On Friday, five Chinese state-owned companies that are publicly traded in the United States and whose audits are currently being investigated by the regulatory body that oversees the securities industry in the United States announced that they would voluntarily delist from the New York Stock Exchange.
Oil giant Sinopec (600028. SS), China Life Insurance (601628. SS), Aluminium Corporation of China (Chalco) (601600. SS), PetroChina (601857. SS), and a separate Sinopec entity known as Sinopec Shanghai Petrochemical Co (600688. SS) all announced that they would apply to delist their American Depository Shares (ADSs) this month.
They are included on a list of more than 150 corporations that have been deemed by the Securities and Exchange Commission (SEC) of the United States as failing to meet auditing standards in the United States.
The firms did not mention the ongoing audit disagreement in their respective announcements, even though Beijing and Washington have been attempting to address the matter through discussions. further reading
Here is the information you need to know about the delistings and the transaction conversations that have taken place so far.
Ten days after submitting their applications to the SEC, the five companies will likely see their delistings go into effect.
In addition to this, they plan to deregister both their American Depositary Shares (ADS) and the underlying Hong Kong-listed H shares on the NYSE, as well as terminate the American Depository Receipts (ADR) program.
Delistings and program terminations will likely result in the ADSs being traded on the over-the-counter market instead.
Investors have the option of exchanging their ADSs for the underlying H shares, which will keep their status as tradeable securities on the Hong Kong stock exchange.
The audit working papers of New York-listed Chinese companies are documents that are essentially cobbled together during the auditing of financial statements.
The regulators in the United States have been demanding full access to these records. For many years, Chinese authorities have cited national security concerns as the primary reason for their reluctance to allow foreign regulators to oversee local accounting firms.
The dispute reached its boiling point in December when the Securities and Exchange Commission (SEC) of the United States finalized rules that enable the prohibition of trading in the shares of Chinese corporations.
In March, Goldman Sachs estimated that institutional investors in the United States held roughly $200 billion worth of American Depositary Receipts (ADRs) in companies based in China.
Since the beginning of last year, regulatory officials from the United States and China have been in discussions to reach an agreement.
In recent months, Beijing has stated that all parties are dedicated to striking a settlement; but, Washington’s stance on the situation has been more cautious.
By the 7th of August, the SEC had identified 162 Chinese companies that were listed in New York as having a risk of being delisted.
Beginning in the spring of 2024, a firm will be prohibited from trading if it is unable to comply with audit working paper requests for three consecutive years starting from that point forward.
The head of the corporate auditing watchdog in the United States stated last week that the organization would not tolerate any restrictions placed on its access to the audit files for New York-listed Chinese businesses.
In March, China’s Vice Premier Liu He stated that discussions between Chinese and U.S. regulators had made progress and that both sides were working on concrete collaboration arrangements. In April, a vice chairman of China’s securities watchdog expressed his optimism that an agreement will be reached “soon.”
On the other hand, the head of the SEC in the United States, Gary Gensler, stated last week that he would not deploy public accounting inspectors to China or Hong Kong unless Washington and Beijing could reach an agreement on full audit access.
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The week before last, the Senate of the United States approved a limited bill that had the goal of improving the country’s ability to compete with China.
According to the interpretation of some analysts and investors, the Act provides an additional year for both parties to resolve the audit impasse:
The final version of the measure does not include a provision that would have changed the deadline for China to comply with audit standards from the beginning of 2024 to the beginning of 2023. further reading
The U.S. accounting agency will be required to finish on-site inspections and investigations in China by the beginning of November, according to statements made by the SEC earlier.
This is something that the watchdog needs to conduct to come to a conclusion about whether or not it can inspect or investigate accounting firms located in mainland China as well as in Hong Kong that are registered with the American regulation.
