Exclusive: U.S. regulators are in China for audit deal talks

Chinese and US flags flutter outside the building of an American company in Beijing, China January 21, 2021. REUTERS/Tingshu Wang

HONG KONG, May 6 (Reuters) – US regulatory officials have arrived in Beijing seeking to settle a long-running dispute over the auditing compliance of US-listed Chinese firms, three people familiar with the matter told Reuters.

The stand-off, if not resolved, could see Chinese firms kicked off New York bourses. This week the US Securities and Exchange Commission (SEC) added over 80 firms, including e-commerce giant JD.com (9618.HK) and China Petroleum & Chemical Corp. (600028.SS) to the list of companies facing possible expulsion. read more

The talks between officials from the US Public Company Accounting Oversight Board (PCAOB) and their counterparts at the China Securities Regulatory Commission (CSRC) can be described as ‘late stage’ after China made concessions in recent months, the people said.

The PCAOB officials are expected to exit quarantine and start working next week, one of the people said. If this visit proceeds as expected, the PCAOB is likely to send a bigger team to China later this year to conduct on-site inspections of local auditors, the person said.

The sources declined to be identified due to the sensitivity of the issue. The PCAOB did not respond to requests for comment. The CSRC did not directly address Reuters queries about the arrival of PCAOB officials or the status of discussions.

Authorities in China have long been reluctant to let overseas regulators inspect local accounting firms, citing national security concerns.

But in a key concession, Chinese regulators last month proposed revising confidentiality rules for offshore listings and scrapping requirements that on-site inspections of overseas-listed Chinese firms be conducted mainly by domestic regulators. read more

The PCAOB sent representatives to China for face-to-face negotiations earlier this year, said the two of the people.

Separate sources also said last month that a preliminary framework for audit supervision cooperation between the two countries has been formed. read more

The spat over audit oversight of New York-listed Chinese companies has been simmering for more than a decade but it came to head last December when the SEC finalized rules to delist Chinese companies under the Holding Foreign Companies Accountable Act. It said there were 273 companies at risk but did not name them.

As of Friday, the PCAOB has identified 128 Chinese firms as at risk of being delisted.

The issue has been a major dragging factor on American depositary receipts (ADRs) issued by Chinese firms, with the Nasdaq Golden Dragon China Index tumbling 57% over the past 12 months.

Goldman Sachs estimated in March that US institutional investors held around $200 billion worth of Chinese ADRs.

In addition to the concessions by Chinese regulators, there have been other signs that a deal is in the offing.

In late March, sources said the CSRC asked some of the country’s US-listed firms, including Alibaba Group Holding Ltd (9988.HK)Baidu Inc. (9888.HK) and JD.com, to prepare for more audit disclosures. Late last month, Fang Xinghai, the CSRC’s vice chairman said he expected a deal in the near future.

Reporting by Xie Yu; Additional reporting by Katanga Johnson in Washington, Selena Li in Hong Kong and Jing Xu in Beijing; Editing by Edwina Gibbs

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