China is developing a system to group US-listed Chinese companies based on the sensitivity of the data they hold, in a potential concession by Beijing to try to prevent American regulators from delisting hundreds of groups.
The system is designed to bring some Chinese companies into line with U.S. rules that require state-owned companies to allow regulators to inspect their audit files, four people with knowledge of the situation said.
Chinese companies listed in the U.S. will fall into three broad categories, the two people said. The groups will be companies with non-sensitive information, those with sensitive information, and others with “confidential” information that should be delisted.
One of the people said Beijing is discussing whether companies in the “sensitive data” category could restructure their operations to comply, including handing over the information to a third party.
The category system would be Beijing’s second major concession to remove barriers that would give the US full access to audits. In April, he changed to decade rule which restricts information sharing practices of foreign companies.
The controversial and changeable schedule follows months of negotiations between Beijing and Washington over whether the U.S. will require Chinese companies and their auditors to submit detailed audit documents or be delisted in 2024.
A massive delisting would be a significant step toward the economic separation of the US and China, threatening $1.3 trillion in shareholder value. Some 260 of China’s biggest companies, including tech group Alibaba, fast-food company Yum China and social media site Weibo, could be delisted from New York if they fail to comply.
The China Securities Regulatory Commission, Beijing’s top securities watchdog, had no comment.
Beijing has typically resisted allowing Chinese companies to provide information to foreign regulators on national security grounds.
But under the tiered scheme, “low-risk” data companies could make their audit records available to the Public Company Accounting and Oversight Board, which oversees the U.S. accounts, the two people said. The low risk category probably includes retailers and restaurant chains.
“Whatever falls into Didi’s category, it’s clearly prohibited,” said the head of a major Hong Kong-based investment firm. was fined more than a dollar over cyber security breaches by Beijing last week.
U.S. officials are skeptical that Chinese companies will fully meet the transparency standards required under the Foreign Holding Companies Accountability Act, a 2020 law that forces Chinese and Hong Kong companies to disclose audit documents.
“However, there have been ongoing and productive discussions between US and Chinese officials. . . Important issues remain and time is running out,” said YJ Fisher, director of international affairs for the SEC’s office, in a speech in May.
An agreement to provide access to audit files “will only be the beginning,” Fischer said. PCAOB officials must also travel to China and conduct audits of any Chinese issuer listed in the United States.
“I don’t know how we’re ever going to solve this,” said the head of an investment firm. He added that Beijing and Washington are using the audit row for “political gains” and that relations are at their worst in 40 years.
As an investor, I hope that both sides will be quite pragmatic.”
The PCAOB said in a statement that “any firm it chooses to audit or investigate should have full access to the audit workbook — no loopholes or exceptions.”
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