China is setting up a system to screen Chinese companies listed in the United States into groups based on the sensitivity of the data they hold, in a potential concession from Beijing to try to prevent US regulators from delisting hundreds of groups.
The system is designed to get some Chinese companies to comply with US rules that require public companies to allow regulators to check their audit files, according to four people familiar with the situation.
Two people said that Chinese companies listed in the United States would fall into three broad categories. The groups will be companies with non-sensitive data, those with sensitive data and others with “confidential” data to be crossed out.
One person said Beijing discussed whether companies in the “sensitive data” category could restructure their operations to become compliant, including by outsourcing information to a third party.
The category system will be the second important concession offered by Beijing to remove obstacles that allow the United States to have full access to audits. In April, it amended a decade-old rule restricting data-sharing practices for outside companies.
The planning, which is under discussion and subject to change, comes after months of stalled negotiations between Beijing and Washington over a US requirement for Chinese companies and their auditors to make detailed audit documents available or to write them off in 2024.
A collective writedown could represent an important step toward economic decoupling between the United States and China and threaten $1.3 trillion in shareholder value. About 260 of China’s largest companies, including technology group Alibaba, fast food company Yum China and social media site Weibo, can be removed from New York stock exchanges if they do not meet the requirements.
The China Securities Regulatory Commission, the largest securities watchdog in Beijing, has not commented.
Beijing has traditionally resisted allowing Chinese companies to provide data to foreign regulators on national security grounds.
But under the tiered scheme, “low-risk” data companies could make their audit records accessible to the Public Company Accounting and Oversight Board, the US accounting watchdog, two people said. Retailers and restaurant chains are likely to be in the lower risk category.
“Whatever falls into the Didi category, it is clearly taboo,” said the head of a large Hong Kong-based investment firm, referring to the taxi group that Beijing has fined more than $1 billion this week on internet charges. Security breaches.
US officials are skeptical that Chinese companies will meet the full transparency standards required under the Foreign Companies Accountability Act, the 2020 law that forced Chinese and Hong Kong companies to open their audit files.
Although there are ongoing and fruitful discussions between the US and Chinese authorities. . . “There are still major problems and time is quickly running out,” said YJ Fischer, director of the Securities and Exchange Commission’s Office of International Affairs, in a speech in May.
The agreement to provide access to audit files “will be only the beginning,” Fisher said. PCAOB officials will also need to travel to China and conduct an audit of any Chinese issuer listed in the United States.
“I don’t know how we’re going to ever settle this,” said the investment firm’s head. He added that Beijing and Washington were using the dispute over scrutiny for “political gain” and that relations were the worst they had been in 40 years.
“As an investor, I hope both sides are practical enough.”
The PCAOB said in a statement that it “should have full access to the audit working papers of any firm it chooses to inspect or investigate – no loopholes, no exceptions.”
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