China’s golden dragons flee to avoid US scrutiny

A two-year standoff between the US and China appears to be resolving itself, with the start of what might become an exodus of Chinese companies listed in the US.

Last week five of China’s largest state-owned companies – Petro China, China Petroleum & Chemical, China Life Insurance, Aluminium Corp of China and Sinopec – announced plans to delist from US stock exchanges.

Five of China’s biggest state-owned companies last week announced plans to delist from US stock exchanges.Credit:Bloomberg

The co-ordinated nature of the announcements suggests that the proposed delistings occurred with the blessing, and perhaps the urging, of China’s authorities even though China’s Securities Regulatory Commission said the decisions to delist were made “out of their own business considerations.”

Other Chinese state-owned companies and even some of the big privately-owned entities within the 270 or so Chinese companies listed on US exchanges – companies with an estimated combined market capitalisation of more than $US2 trillion ($2.9 trillion) – are expected to follow suit. The big state-controlled airlines, China Eastern and China Southern, are expected to be in the next wave of delistings.

The decision by the five companies (with a combined market capitalisation of $US318 billion) to abandon their US listing relates to a dispute between the US and China that dates back about 20 years but which came to a head during the ramping up of tensions that occurred during the Trump administration.

In the early 2000s, after the Enron and WorldCom accounting scandals, the US Sarbanes Oxley Act created the Public Company Accounting Oversight Board (PCAOB) to audit the auditors of public company accounts.

Every jurisdiction that has companies listed in the US has agreed to allow the PCAOB access to the working papers of the auditors of their companies – except mainland China and Hong Kong.

The flashpoint in what evolved into a confrontation between the US and China over the issue occurred in 2020 when the Nasdaq-listed Luckin Coffee, China’s home-grown Starbucks lookalike, collapsed and massive accounting frauds were revealed.

That caused the US Congress to pass, with bipartisan support, legislation banning companies from being listed on US exchanges if the PCAOB hadn’t been able to inspect the working papers of their auditor for three years in a row.

That put the US in direct conflict with a long-standing directive from China’s authorities to its companies that restricted, on national security grounds, the ability of overseas regulators to supervise Chinese auditors.

That directive took on a keener edge as the hostilities between the US under Trump and China intensified, tensions that haven’t abated – relations have deteriorated further – under the Biden administration.

The flashpoint in what evolved into a confrontation between the US and China over the issue occurred in 2020 when the Nasdaq-listed Luckin Coffee, China’s home-grown Starbucks lookalike, collapsed and massive accounting frauds were revealed.

It also coincided – partly because of those increased tensions and partly because of Xi Jinping’s reorientation of China’s economy away from private enterprise and towards a more socialist model — with an increased focus by Beijing on data security and the vast hoards of consumer data its tech giants hold and moves by the Chinese authorities to increase their influence over those big tech companies.

That focus that manifested itself in the crackdown on companies like Alibaba and Tencent and its targeting of ride-hailing giant Didi, within days of its $US4.4 billion equity raising in the US, on national security grounds.

China’s state-owned companies (and, it is suspected, some of its larger privately-owned companies) operate under central direction and pursue China’s strategic objectives, so it isn’t surprising that the Chinese authorities are paranoid about allowing a US regulator to peer into their inner workings.

Similarly, perhaps because of the way they themselves exploit the data their companies hold on Chinese consumers (and perhaps citizens of other countries) they are fearful that the immense troves of data held by companies like Didi, which has a 90 per cent-plus share of the Chinese ride-hailing market, could provide sensitive information to US intelligence agencies.

Chinese companies flocked to the US markets because of the vast and stable pools of capital and broader investor bases available in markets that are more efficient, and provide more efficient and timely access, than their own more-intrusively regulated and relatively shallow home markets.

Some liberalisation of Hong Kong’s securities regulation has, when factored into the stand-off between the US and China over the audit issue, made the Hong Kong exchange, however, a somewhat more attractive market for those companies exiting the US. Alibaba, for instance, announced last month that it would seek a primary listing in Hong Kong.

Talks between the US and Chinese regulators haven’t been abandoned and China has made some concessions on data security rules that might result in a large number of Chinese companies deemed to have less significance in terms of China’s national security sensitivities remaining on US exchanges.

It isn’t surprising that the Chinese authorities are paranoid about allowing a US regulator to peer into their inner workings.

The deadline for issue is 2024 – three years after the legislation imposing the requirement that the PCAOB have access to three years of auditor working papers – but there has been discussion within congress of moving that forward to next year.

There’s also another potential friction point within the discussions between the two sets of regulators because the PCAOB claims its authority to inspect working papers is retrospective—it could seek the working papers even after the companies have delisted – because it wants to check for frauds that might have occurred while the companies were listed in the US.

It is impossible to tell how much the standoff over the issue and the threat of expulsion from US exchanges for Chinese companies that don’t open their books to the PCAOB might have impacted Chinese companies listed in the US.

It is notable, however, that while the US sharemarket is about three per cent lower than it was a year ago and is down about 11 per cent this year, Nasdaq’s Golden Dragon index of the larger Chinese companies listed on US exchanges is down about a third against this time last year and more than 20 per cent year-to-date.

There’s potentially a price to be paid for this strand of the wider decoupling of China from the US.

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