China’s golden dragons flee to avoid US scrutiny

That prompted the US Congress, with bipartisan support, to pass legislation banning companies from listing on US stock exchanges if the PCAOB has not been able to see their auditor’s working papers for three years.

This put the US in direct conflict with a long-standing policy issued by the Chinese authorities to its companies, which, for reasons of national security, restricted the ability of foreign regulators to oversee Chinese auditors.

That policy grew in severity as hostilities between the US and China grew under Trump, tensions that have not eased — relations have continued to deteriorate — under the Biden administration.

The focus of what became a US-China confrontation over the issue came in 2020, when Nasdaq-listed Luckin Coffee, China's home-grown Starbucks double, collapsed and massive accounting fraud was exposed.

The focus of what became a US-China confrontation over the issue came in 2020, when Nasdaq-listed Luckin Coffee, China’s home-grown Starbucks double, collapsed and massive accounting fraud was exposed.

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

That focus, which has culminated in its crackdown on companies like Alibaba and Tencent for national security reasons and its targeting of ride-hailing giant Didi within days of its $4.4 billion US fundraising manifested.

With China’s state-owned companies (and some of its larger private companies suspected to be) operating under central control and pursuing China’s strategic goals, it is not surprising that Chinese authorities are paranoid about allowing a US regulator to take over into her inner life.


Perhaps because of the way they themselves exploit their companies’ data on Chinese consumers (and perhaps citizens of other countries), they also fear the vast amounts of data held by companies like Didi, which account for over 90 percent of China’s ride-hailing market could provide sensitive information to US intelligence agencies.

Chinese companies have flocked to US markets because of the huge and stable capital pools and broader investor base available in markets that are more efficient and offer more efficient and timely access than their own more regulated and relatively flat home markets.

However, some liberalization of securities regulation in Hong Kong, when factored into the US-China standoff over the audit issue, has made the Hong Kong Stock Exchange a slightly more attractive market for companies exiting the US. Alibaba, for example, announced last month that it would seek a primary listing in Hong Kong.

Talks between US and Chinese regulators have not broken down and China has made some concessions on privacy regulations that could result in a large number of Chinese companies being viewed as less relevant to China’s national security sensitivities and to the US -Exchanges remains.

Not surprisingly, Chinese authorities are paranoid about giving a US regulator a glimpse into their inner workings.

The deadline for publication is 2024 — three years after legislation requiring the PCAOB to have access to three-year working papers of auditors — but there has been debate in Congress to bring that forward to next year.

There is also another potential point of friction in the discussions between the two regulators, as the PCAOB claims its power to inspect working papers is retrospective – it could also inspect the working papers after companies are delisted – because it wants to check for fraud that could do so could have occurred while the companies were listed in the US.

It is impossible to say how much the standoff on the matter and the threat of delisting from US stock exchanges for Chinese companies that do not open their books to the PCAOB may have impacted US-listed Chinese companies.


However, it is worth noting that while the US stock market is about 3 percent lower than a year ago and about 11 percent this year, the Nasdaq’s Golden Dragon index of larger Chinese companies listed on US exchanges are down about one percent, one-third from this time last year and more than 20 percent year-to-date.

There may be a price to pay for this strand of China’s broader decoupling from the US.

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Brian Lowry

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