US and China make progress on averting stock delistings

Written by Kapronasia || September 05 2022

While U.S.-China tensions are heated in many areas, it appears that the two countries want to keep the bilateral relationship on an even keel when it comes to the financial services sector. Despite the sensitive politics on both sides of the conversation, the two countries have, for now, reached an agreement that should reduce the chance of a large-scale delisting of Chinese companies from U.S. stock exchanges.

Though some media announced this news as if it were a done deal, the reality is that this agreement is more of a first step in a longer process that if successful can prevent forced delisting of Chinese firms from U.S. exchanges and keep America’s capital markets open to Chinese companies. We do not have many details on the actual agreement yet, though the PCAOB said in a statement that the deal would give it “sole discretion to select the firms, audit engagements and potential violations it inspects and investigates — without consultation with, nor input from, Chinese authorities."

Securities and Exchange Commission (SEC) chairman Gary Gensle emphasized that the success of the deal would depend on the ability of U.S. inspectors to audit Chinese firms per the terms of the agreement. "Make no mistake, though: The proof will be in the pudding," he said.

In its own statement about the deal, the China Securities Regulatory Commission (CSRC) used more ambiguous language. "It is in line with the hope and expectation of the markets ... if cooperation afterwards satisfies each side's regulatory needs, there is hope that the audit issue will be resolved, and passive delisting will be avoided."

While China and the U.S. both have an interest in avoiding a mass delisting of Chinese companies from the NYSE and Nasdaq, it is important to note the context in which this agreement is taking place, and whether tactical considerations may be in play. Wall Street would no doubt prefer to not see Chinese companies ejected from U.S. capital markets, as it would mean fewer business opportunities. For their part, U.S. politicians are focused on making China follow U.S. law, and will undoubtedly press for details that China is upholding its obligations under the agreement. As for China, President Xi Jinping is heading into the 20th Party Congress, which will begin in mid-October, and stability is a priority for him. This initial agreement on audits can be a stabilizing force in U.S.-China relations.

Nevertheless, some analysts are unconvinced that delisting can be ultimately avoided. Goldmach Sacks reckons the chance is still 50%, though that is down from 95% earlier this this year. Per Goldman’s forecast, if a complete delisting proceeds, they estimate a 13% decline in valuations from current prices for Chinese ADRs and a 6% valuation hit to the MSCI China. If the delisting risk is completely removed, they see a possible 11% boost to price-earnings ratios and 5% bump for the MSCI China.