March 25, 2023


About 200 U.S.-listed Chinese companies, including and Baidu, face the prospect of delisting from the New York Stock Exchange if U.S. regulators continue to be blocked from a full review of their audit documents. The companies say China’s national security law prohibits them from handing over working papers. A tentative deal between Beijing and Washington could lead to a resolution of a decades-long access dispute.

1. Why does the US want an audit?

The Sarbanes-Oxley Act of 2002, enacted in the wake of the Enron accounting scandal, requires public companies to provide their audit working papers for inspection by the Public Company Accounting Oversight Board (PCAOB). According to the SEC, more than 50 jurisdictions work with boards to allow review, while only two — China and Hong Kong — do not. The discrepancy drew attention when the Nasdaq-listed Chinese chain Luckin Coffee was found to have deliberately fabricated a portion of its 2019 revenue. In 2020, Congress passed the Foreign Corporate Accountability Act (HFCAA), which prohibits companies from trading on U.S. exchanges if U.S. inspectors are unable to review their audits for three consecutive years.

2. How well is the law enforced?

In March, the SEC began publishing its “provisional list” of companies it found to have violated the requirements. By the end of July, the list had grown to more than 100 companies, including Alibaba,, Pinduoduo and China Petroleum & Chemical Corporation. The PCAOB said that in the 13-month period ending Dec. 31, through 2021, the 15 auditing firms it oversees signed audit reports for 192 businesses based in China or Hong Kong — reports that regulators cannot review.

3. How should China respond?

In what could be a major breakthrough, U.S. and Chinese regulators announced on Aug. 26 that they had reached a tentative agreement to allow PCAOB inspectors access to audit workpapers and personnel. While the deal is seen as an important step, U.S. officials are unlikely to announce before December 2022 whether they are satisfied with the admission. The deal comes after several of China’s largest state-owned companies announced plans to delist from the U.S., while tech giant Alibaba Group Holding Ltd said it would seek a major listing in Hong Kong, a sign it may be preparing to exit the U.S. market.

4. What is behind the US pressure?

Critics say Chinese companies enjoy the trading privileges of a market economy — including access to U.S. stock exchanges — while receiving government support and operating in an opaque system. In addition to inspection audits, the HFCAA requires foreign companies to disclose whether they are under government control. The SEC is also asking investors for more information about the structures and risks associated with shell companies — known as variable interest entities, or VIEs — that Chinese companies use to list stocks in New York. SEC Chairman Gary Gensler has said that more than 250 companies that have already traded will face similar requirements.

5. Are some Chinese companies really controlled by the government?

Large private companies like Alibaba may argue that they are not, although other companies with large state-owned stakes may struggle. The U.S.-China Economic and Security Review Commission, which reports to Congress, said China considers eight companies listed on major U.S. exchanges to be “national Chinese state-owned enterprises.” They are PetroChina, China Life Insurance, China Petrochemical, China Southern Airlines, Huaneng International, Aluminum Corporation of China, China Eastern Airlines and Sinopec Shanghai Petrochemical.

6. Why do Chinese companies go public in the US?

They are attracted to larger, less volatile capital pools that may be utilized more quickly. China’s own market, while huge, is still relatively underdeveloped. Dozens of companies have scrapped plans for initial public offerings in 2021 after Chinese regulators tightened listing requirements to protect retail investors who dominate stock trading, rather than institutional investors and mutual fund bases active in the U.S. Until recently, the Hong Kong Stock Exchange banned dual-class shares, which tech entrepreneurs often use to control their startups after listing in the U.S. It eased somewhat in 2018, prompting Alibaba, Meituan and Xiaomi to go public.

More similar stories are available at Bloomberg

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