China and the US recently made a substantial initial step toward preventing stocks like Alibaba from delisting exchanges. The next crucial step would be a smooth on-ground inspection by the US in China with reliable support from the local authorities. The US PCAOB (Public Company Accounting Oversight Board) has scheduled its inspectors to arrive in mid-September in Hong Kong. Hence, they will receive all necessary PCAOB audit work papers.
These PCAOB audit work papers are different from the regular audit of companies by the local accounting firms. The work papers record the review conclusions, gathered information, tests, and the audit procedure. Still, it is unclear whether it will involve any sensitive information. Generally, there has been a dispute between China and the US regarding the US inspecting Chinese companies listed in the US stocks. Thus, the US legal and political developments over the past two years sped up the threat on China to delist these companies.
The turning point was in late August 2022 when the China Securities Regulatory Commission and the PCAOB signed a cooperation agreement that allowed the US regulatory basis to inspect & audit US-listed Chinese firms. The two governments recently announced that the Ministry of Finance in China has also allowed the inspection. The Ministry of Finance in China oversees all accounting firms and is responsible for planning.
Nonetheless, analysts are concerned that the agreement's implementation is full of uncertainty since it has not established a clear framework. There are concerns about the information Chinese companies would provide, complying to local regulations. In any case, the process would be successful if it eradicates political interference from the two governments. The Ministry of Finance in China looks toward addressing the public on the audit cooperation agreement.
Other analysts advocate a better relationship between the two presidents to allow a smooth audit. All in all, the PCAOB has promised a determination on if China still obstructs access to audit info in December. According to US regulators, they will understand the PCAOB determination from October through November. Some US-listed Chinese companies like Alibaba are worried about potentially delisting from the US stock market. Thus they are now issuing shares in Hong Kong and across China.
Overall, China has increased scrutiny of companies looking to list stocks overseas. On the other hand, the political uncertainty in the US has slowed Chinese IPOs flow in the country. The slowdown impacts larger companies. Only 16 Chinese companies have listed stocks in the US since July 1st, 2021. This number excludes special-purpose acquisition firms. It is contradictory to back in 2020 when 30 China-based firms listed stock in the US.
