Delisting risks lifted for 173 US-listed Chinese companies, including NIO, XPeng and Li Auto.
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The delisting risks faced by US-listed Chinese companies over the past two years has finally been removed, as the United States and China reach historic progress on audit regulatory cooperation.
The US Public Company Accounting Oversight Board (PCAOB) announced Thursday that it has been given full access to inspect and investigate accounting firms based in the Chinese mainland and Hong Kong, for the first time ever.
"And this morning the Board voted to vacate the previous determinations to the contrary," the PCAOB's statement reads.
In a statement Friday morning, the China Securities Regulatory Commission (CSRC) said the renewed determinations by US regulators are welcome and it looks forward to working with them to advance sustainable cooperative mechanisms to safeguard the legitimate rights of global investors.
The risk of delisting Chinese companies listed in the US over the past roughly two years due to audit paper issues was one of the key factors that led to a significant depression in their valuations.
On March 8, the US Securities and Exchange Commission (SEC) released for the first time a provisional list of issuers identified under the Holding Foreign Companies Accountable Act (HFCAA), sparking greater investor concern about the risk of delisting Chinese companies.
Under the HFCAA, the SEC has the authority to delist a foreign-listed company from US exchanges if it fails to file reports required by the PCAOB for three consecutive years.
Companies placed on a conclusive list are required to file the SEC's required documents within three years, and if they fail to do so, they will be delisted in early 2024 after disclosing their 2023 annual report.
The list has grown since then and now includes 173 Chinese companies, including NIO (NYSE: NIO), XPeng (NYSE: XPEV) and Li Auto (NASDAQ: LI).
Many companies have chosen to make secondary listings in Hong Kong to avoid the impact of delisting risks, with NIO even completing a listing in Singapore.
After that, efforts by Chinese and US securities regulators to move forward with a resolution of the issue accelerated significantly.
On August 26, the CSRC, China's Ministry of Finance and the PCAOB signed an audit and regulatory cooperation agreement, with the CSRC saying at the time that the cooperation would start soon.
This is an important step forward for both Chinese and US regulators in addressing the common concern of audit regulatory cooperation, and sets the stage for the next phase of advancing cooperation between the two sides, according to the CSRC's statement at the time.
Following the agreement, PCAOB inspectors came to Hong Kong to conduct on-site inspections of audit materials for a number of companies listed in the US.
On November 4, Bloomberg reported that US audit officials completed the first round of on-site inspections of Chinese companies ahead of schedule, signaling progress in the process of preventing the delisting of hundreds of US-listed Chinese companies' stocks.
In the statement yesterday, the PCAOB said more than 30 staff members conducted on-site inspections and investigations in Hong Kong, reviewing thousands of pages of documents, conducting interviews and hearing testimony over a nine-week period from September to November.
"Our inspections team was more than double the size of a typical team for similar inspections, and they remained on the ground in Hong Kong for about three weeks longer than the typical timeframe," the statement said.
The latest development is the beginning, not the end, of the work of inspecting and investigating Chinese companies, the PCAOB stressed.
"Our teams are already making plans to resume regular inspections in early 2023 and beyond, as well as continuing to pursue investigations," the statement said.
The PCAOB will not have to wait another year to reevaluate its decision, but if access is blocked, new measures will still be taken, the statement said.
The CSRC said in a question-and-answer session today that they have consistently advocated for regulatory cooperation mechanisms to address cross-border listing audit oversight issues.
As long as both sides uphold the spirit of mutual respect, professionalism and pragmatic cooperation, they will certainly be able to find a feasible cooperation path that meets their respective legal and regulatory requirements, the CSRC said.
The Chinese side has specifically processed specific data such as personal information contained in the paper documents as agreed in the cooperation agreement and has met the requirements of laws and regulations on information security protection while both sides perform their regulatory duties in accordance with the law, according to the Q&A.
The CSRC concluded:
We welcome the re-determination made by the US regulators based on regulatory professional considerations and look forward to working with the US regulators to continue to promote future annual audit and regulatory cooperation based on the experience of the previous cooperation.
We look forward to mutual respect, enhancing mutual trust, forming a regular and sustainable cooperation mechanism, and jointly creating a more stable and predictable international regulatory environment to safeguard the legitimate rights and interests of global investors in accordance with the law.