China is preparing a system to classify US Chinese companies into groups based on the sensitivity of the data they hold, in a potential concession by Beijing to try to prevent US regulators from removing hundreds of groups.
The system is designed to bring some Chinese companies into line with U.S. rules that require public companies to allow regulators to review their audit files, according to four people with knowledge of the situation.
Chinese companies listed in the U.S. would fall into three broad categories, the two people said. The groups would be companies with non-sensitive data, those with sensitive data and others with “secret” data that would have to be removed.
One of the people said Beijing was discussing whether companies in the “sensitive data” category could restructure their operations to become compliant, including handing over information to a third party.
The category system would be Beijing’s second major concession to remove obstacles that would allow the US full access to the audits. It’s in April changed the decade rule which restricted the data sharing practices of overseas companies.
The planning, which is debated and subject to change, follows months of stalled negotiations between Beijing and Washington over US demands that Chinese companies and their auditors make available detailed audit documents or be delisted in 2024.
A massive delisting would be a significant step toward the economic decoupling of the US and China and threaten $1.3 trillion in shareholder value. About 260 of China’s biggest companies, including tech group Alibaba, fast-food company Yum China and social media site Weibo, could be delisted from the New York Stock Exchange if they fail to comply.
The China Securities Regulatory Commission, Beijing’s top securities watchdog, had no comment.
Beijing has typically resisted allowing Chinese companies to provide data to foreign regulators on national security grounds.
But under the tiered scheme, companies with “low-risk” data could make their audit records available to the Public Company Accounting and Oversight Board, the U.S. accounting watchdog, the two people said. Retailers and restaurant chains would probably fall into the low risk category.
“Anything that falls into the Didi category is obviously banned,” said the head of a major Hong Kong-based investment firm, referring to the ride-hailing group that fined more than a billion dollars by Beijing last week for cyber security breaches.
U.S. officials are skeptical that Chinese companies will meet the full transparency standards required under the Holding Foreign Companies Accountable Act, a 2020 law that forced Chinese and Hong Kong companies to open their audit files.
“Although there have been ongoing and productive discussions between the US and Chinese authorities. . . significant problems remain and time is running out quickly,” YJ Fischer, the SEC’s director of international affairs, said in a May speech.
An agreement to provide access to audit files “would be just the beginning,” Fischer said. PCAOB officials must also travel to China and audit any Chinese issuer listed on a U.S. exchange.
“I don’t know how we will ever solve it,” said the head of the investment company. He added that Beijing and Washington were using the audit dispute for “political gain” and that relations were at their worst in 40 years.
“As an investor, I hope that both sides will be pragmatic enough.”
The PCAOB said in a statement that it “must have full access to the audit working papers of any firm it chooses to review or investigate — without loopholes or exceptions.”