China is preparing a system to sort US-listed Chinese companies into groups based on the sensitivity of the data they hold in a possible concession by Beijing to try to prevent American regulators from listing hundreds of groups of to take the stock market.
The system aims to bring some Chinese companies into compliance with US regulations that require listed companies to allow regulators to see their audit records, according to four people familiar with the situation.
Chinese companies listed in the US would be divided into three broad categories, two people said. The groups would be companies with non-sensitive data, those with sensitive data and others with “secret” data that would need to be removed from the list.
One of the people said Beijing has been discussing whether companies in the “sensitive data” category could restructure their operations to become compliant, including by outsourcing the information to third parties.
The category system would be Beijing’s second significant concession to removing hurdles that give the US full access to audits. In April it is modified a decades-old rule restricting the data sharing practices of foreign companies.
The plan, which is subject to debate and amendment, follows months of deadlocked negotiations between Beijing and Washington over US demands that Chinese companies and their auditors provide detailed audit documentation or be delisted by 2024.
A mass delisting would represent a significant step towards US-China economic decoupling and put $1.3 trillion in shareholder value at risk. Some 260 of China’s biggest companies, including tech giant Alibaba, fast-food company Yum China and social media site Weibo, could be delisted from New York’s stock exchanges if they don’t meet the requirements.
The China Securities Regulatory Commission, Beijing’s top securities regulator, did not comment.
Beijing has typically resisted allowing Chinese companies to share data with foreign regulators on national security grounds.
But under the tiered system, “low-risk” data companies could make their audit records available to the Public Company Accounting and Oversight Board, two of the people said. The low-risk category would likely include retailers and restaurant chains.
“Anything that falls into the Didi category is clearly a no go,” said the head of a major Hong Kong-based investment firm, referring to the ride-hailing group was fined more than $1 billion by Beijing last week for cyber security breaches.
US officials are skeptical that Chinese companies will meet the full transparency standards required under the Holding Foreign Companies Accountable Act, the 2020 law that forced Chinese and Hong Kong companies to open their audit files.
“Although there have been ongoing and productive talks between the US and Chinese authorities. . . Important issues remain and time is running out,” said YJ Fischer, the director of the SEC’s office of international affairs, in a speech in May.
An agreement on the inspection of audit files is “only the beginning,” said Fischer. PCAOB officials are also required to travel to China and conduct a scrutiny inspection of every US-listed Chinese issuer.
“I don’t know how we’re ever going to settle this,” said the head of the investment company. He added that Beijing and Washington are using the audit dispute for “political gain” and that relations are at their worst in 40 years.
“As an investor, I hope that both sides are pragmatic enough.”
The PCAOB said in a statement that it must have “full access to audit working papers of every firm it inspects or investigates – no loopholes and no exceptions.”