US regulators have gained full access to the audits of Chinese companies for the first time, reducing the threat that tech giants such as Alibaba (BABA) and JD.com (JD) could be kicked off US stock exchanges.
The announcement marks a major breakthrough in a yearslong standoff over how Chinese companies listed on Wall Street should be regulated. It will come as a huge relief for these firms and investors who have invested billions of dollars in them.
“For the first time in history, we are able to perform full and thorough inspections and investigations to root out potential problems and hold firms accountable to fix them,” Erica Williams, chair of the Public Company Accounting Oversight Board (PCAOB), said in a statement Thursday, adding that such access was “historic and unprecedented.”
More than 100 Chinese companies — including Alibaba, JD.com, and Baidu — had been identified by the US securities regulator as facing delisting in 2024 if they did not hand over the audits of their financial statements.
On Friday, China’s securities regulator said it’s looking forward to working with US officials to continue promoting future audit supervision of companies listed in the United States.
“We have always advocated solving issues of audit supervision on cross-border listings through regulatory cooperation mechanisms,” the China Securities Regulatory Commission said in a statement.
There are more than 260 Chinese companies listed on US stock exchanges, with a combined market capitalization of more than $770 billion, according to recent calculations posted by the US-China Economic and Security Review Commission.
But investors often face a lack of transparency when it comes to Chinese stocks. US regulators have been long demanding access to the books of these companies, but Beijing had resisted such scrutiny, citing national security concerns.
The United States had increased pressure by passing a law in December 2020 requiring Chinese companies listed in the US to open their books to audit watchdogs. If they failed to comply with the requirements for three straight years, they would be delisted.
In August, China finally agreed to let US officials inspect the audit work of these firms.
In Friday’s statement, the PCAOB said it had inspected the audits of eight Chinese companies completed by KPMG Huazhen LLP in China and PricewaterhouseCoopers in Hong Kong. The board will finalize the inspection reports and make them public as early as next year.
“This is the beginning of our work to inspect and investigate firms in China, not the end,” Williams said in the statement.
She added that the watchdog is continuing to demand complete access in mainland China and Hong Kong moving forward.