, 2021. REUTERS/Brian Snyder/File Photo

NEW YORK, Dec 15 (Reuters) - The U.S. Public Company Accounting Oversight Board on Thursday said it has determined that it has gotten full access to inspect and investigate firms in China for the first time.

The announcement from the U.S. accounting watchdog removes the risk that around 200 Chinese companies, including Alibaba (BABA.N), could be kicked off U.S. stock exchanges.

The PCAOB said last year said that Chinese authorities had prevented it from completely inspecting and investigating in mainland China and Hong Kong. U.S. lawmakers in 2020 agreed to legislation that would oust Chinese companies from U.S. stock exchanges unless they adhere to American auditing standards. read more

COMMENTS:

DEREK LIN, PORTFOLIO MANAGER, COLUMBIA THREADNEEDLE, PORTLAND, OREGON

“Today’s news is a rare positive. Obviously it’s an ongoing process and something that needs to be repeated every cycle. But it seems like practicality has won out.”

“We saw the trade war and we’re kind of in a tech war now. So it’s nice that on the capital front we have chosen to continue cooperating with China.”

JULIE BELL LINDSAY, CHIEF EXECUTIVE OFFICER, CENTER FOR AUDIT QUALITY, WASHINGTON, DC

“Today’s news from the PCAOB is a positive outcome that will protect investor interests and maintain the efficient operation of our U.S. capital markets. The PCAOB’s inspections play an important role in creating investor trust with oversight of the important work that public company auditors perform to provide investors and other capital market stakeholders with reliable information for decision making. The ability for the PCAOB to inspect PCAOB registered firms in mainland China and Hong Kong will bring greater trust to companies accessing our capital markets, no matter where they are headquartered.”

QUINCY KROSBY, CHIEF GLOBAL STRATEGIST, LPL FINANCIAL, CHARLOTTE, NORTH CAROLINA

"That's been a long-running issue. The bilateral relationship between the U.S. and China - not just on the geopolitical front - is strained even at the market level. Transparency is a major issue for U.S. investors, so the ability to audit the accounts has been a sticking point and an important issue for U.S. investors in Chinese companies. If the auditors can examine and confirm the books, it's a positive for analysts and investors."

TIM GHRISKEY, SENIOR PORTFOLIO STRATEGIST, INGALLS & SNYDER, NEW YORK

“We will see how much detail is actually provided and if there are ways of verifying it. That is still all to be determined. It’s a great thing and it hopefully will legitimize these companies and takes one of the risks, theoretically, off the table of investing in them.”

"If this accounting oversight proves to uncover issues it could be very bad for the sector, especially if there is then no effort to correct it or come clean. Hopefully everything is good and this is a stamp of approval on these companies. The other issue out there is the economic data release by China was very weak, that was really still during the Covid lockdown period and it is still basically locked down over. That is another issue that is impacting all these stocks."

DON CALCAGNI, CHIEF INVESTMENT OFFICER, MERCER ADVISORS, DENVER

"My initial reaction is that it's positive. It's a pre-requisite for moving forward. We need transparency. We need to make sure that we have standards that we can believe in. I do think it’s an important step forward. However, the market, and investors like myself, are still suspicious of quality of the data we get from China, especially from Beijing ... You really can't trust the data you're getting from the Chinese communist party. For that reason, at least in my view, I don't think this is anything to get remotely excited about yet."

"But I do think it’s an important pre-requisite in order for us to normalize our economic relationship with China. I don't think it’s anything I'd make an investment decision based on, at this time."

LELAND MILLER, CEO AND CO-FOUNDER, CHINA BEIGE BOOK, WASHINGTON, DC

“One of the things the Chinese government is doing here is buying itself time to be able to provide options for some of these companies to not be delisted, to have the ability to just come home in the future.”

“Somewhere down the line, a year from now, two years from now, all of a sudden, compliance starts to pull back as the relationship deteriorates and regulators may find it more difficult to resuscitate the delisting issue.”

“This is not a situation in which the second the books are signed off this issue dies. This is an issue of ongoing compliance.”

“Overall it is very market positive, but it does not mean that there can’t be a fraying in the future.”

ART HOGAN, CHIEF MARKET STRATEGIST, B. RILEY FINANCIAL, NEW YORK

"The good news is there's some 200 companies that are based in China that actually have US traded ADRs that no longer face the acute threat of being kicked off US exchanges."

"I would certainly say this falls into the category of something that improves relations between U.S. and China"

"This falls into the category of a game changing view of Chinese companies because the threat of their delisting seems to have been eliminated. The reticence for investing in Chinese ADRs for an extended period of time has been the fear of the potential for them to be delisted, removing that fear shifts the basis for investing in them back to the fundamentals."

PAUL LEDER, ATTORNEY, MILLER & CHEVALIER, FORMER DIRECTOR OF SEC'S OFFICE OF INTERNATIONAL AFFAIRS

"This is major win for Erica Williams and the PCAOB."

"Backed up by new legislation, the HFCAA, the PCAOB and the SEC were able to bring the Chinese side to the table and then reach and enforce a great deal for U.S. investors and markets."

RICK MECKLER, PARTNER, CHERRY LANE INVESTMENTS, NEW VERNON, NEW JERSEY

"US – China business relations reflect a constant stream of problem solving combined with the emergence of new problems, particularly with respect to technology. The Tik Tok debate could be a new flash point for relationship problems and potential retaliation."

"All of this means that it will take significant time for large US money managers to gravitate back to US listed Chinese equities. I would also expect limited future Chinese IPOs in the US without a more meaningful warming in the overall political relationship of the two countries."

Compiled by the Global Finance & Markets Breaking News team

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