US to push for audits of Chinese public companies

The more than 150 Chinese publicly traded companies listed on US stock exchanges, including state-controlled Sinopec and PetroChina, could be forced to delist after 1 January 2022 unless they agree to closer scrutiny by US auditors and regulators.

A White House working group on financial markets yesterday recommended the action to the US Securities and Exchange Commission (SEC) following a June directive from President Donald Trump.

The Public Company Accounting Oversight Board (PCAOB), which is tasked with oversight of major US auditing firms, has complained for years that the Chinese finance ministry's regulators prevent it from inspecting and investigating local audit results for Chinese public companies, as required under the US securities laws. But Trump's administration is seizing on the issue now, in the latest effort to restrict trade and investment flows between the US and China.

"The recommendations outlined in the report will increase investor protection and level the playing field for all companies listed on US exchanges," said treasury secretary Steven Mnuchin. Mnuchin chairs the White House working group on financial markets, which also includes chairs of the SEC, Commodity Futures Trading Commission and the Federal Reserve.

As of February 2019, 156 Chinese companies were listed on US stock exchanges, with a total capitalization of $1.2 trillion, based on data compiled by Congress' US-China Economic and Security Review Commission. The list includes 11 state-controlled companies, including oil companies.

PCAOB says it has been unable to verify the work of Chinese auditors overseeing companies listed on US stock exchanges for more than a decade. The White House working group recommended to the SEC that it require that US auditors gain access to work papers of the principal audit firm for the audit of a Chinese company listed on a US stock exchange as a condition for new and existing listings. Chinese companies alternatively could provide a co-audit from an audit company "with comparable resources and experience" so long as the US auditing board determines it has sufficient access to audit work papers and practices.

The 1 January 2022 deadline was to reduce market disruptions for companies currently listed at the US stock exchanges.

The White House working group also recommended the SEC enhance disclosure requirements of investment risks for the affected companies, index funds that track them and for investment advisory companies.

Congressional action likely

The proposed action is likely to be matched by a US congressional mandate — a bill tightening accounting scrutiny for Chinese companies listed on US exchanges, especially state-controlled companies, passed the Senate unanimously in May.

Beijing has slammed the proposal as "political manipulation of regulatory issues" and said that forcing Chinese companies to delist would hurt US investors.

The US administration is piling pressure on China on other fronts as well. The US Treasury Department today imposed sanctions on Hong Kong chief executive Carrie Lam and Xia Baolong, a hardline ally of China's president Xi Jinping who was installed in February as director of the Hong Kong and Macau Affairs Office.

Executive orders issued by Trump yesterday also threaten to impose sanctions on users of Chinese social media platforms TikTok and WeChat, in a bid to force their Chinese owners to cede operational control or sell them.

"The US, under the pretext of national security, has time and again used state power to wantonly oppress non-US companies — nothing short of bullying," China's foreign ministry said today.

By Haik Gugarats