The plight of China Concept Stock (CCS) remains a cause for concern in financial circles. On March 8, the U.S. Securities and Exchange Commission (SEC) announced that five Chinese enterprises had been temporarily placed on the “delisting list,” triggering a plunge in CCS prices. As the number of enterprises added to the list grows, Chinese Vice Premier Liu He on March 16 presided over a meeting of the Financial Stability and Development Committee under China’s State Council, sending positive signals that may help CCSs rebound. But drastic fluctuations show prospects are still uncertain.
Recent individual cases have led many market participants to believe that China is gradually “decoupling” from overseas financial markets. But the March 16 meeting conveyed a clear message that the Chinese government will continue to support overseas listings of all kinds of companies. This greatly reduced tension in capital markets. The strategic focus and determination of decision-makers will provide robust support for lifting CCSs out of the mire.
The trigger of CCSs’ predicament is a dispute over cross-border audit supervision between China and the U.S. According to the U.S. “Holding Foreign Companies Accountable Act,” starting from 2021 annual reports, where the Public Company Accounting Oversight Board (PCAOB) is unable to inspect the accounting firms of a U.S.-listed firm for three consecutive years, the Securities and Exchange Commission (SEC) will ban the company from trading on nationwide exchanges and forcibly delist it. The earliest delisting time is in early 2024, or after disclosure of the 2023 annual report. This means there is not much time for hesitation in settling a form of regulatory cooperation on CCSs between China and the U.S.
The meeting also said the regulatory bodies of both sides have maintained good communication, made progress, and are working on a concrete cooperation plan. Obviously, more strenuous efforts from both sides are needed to address the CCS issues and enable the associated market panic to subside. As China is, as always, open to dialogue and ready to take a professional, rational stance and put in place more flexible, pragmatic measures, a consensus is likely to be reached sooner rather than later.
This attitude will be particularly valuable. Even in the China-United States trade war, China looked at the feasibility of cross-border regulation between two countries with a conscious and problem-solving attitude. Yi Huiman, chairman of the China Securities Regulatory Commission (CSRC), said in an exclusive interview with Caixin that China has never banned or inhibited relevant accounting firms from providing audit working papers. PCAOB has also made several statements claiming it is willing to adopt similar cooperation with dozens of other countries and regions to carry out the inspection and investigation of Chinese accounting firms. Developed economies such as Japan and those in Europe that had initially grown in antipathy toward inspections, were able to eventually, after years of negotiations on cross-border regulation, come to an agreement with the U.S. This empirical approach may help China and the U.S. settle their current disputes.
We must admit that at present, differences between China and the U.S. remain profound, with law enforcement in China and audit working papers being two major difficulties. PCAOB, which supervises the certified public accountant (CPA) industry by inspecting the quality control system and auditing working papers, was the first independent regulator of the CPA industry in the world. However, according to Chinese laws and regulations, PCAOB cannot directly inspect accounting firms on the Chinese mainland or Hong Kong responsible for auditing CCSs, nor obtain their audit working papers. If PCAOB were to carry out law enforcement in China, it would be deemed to encroach on China’s sovereignty. The working papers may also comprise secrets related to Chinese national security. However, the divergence is not unsolvable. In the last few years, China has propounded a variety of proposals. Recently, Chinese regulators have been considering a clear explanation of the relevant provisions of the “Securities Law,” so that audit working papers and other documents can be handed over to the PCAOB after certain conditions are met. China’s stance is enough to demonstrate its sincerity in promoting regulatory cooperation.
CCS-related issues are inevitably affected by the overall relationship between China and the U.S., but it doesn’t have to be highlighted in a “grand narrative” way. To deal with these issues, we need to focus on the basic rules and systems of the capital market. Cross-border supervision involves specific and even trivial professional issues, which need to be resolved through careful negotiations.
Understanding the significance of international capital markets to China’s economy is a prerequisite to understanding CCS-related issues. In addition to broadening financing channels with the help of the world’s largest financial market, the main gain of overseas listings is that it enhances corporate governance and expands China’s influence. CCSs have long been a window to show the world that China’s economy is booming. Most of the economic and trade negotiations since China’s reform and opening-up have boosted the country’s economic and social development, despite early concerns that the negotiation results may bring losses to the country. After the dispute between China and the U.S. over audit papers is resolved, the practice of Chinese accounting firms will be more standardized and the governance structure for listed companies improved.
To address the issues professionally, one priority is to eliminate misinformation. At present, misleading and popular claims such as “U.S. regulators want to check the books of Chinese companies” can easily arouse negative public sentiment and interfere with smooth negotiations between the two sides. The PCAOB reviews working papers of accounting firms and focuses on their compliance, rather than the books of listed companies. As audit working papers may involve business secrets or even state secrets that could potentially be recorded or collected in the audit work, the concerns of the Chinese side in this regard are reasonable. However, measures can be taken to regulate confidential matters in advance, such as divesting the relevant business sectors of overseas listed companies, clearly defining state or national security secrets, and prohibiting relevant enterprises from listing overseas. The Chinese government has never been without flexible and pragmatic solutions.
Cross-border regulatory negotiations between China and the U.S. have been going on for many years and have overcome many difficulties. Fortunately, neither side has fallen into an emotional quagmire and both have stayed professional and rational. Any negotiation is a game in which the participants have their own demands and bottom lines and the support to find an optimal solution. As one CSRC member said, “With joint efforts, the two sides will certainly be able to make cooperation arrangements that meet respective legal and regulatory requirements in the near future, while jointly protecting the legitimate rights and interests of global investors, and promoting the healthy and stable development of the markets of the two countries.” We look forward to seeing a win-win or even multi-win outcome.
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