U.S. Still Fighting For More Access to Accounts of New York-Listed Chinese Firms
As a phase one trade agreement between the U.S. and China made global headlines late last week, a much quieter round of talks took place that could produce a similar breakthrough for many Chinese tech firms listed on U.S. stock markets.
Those talks haven’t received much ink, even though the issue driving them has been a sore point behind the scenes for nearly two decades. They made a somewhat unexpected appearance this week in a Bloomberg article, which said U.S. and Chinese securities regulators were discussing a lower-profile deal that would give the former access to books of the many Chinese companies listed in New York.
If the bigger U.S.-China trade dispute can be said to have its roots in China’s accession to the World Trade Organization in 2001, this stock exchange issue is nearly the same age. It dates back to 2000, when three little-known Chinese internet companies named Sina Corp., Sohu.com and NetEase Inc. made breakthrough listings on the Nasdaq at the height of the U.S. internet bubble.
That trio would open the gates for New York listings by an emerging generation of Chinese internet and other tech companies, including heavyweights like Alibaba Group Holding Ltd., Baidu Inc. and JD.com Inc., now some of the nation’s biggest and most cutting-edge names. Yet through all that, the U.S. securities regulator has had surprisingly little ability to police these companies when it suspected financial misdeeds, because those companies were all physically based in China.
The issue splashed across headlines in 2011 when a Chinese company called Longtop Financial Technologies Ltd. was “outed” by short sellers, later resulting in a tug of war between Chinese and U.S. regulators as the latter fought for access to Longtop’s China-based financial records.
To this day, short sellers take advantage of the gap to make money off these Chinese firms, seeking to turn a quick buck by filling in the blanks with their own renditions of financial misdeeds that might be happening behind the scenes. One such attack made headlines just last week, when a short seller took aim at recently listed news aggregator Qutoutiao, calling most of the company’s revenues fake. Qutoutiao denied the claims.
All that said, it’s really high time that the U.S. and China reach a deal to give the former the kinds of access it needs to keep these companies honest, and launch probes when it expects financial monkey business. The Bloomberg report says the two sides have stepped up talks this year that would allow for joint inspections of accounting firms overseen by both sides.
The report points out that the U.S. body at the center of the talks, the U.S. Public Company Accounting Oversight Board, already has similar agreements with many other countries whose firms are listed in New York. It also points out that U.S.-listed Chinese firms now have a combined market cap of more than $1 trillion, and auditors for 213 U.S. listed companies are effectively beyond the reach of American oversight because they are based in Hong Kong or on the Chinese mainland.
With all that history and background in mind, we’ll spend the second half of this column exploring what’s driving these latest lower-key talks, and also the likelihood of a deal being struck. We’ll also look at what such a deal could mean for the hundreds of Chinese companies listed in the U.S., many of them tech-focused, including whether such a deal could boost both confidence and valuations.
I won’t go too deeply into what’s driving the latest talks, though the timing with the U.S.-China trade war does seem a little too coincidental to at least merit a quick mention. The U.S. has done a bit of saber rattling over the past year about potentially limiting or even cutting off Chinese companies from U.S. capital markets, or at the very least placing them under more scrutiny.
So it does seem quite possible the trade war helped jumpstart these on-again, off-again talks. This kind of access to company accounting records really benefits both sides, since Chinese companies are currently perceived as “aggressive” accountants that are often more than happy to play tricks to make their books look more attractive when it suits them.
In my usual manner, I polled a few of my contacts who work with these companies to get their take on which way the wind is blowing, and the bigger direction things are headed. None of the four I talked to had any personal knowledge of the talks, but neither were they surprised that this was happening.
In terms of what such a deal could mean, everyone agreed it would almost certainly boost investor confidence. After all, Chinese companies will be much more careful if they know they could be raided at home for suspected financial misreporting in the U.S., eliminating a convenient obstacle they can currently hide behind.
But the agreement over longer term implications ends there. Most of the contacts doubted such an agreement would result in higher valuations or help shore up weak IPO pricing and debuts like the many that we’ve seen lately. One pointed out that a lemon is still a lemon, no matter how much you try to dress it up, and that few such duds can use accounting tricks to completely fool relatively sophisticated Wall Street buyers.
One pointed out that the gold standard has been and will continue to be the quality of the company’s auditor, and that companies with big name auditors like Ernst & Young and PricewaterhouseCoopers are automatically given a certain degree of respect and credibility.
At the end of the day, I would probably agree with them that nothing is bound to change overnight, even if a deal is reached, which seems likely. But as the saying goes, a rising tide lifts all boats, and I would expect the prospect of rising oversight to have a similar impact on the dynamic crop of Chinese high-tech firms listed in the U.S.
Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com
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