April 11th, 2022 by Danny Li

What’s Happening: In an unprecedented move over the weekend, the China Banking and Insurance Regulatory Commission (CSRC), China’s top securities regulator, proposed revisions to China’s secrecy laws that would remove a requirement shielding overseas-listed Chinese companies from audits by overseas inspectors.

• The draft changes signify a concrete first step towards a potential resolution that could save hundreds of Chinese companies from being delisted from U.S. exchanges.

The Background: This latest development potentially marks a significant conciliatory step by Beijing to resolve a long-running audit dispute with Washington.

• In 2021, the U.S. Securities and Exchange Commission (SEC) began implementing the Holding Foreign Companies Accountable Act, which requires companies who are noncompliant with U.S. auditing rules to delist from U.S. stock exchanges and thus marks hundreds of U.S.-listed Chinese companies for eventual delisting in 2024.
• In recent weeks, the SEC has identified 11 Chinese companies as noncompliant with U.S. regulations, prompting sharp sell-offs in shares of numerous overseas-listed Chinese companies and putting more pressure on Chinese regulators to intervene.

The Impact: Beijing’s attempt to achieve a workaround to its auditing impasse with Washington has massive financial implications.

• At present, there are about 250 Chinese companies listed on U.S. capital markets, amounting to a combined market capitalization of more than $1 trillion.
• Allowing access to audit records of U.S.-listed Chinese companies would allow China to maintain a crucial pipeline for foreign capital inflows. Before Beijing’s crackdown on foreign listings in the summer of 2021, Chinese companies raised a combined total of $12.8 billion in the U.S. in the first seven months of the year.

Beijing’s Calculus: The loosening of Beijing’s fixation on barring access to audit records of U.S.-listed Chinese firms could potentially slow the exit of Chinese companies from U.S. capital markets.

• That trend accelerated following Chinese ride-hailing company Didi Chuxing’s announcement in December that it would exit the U.S. stock market and prepare for a Hong Kong listing.
• In permitting U.S. inspections, Beijing may still push certain Chinese companies deemed in possession of sensitive data to delist from the U.S. to preserve its national security interests. This would likely entail the exit of some Chinese state-owned firms, but allow other Chinese private companies to remain tied to U.S. capital markets.

Between the Lines: While the concession is significant, the CSRC’s revisions stop short of giving unfettered access to overseas regulators as demanded by Washington.

• Last week SEC Chairman Gary Gensler said that only total compliance with U.S. audit inspections would allow Chinese companies to stay listed on the NYSE. 
• Beijing’s fudging of the language is unlikely to be well received by Washington, which is currently demanding all-or-nothing compliance.

The Bottom Line: The CSRC’s amendment of China’s secrecy laws coincides with Beijing’s recent efforts to signal more market-friendly policies and calm turmoil in Chinese markets and the broader economy.

• The development could be a sign that Chinese financial authorities, led by Vice Premier Liu He, have gained traction in an ongoing internal debate on how to balance China’s national security and political imperatives with economic and financial priorities.
• Chinese President Xi Jinping is likely well aware that, unless his team can halt the downward spiral in Chinese stocks and stem capital outflows, the mounting headwinds facing the struggling Chinese economy may soon morph into political headwinds that could threaten his bid to seek a third term in power at the crucial 20th Party Congress this fall.