China listings may soon flee U.S., expert says

By Chris Oliver, MarketWatch

Reuters

HONG KONG (MarketWatch) — A mass exodus of Chinese companies listed on U.S. exchanges looks increasingly possible as an accounting rift between the two countries reaches a dangerous stage, a Chinese accounting expert says.

Paul Gillis, a financial author and professor of accounting at Peking University, believes the window to prevent a worst-case scenario of wholescale delistings of Chinese firms in the U.S. is rapidly narrowing.

He puts the odds of China companies having to pull up stakes from U.S. exchanges at 80%. In June he assigned a 20% probability of such an outcome, while seeing 70% odds that the “can is kicked down the road,” and U.S. and Chinese regulators find some way to defer the issue.

“We are in a very difficult position right now because there is an indication that diplomacy has failed,” Gillis said.

The Securities and Exchange Commission on Monday charged the Chinese affiliates of the big four U.S. accounting firms, plus another firm known as BDO, with violating U.S. securities laws by refusing to produce audit work papers.

The big four are Ernst & Young, PricewaterhouseCoopers, Deloitte Touche Tohmatsu and KPMG.

Click to Play

Why audit firms in China won't hand over paperwork

The U.S. Securities and Exchange Commission, investigating alleged accounting fraud in China, has charged the Chinese affiliates of major accounting firms for refusing to produce audit work papers.

Specifically, the SEC charged that the audit firms violated the Sarbanes-Oxley Act, which requires overseas companies listed on a U.S. exchange use an auditor registered with the Public Company Accounting Oversight Board, or PCAOB.

The body exercises its oversight of the registered auditors by inspecting their audit papers. Since 2009, however, China has prohibited the locally based auditors — which audit the U.S.-listed Chinese firms, and are registered with the PCAOB — from sharing accounting papers with foreign regulators.

Chinese officials have argued that sharing such information would be in violation of their own laws involving state secrets.

Part of the reluctance, according to Macquarie analysts, may also be tied to national-sovereignty concerns and the view that “foreign governments should not be able to come onto Chinese soil and regulate Chinese citizens.”

A meeting between U.S. and China regulators last week “was the last chance to avoid a regulatory confrontation,” Gillis said, with the parties now at a crossroads that makes any future deal less likely.

Stakes are huge

The disappearance of Chinese listings from the U.S. could have tremendous financial consequences.

When ranked by value, the biggest 200 Chinese American Depositary Receipts have a market capitalization of $951 billion, according to July calculations by investment bank Macquarie.

Chinese companies listed solely in the U.S., meanwhile, have a combined market value of about of $101 billion, according to the research house.