NEW YORK/HONG KONG/WASHINGTON, Dec 15 (Reuters) – The U.S. accounting watchdog said on Thursday it had the full ability to audit and investigate businesses in China for the first time, eliminating the operations of nearly 200 Chinese companies. US stock exchanges.
The announcement by the Public Company Accounting Oversight Board (PCAOB) marks a victory for US regulators and a relief for Chinese companies, including Alibaba, which face delisting amid strained relations between the world’s largest economies. Washington and Beijing are locked in a heated trade and technology war.
“For the first time in history, we are able to conduct full and thorough inspections and investigations to identify potential problems and hold companies accountable for fixing them,” said PCAOB Chair Erica Williams.
“This falls into the category of a game-changing view for Chinese companies because the threat of their withdrawal appears to have been eliminated,” said Art Hogan, chief market strategist at B. Riley Financial.
However, the relief was not seen in U.S.-listed shares of Chinese companies on Thursday, which were higher on the news but gave up gains, with some ending sharply lower.
U.S.-traded shares of e-commerce giants Alibaba ( BABA.N ), JD.com ( 9618.HK ) and Internet behemoth Baidu ( 9888.HK ) fell 3-5 %, while music streaming provider Tencent Music fell by 3.5%. %, more than the broader market, where the S&P 500 Index (.SPX) fell 2.5%. The iShares MSCI China ETF ( MCHI.O ) fell 2.2%.
Some concerns were raised about what problems the audits might uncover.
Tim Grisky, senior portfolio strategist at Ingalls & Snyder, said the move should take “one of the risks, theoretically, off the table to invest in them.”
However, any problem uncovered by the tighter accounting oversight “could be very bad for the industry, especially if there is no effort to fix or clean it up,” he said.
In its statement, the PCAOB said it had discretion to select firms to audit and chose two: KPMG Huazhen LLP in China and PricewaterhouseCoopers in Hong Kong.
PCAOB staff found “numerous potential deficiencies” in their inspection work, the PCAOB’s Williams said, saying inspection reports will be finalized and released next year.
“Today’s announcement should in no way be misconstrued as speaking about the health of firms in mainland China and Hong Kong,” he said.
He declined to specify the types of deficiencies, but said they were consistent with what auditors had seen during first-time inspections at other locations.
PATH TO AUDIT
The PCAOB, which oversees registered public accounting firms around the world, said late last year that Chinese authorities had prevented the watchdog from fully inspecting and investigating mainland China and Hong Kong.
In August, Washington and Beijing reached a landmark agreement to resolve a long-running dispute over audits of US-listed Chinese companies. Chinese authorities have long been reluctant to allow foreign regulators to audit local accounting firms, citing national security concerns.
U.S. lawmakers agreed to legislation in 2020 that would delist Chinese companies from U.S. stock exchanges if they fail to comply with U.S. auditing standards.
The deal gave the PCAOB full access to Chinese audit working papers without redactions, the right to take depositions from audit firm personnel in China, and the right to choose the companies it audits at its sole discretion.
Investors and lawyers awaited news from the PCAOB on whether US inspectors had received the promised access.
Sources told Reuters earlier that US officials had “good access” to all the information they requested during the seven-week inspection.
The decision announced Thursday resets the three-year clock for compliance, said Gary Gensler, chairman of the Securities and Exchange Commission, which oversees the PCAOB.
In the statement he said: “Chinese authorities must provide the PCAOB with ‘full access for inspections and investigations in 2023 and beyond.’
On Thursday, the Biden administration added Chinese memory chip maker YMTC and 21 “major” players in the artificial intelligence chip industry to a trade blacklist, expanding its crackdown on China’s chip industry.
But in a decision to renew cooperation between Washington and Beijing, the Commerce Department also removed a subsidiary of Wuxi Biologics ( 2269.HK ), which makes components of AstraZeneca’s ( AZN.L ) COVID-19 vaccine, and 25 other Chinese. entities from the so-called unverified list due to successful site visits.
The United States and China have been seeking to repair ties since House Speaker Nancy Pelosi’s visit to Taiwan in August caused a fresh rift in relations and forced China to cancel cooperation with the United States in a number of areas.
Since then, the two countries have gradually restored communication, first with a meeting between US President Joe Biden and Chinese President Xi Jinping, followed by low-level meetings and renewed talks on climate change and other topics.
Reporting by Xi Yu, Chris Prentice and Susan Heave, Additional reporting by Bansari Mayur Kamdar, Alex Alper Don Durfee and Chuck Mikolajczak Editing by Megan Davis, Nick Zieminski and Chizu Nomiyama.
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