CSRC tells Chinese US-listed firms to brace for more audit disclosures

FILE PHOTO: Chinese and US flags near The Bund, before US trade delegation meet their Chinese counterparts for talks in Shanghai, China July 30, 2019. REUTERS/Aly Song

HONG KONG/BEIJING (Reuters) – The China Securities Regulatory Commission (CSRC) and other regulatory agencies have asked some of the country’s US-listed firms, including Alibaba, Baidu and JD.com, to prepare for more audit disclosures, sources said, as Beijing steps up efforts to ensure domestic companies remain listed in New York.

This comes as China’s regulators are considering a proposal to allow their US counterparts to inspect audit working papers of some Chinese firms that do not gather sensitive data, two of the sources said.

As part of that move, the CSRC and other agencies earlier this month summoned top internet companies, including search engine leader Baidu and e-commerce major JD.com, four sources told Reuters.

They were asked to prepare audit documents for the 2021 financial year keeping in mind US regulators’ requests for more disclosure, said the sources, who declined to be named as they were not allowed to discuss details of the meeting.

The companies should better seek Chinese regulators’ advice if they are “uncertain about anything” during the whole process the first source said, which includes auditing and communications with US regulators.

CSRC did not immediately respond to a request for comment.

Alibaba, Baidu, JD.com and Weibo did not immediately respond to a request for comment. Pinduoduo and NetEase also did not immediately provide comment.

The latest step by the Chinese regulators shows Beijing’s willingness to make some concessions to resolve a long-running Sino-US audit stand-off that has put hundreds of billions of dollars of US investments in Chinese companies at stake.

The US authorities are moving towards kicking Chinese companies off American stock exchanges if the companies’ audit records are unavailable for their inspection for three years in a row.

Delisting risks

In December, the US Securities Exchange Commission (SEC) finalized rules to delist Chinese companies under the Holding Foreign Companies Accountable Act (HFCAA), and said it had identified 273 companies that were at risk, without naming them.

The SEC earlier this month named for the first time five of these firms, including KFC operator Yum China Holdings and biotech firm BeiGene, that could face delisting.

Describing the SEC move as “normal procedure”, CSRC said it was confident it would reach an agreement with US counterparts to solve the dispute.

Chinese regulators’ deliberations with the New York-listed domestic companies on more audit disclosure were ongoing, three of the sources said.

Washington has long demanded complete access to the books of US-listed Chinese companies, but Beijing, citing national security concerns, bars foreign inspection of working papers from local accounting firms.

A map on the website of the Public Company Accounting Oversight Board (PCAOB), an auditor oversight body tasked to help keep publicly traded companies in the United States in check, showed China as the only jurisdiction that denied the organization “necessary access to conduct oversight”.

Goldman Sachs estimated on March 11 that US institutional investors held around $200 billion of exposure to Chinese companies’ American depositary receipts (ADRs).

The Nasdaq Golden Dragon China Index, which tracks Chinese companies traded on Wall Street, fell nearly 60% over the past 12 months.

In an attempt to calm investor fears, China’s Vice Premier Liu He said last week talks between Chinese and US regulators on companies listed in the United States have made progress and both sides are working on specific cooperation plans.

(Reporting by Yingzhi Yang, Julie Zhu, Xie Yu and Kevin Huang; Editng by Sumeet Chatterjee and Jacqueline Wong)

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