The audit deal will leave traders with the dregs of China

A specialist trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., June 30, 2022. REUTERS/Brendan McDermid

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HONG KONG, Aug 29 (Reuters Breakingviews) – Beijing has bowed to U.S. demands that could theoretically let $1.5 trillion worth of New York shares escape delisting. However, a large number of Chinese companies will still leave New York, voluntarily or not. The remaining constituents could be a worthless lot.

This row has been going on since 2007, but the issue caught the attention of investors in 2011 when several companies on the mainland were kicked out for fraud. Most notable was Longtop Financial Technologies, underwritten by Goldman Sachs (GS.N) and Deutsche Bank (DBKGn.DE) and audited by Deloitte’s China unit. China’s security law prevented Deloitte China and other auditors from cooperating with investigations even as owners of US stocks lost their shirts, with little recourse.

In 2020, U.S. lawmakers passed a law to evict any foreign company whose auditor does not allow the Public Company Accounting Oversight Board (PCAOB) to re-audit its books by 2024. The overwhelming majority of violators are Chinese . State-owned companies began proactively opting out this month while some private companies like Alibaba (9988.HK) have already put in place additional listings that could serve as a backup, or have gone private.

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On Friday, Beijing conceded, allowing full access to Chinese audit working papers, the right to take testimony in China and discretion to select companies to inspect. China had good reason to host the PCAOB, but its bureaucracy, in which multiple agencies seek to influence offshore capital raisings, will struggle to provide genuine cooperation. In addition to strategic concerns, they are very worried about data, which bodes ill for the continued hiring of fintech companies like Lufax (LU.N), insurer Waterdrop and Kingsoft Cloud (KC.O). Didi Global rideshare has already pulled out of the New York roster.

The average Chinese company on US exchanges is down about three-quarters from its IPO price, according to Refinitiv data, and many are thinly traded. Some are yesterday’s thematic actions like Renren, once billed as China’s Facebook. Others, like the cluster of online tutoring providers, are victims of regulatory changes that make their business models unsustainable. There are also a host of names that most Americans have never heard of. Many have small free floats making them prone to abuse.

The profile of the average company that Beijing is likely to leave on US corporate boards will have no key technologies, no strategic roles to play and minimal user data. Chinese investors won’t want it.

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(Amends reference in fourth paragraph to reflect that Didi was removed from the New York list. The author is a Reuters Breakingviews columnist. Opinions expressed are his own)

BACKGROUND NEWS

Beijing and Washington signed a pact on August 26 allowing US regulators to control accounting firms in China and Hong Kong.

Regulators in the United States have for more than a decade demanded access to audit documents from Chinese companies listed in the United States, but Beijing is reluctant to let foreign regulators inspect its accounting firms, citing national security concerns.

(This story corrects to change the reference in the fourth paragraph to reflect that Didi was removed from the New York roster)

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Editing by Una Galani and Thomas Shum

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias by principles of trust.

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