On August 6, US time, the official website of the US Treasury Department released the "report on protecting US investors against Major risks of Chinese companies", which put forward five audit recommendations for US-listed Chinese companies. These include raising the listing threshold for Chinese companies planning to list in the US and requiring US-listed Chinese companies to submit audit working papers to the US Public Company Accounting Oversight Board (PCAOB), otherwise the company will face delisting and be forced to delist.

According to the original report, the US government requires that audit standards be strengthened for all companies that are listed for the first time and have already been listed:

1. The Accounting Oversight Board of listed companies (PCAOB) has the right to consult the working papers of the major audit firms of listed companies.

2. If the company is unable to provide audit manuscripts due to government restrictions, the company can adopt "Joint audit"--employ American firms as the main audit firms to be jointly responsible for the audit work with Chinese audit firms.

3. Effective node:

   1. For companies preparing to list in the United States, the standardEffective immediatelyThe company can not be listed until it meets the standards

   2. For companies that are already listed in the United States, if they cannot meet the audit requirements in the United States, they must be listed in theJanuary 1, 2022Former delisting.

On August 10, US time, US Treasury Secretary Mnuchin publicly confirmed the audit requirements in the report.It means that companies listed in the United States, including Chinese-funded enterprises,If the audit requirements of the United States are not met by the end of 2021, the company will be delisted.。

The impact on Chinese stocks

What are US-listed stocks:

For foreign investors, Chinese concept stocks are Chinese stocks listed overseas, but the company's actual controller or the largest controlling stake belongs to Chinese private enterprises or individuals.

The storm of delisting of Chinese stocks:

At the close of trading on Friday (August 7), affected by the threat of delisting, a number of Chinese stocks suffered a collective setback, falling more than 5%. According to the order of decline from high to low, who learned from whom fell nearly 19%, JOYY Inc fell below 13%, Bilibili Inc. fell more than 6%, BABA fell more than 5%, JD.com fell 4%.

However, this is not the first time US regulators have attacked US-listed stocks.

Behind the storm of delisting of Chinese stocks (time line carding):

• In February 2020, Muddy Waters, a US stock short seller, released a short-selling report on LUCKN COFFEE DRC, accusing him of long-term financial fraud.

• In April 2020, LUCKN COFFEE DRC exposed the financial fraud scandal, and the share price plummeted in after-hours trading. Subsequently, a large number of other Chinese stocks were also shorted, such as who to learn from, TAL Education Group and so on.

• At the end of April, Jay Clayton, chairman of the US Securities Regulatory Commission (SEC), warned investors not to invest in US-listed stocks, openly questioning the quality of their financial statements and information disclosure.

• May 2020The U.S. Senate passed the Foreign Company Accountability Act, which requires foreign companies to be subject to audit supervision by the listed companies Accounting Oversight Board (PCAOB) for three consecutive years, and to prove that they are not owned by foreign governments, otherwise they will be prohibited from trading in the United States.. As a result, a large number of Chinese giants are in danger of being delisted.

• LUCKN COFFEE DRC suspended trading and delisted shares on Nasdaq in June 2020, and US President Donald Trump announced that he would allow his financial markets working group to publish specific proposals for the China-listed stocks Act within 60 days.

Is it illegal to let the US audit? The SFC responded:

On August 8, the head of the Securities Regulatory Commission answered a reporter's question on the report on the Protection of American investors against Major risks of Chinese companies, which made it clearChina has never prohibited or prevented relevant accounting firms from providing audit working papers to overseas regulators.。

It turns out that as early as 2013, the China Securities Regulatory Commission signed a memorandum of understanding on law enforcement cooperation with the American Public Company Accounting Supervision Board (PCAOB). The Chinese side agreed to provide to the US Securities Regulatory Commission and PCAOB in accordance with the process.Working papers of company audit that do not involve state secrets。

Since 2019, Chinese regulators have repeatedly communicated with the US Securities Regulatory Commission (SEC) and the US Public Company Accounting Oversight Board (PCAOB) on the joint inspection plan for accounting firms.

Recently, on August 4, 2020, Chinese regulators also sent updated proposals to PCAOB in accordance with the latest needs and ideas of the United States.

What is the follow-up course for Chinese stocks: joint audit or listing back to Hong Kong?

A total of 276 US-listed companies are affected, of which about 89 per cent are from mainland China and Hong Kong, according to China International Capital Corporation.

As early as May, Wu Wei, chief financial officer of BABA, said, "Foreign Company Accountability LawIn response, companies will strive to abide by laws that protect investors on American stock exchanges and provide them with transparency. However, Chinese companies that chose to re-list in Hong Kong, such as NetEase, Inc and JD.com, mentioned in their reports that they might be delisted if they failed to meet the regulatory requirements of the US Public Company Accounting Oversight Board.

Therefore, we are now faced with the same dilemma.Listed companies in the United States obviously have only three options:Submit audit manuscripts, or be reviewed jointly by US auditors, and in the worst case, delist from the US.

In response, the Wall Street Journal pointed out that the practice of driving Chinese companies out of the US trading marketIt is very likely to lead them to Hong Kong or Shanghai, where the requirements for audit disclosure are relatively relaxed.. The report released by Trump's Financial Markets working Group also shows that "China actively encourages mainland issuers to list on Hong Kong or mainland exchanges, rather than on foreign exchanges."

In recent months, several large Chinese companies, including JD.com and NetEase, Inc, have announced secondary listings in Hong Kong or Shanghai. Ant Group, owned by BABA, last month announced plans for a dual listing of shares in Hong Kong and Shanghai this year in what could be the largest IPO in global history.

The capital market is global. Shutting out Chinese companies from listing in the US will not deprive them of access to US capital.

Peterson Institute for International Economics

The latest response of Chinese listed companies:

August eleventhTencent Music (NYSE: TME)Chief Strategy Officer Ye Zhuodong publicly responded to speculation about the delisting of US stocks at a briefing after the release of the financial results. It shows thatDelisting is not the only option, and it can be jointly audited by US audit institutions.。

This weekXPeng Inc. 、 KE Holdings IncBoth plan to list in New York and have submitted an IPO prospectus to SEC a few days ago. The person in charge of the company has not yet responded to the new audit request. According to the Chinese Stock Act, these companies that plan to list in the United StatesThe financial audit draft must be disclosed to the United States, otherwise trading will be suspended by the stock exchange.。