According to the agreement reached between China and the United States on the audit of US-listed Chinese stocks at the end of August, the CSRC will arrange for Chinese companies and their accounting firms listed in the United States to transfer their audit manuscripts and other data from the mainland to Hong Kong to be inspected by the United States in mid-September. The Foreign Company Accountability Act of the United States at the end of 2020 stipulates that the Securities and Exchange Commission (SEC) has the right to delist US-listed Chinese stocks from US exchanges if they fail to submit the reports required by the US Public Company Accounting Supervisory Board (PCAOB) for three consecutive years. So far, more than 160 Chinese companies have been found by the SEC to have failed to comply with US audit rules, including Chinese Internet giants BABA, JD.com and Pinduoduo. According to the website of the US Securities Regulatory Commission, on September 14, another Chinese-listed company was included in the "pre-picked" list. The cooperation between China and the United States in audit supervision is regarded as an important turning point for US-listed Chinese stocks.

The first batch of audits by Internet giants

According to a report in the Wall Street Journal on the 16th, Gary Gensler, chairman of SEC, revealed that PCAOB staff are expected to start examining the audit manuscripts of US-listed Chinese stocks on Sept. 19. Gensler told the Senate Banking Committee hearing that the whole process would take eight to 10 weeks, or the results could be reached in early December 2022. He also said that Chinese regulators said they would abide by the provisions of the agreement.

Hong Kong's South China Morning Post said in a report on the 15th that staff from PCAOB will arrive soon. The source also revealed that before these staff members start the audit inspection, they need to carry out three days of hotel quarantine in accordance with Hong Kong regulations and the following four days of home medical surveillance. As of the publication of the Global Times on the 18th, there was no news that PCAOB staff had arrived in Hong Kong.

Two of the world's top four accounting firms, PricewaterhouseCoopers and KPMG, have been informed that PCAOB has selected them to inspect several of its audit clients, the South China Morning Post said on the 15th. And the two companies have prepared the paper and electronic audit materials to be provided. The source also revealed that all audit records have been archived in accordance with PCAOB standards and auditors are ready to be interviewed at the request of PCAOB. Deloitte and Ernst & Young, the other four global accounting firms, have not yet received notification from PCAOB, but are expected to receive invitations soon.

According to previous foreign media reports, US regulators have selected BABA, NetEase, Inc, Baidu, Inc., JD.com and Yum China as the first batch of Chinese-listed companies to undergo audit draft inspection.

On the evening of August 26th, the China Securities Regulatory Commission and the Ministry of Finance formally announced the signing of an audit supervision cooperation agreement with PCAOB, and it is clear that the relevant cooperation will be launched in the near future. According to a statement issued by the US Securities Regulatory Commission on the same day, PCAOB staff will start working in Hong Kong in mid-September.

According to PCAOB, the big four firms provide audit services for more than 130 of the 168US-listed Chinese mainland companies, accounting for more than 78 per cent of the total. As of June, a total of about 168 US-listed Chinese companies had been audited by 15 PCAOB-registered Hong Kong and mainland accounting firms. These companies, with a total market capitalization of $1.5 trillion, will be removed from US exchanges under the Foreign companies Accountability Act if they do not allow PCAOB to review their audit records for three consecutive years.

The probability of delisting of China-listed stocks is decreasing.

In a news release on the evening of August 26, the China Securities Regulatory Commission pointed out that in the next step, China and the United States will carry out daily inspection and investigation activities on relevant accounting firms in accordance with the cooperation agreement, and objectively evaluate the effectiveness of the cooperation. If the follow-up cooperation can meet their respective regulatory needs, it is expected to solve the problem of audit supervision of Chinese stocks, so as to avoid passive delisting from the United States.

After the agreement between China and the US, Goldman Sachs Group believes that the chance of Chinese stocks being forced to delist from the US has dropped to 50 per cent from 95 per cent in March, and that if the risk of delisting is completely eliminated, it may increase the price-to-earnings ratio of US-listed stocks by 11 per cent. The Wall Street Journal believes the agreement, reached after a decade-long stand-off between Chinese and US regulators, opens the way to prevent about 200 Chinese companies from being forced to delist from US stock exchanges in early 2024.

According to the South China Morning Post, Drew Bernstein, co-chairman of New York-based Mackay Asia accounting firm, said that if the first round of audit inspections conducted in Hong Kong went smoothly, more Chinese companies should be encouraged to seek listings in the United States. "I believe we will see a large backlog of Chinese companies entering the market in 2023," he said. "

China-listed stocks are the common interests of China and the United States

Dong Shaopeng, a senior researcher at the Chongyang Institute of Finance of the National people's Congress, told the Global Times on the 18th that according to the information disclosed so far, the PCAOB is obviously ready for the upcoming inspection work, and the Chinese side will also support and cooperate on the principle of equality and mutual benefit in accordance with the agreement reached between the two sides last month.

Dong Shaopeng believes that PCAOB may organize some experienced staff, or focus on inspecting some companies, or conduct spot checks on some Chinese stocks. China and the United States share common interests in the listing of Chinese stocks in the United States, and we hope that the PCAOB inspection work will abide by the agreement reached between the two sides and abide by the laws and regulations of the Chinese side. However, Dong Shaopeng also believes that the confrontation on the US side is quite serious, and he hopes that the inspection work of the US PCAOB will adhere to the principle of cooperation, abide by the laws of both sides, take the protection of investors as the starting point, serve the fairness and justice of the market, and not be mixed with any man-made political factors.

Due to the continuous pressure on Chinese companies by the United States in the capital market for some time, many Chinese stocks have achieved or are seeking secondary listing or dual major listing in Hong Kong in order to gradually get rid of their dependence on the US capital market. Some large state-owned enterprises have chosen to delist from the United States because of their small trading volume. China Life Insurance Company Limited, China Petroleum & Chemical, Petrochina, Aluminum Corporation Of China Ltd and Sinopec collectively announced their intention to delist American depositary shares from the New York Stock Exchange on the evening of August 12. Prior to this, China's three major operators have been delisted from the United States. The market believes that the return of Chinese stocks to Hong Kong, as an international financial center, has become a trend, while some large state-owned enterprises delisting from the United States can also avoid possible data security risks.

Data from market institutions show that as of August, the total amount raised by IPO channels in the United States this year was only $5.1 billion, far below the average of about $33 billion over the past 20 years. In the first half of 2021, there were 37 US IPO stocks, compared with only three in the same period in 2022.