Alibaba, others stocks sink after US says speculation on China stock listings premature

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Update 11:52 am: Adds confirmation of statement from PCAOB, talking points at bottom.

Alibaba (NYSE: BABA) and several other Chinese tech stocks dropped after a report that the US audit watchdog said speculation on a deal that would prevent hundreds of Chinese companies from being removed from US exchanges is “premature.”

The Public Company Accounting Oversight Board said that while its meeting with Chinese regulators, it is not clear if Chinese authorities will agree to permit US inspectors to fully review audit papers of companies, the PCAOB said in statements confirmed by Seeking Alpha. The regulator said a potential agreement would be a “first step.” The story was previously reported by Bloomberg News.

The PCAOB comments come after China’s Vice Premier Liu He made comments last week in an attempt to calm investor fears and said it would continue “to support various types of companies to list overseas,” noting that it would work with US regulators, including the Securities and Exchange Commission on the matter.

“While we will continue our work to find practical solutions to address the concerns of PRC authorities, ultimately, full access to relevant audit documentation is necessary to carry out our mandate on behalf of investors,” the PCAOB said in the statement. “This is not negotiable, even with respect to issuers in sensitive industries.”

Reuters reported on Tuesday that Alibaba (BABA), JD.com (NASDAQ: JD), Baidu (BIDU) and other Chinese US-listed tech firms have been told by Chinese regulators to prepare for more audit disclosures,

Earlier this month, the China Securities Regulatory Commission and other agencies reached out to these companies and asked them to prepare audit documents for 2021.

Alibaba (BABA) fell 3.6%JD.com (JD) dropped 6.5%, Weibo (NASDAQ: WB) slipped 2.9% and Pinduoduo (NASDAQ: PDD) declined 7.5%.

Shares of other companies, such as Tencent (OTCPK: TCEHY), Kingsoft Cloud (KC), Huya (HUYA), DouYu (DOYU), Dada Nexus (DADA), Baozun (BZUN), Bilibili (BILI), KE Holdings (BEKE ), Joyy (YY), NetEase (NTES), Zhihu (ZH), Trip.com Group (TCOM), iQIYI (IQ), Hello Group (MOMO), Vipshop (VIPS) and Dingdong (DDL) also fell on Thursday.

Alibaba and other Chinese ADRs and Internet stocks have whipsawed around in recent weeks, which started on March 10 when the US Securities and Exchange Commission named five companies from China that could be de-listed for failing to abide by US accounting regulations.

See below for the talking points from the PCAOB.

  • Speculation about a final agreement between the PCAOB and the People’s Republic of China (PRC) authorities on PCAOB access to audit firms headquartered in China and Hong Kong is premature.
  • We continue to meet and engage with PRC authorities in an effort to achieve a cooperative agreement that provides the PCAOB with the access required to inspect and investigate completely auditors headquartered in mainland China and Hong Kong. We appreciate the commitment of the Chinese Securities Regulatory Commission and Ministry of Finance to work through several important threshold issues, though it remains unclear whether the PRC government, as a whole, will agree to permit and facilitate the access we require.
  • The PCAOB’s requirements are straightforward, including the ability to inspect or investigate completely any audit engagement within our mandate, regardless of the issuer’s location or industry. This requires full access to audit work papers, firm personnel, and any other relevant information related to such audit engagements. Restrictions on PCAOB access to firms that have registered voluntarily with the PCAOB and that have chosen to perform required audits of companies that avail themselves of US capital markets and are subject to US federal securities laws deprive investors and the public of the benefits of the protections resulting from the work the PCAOB performs on behalf of investors.
  • While we will continue our work to find practical solutions to address the concerns of PRC authorities, ultimately, full access to relevant audit documentation is necessary to carry out our mandate on behalf of investors. This is not negotiable, even with respect to issuers in sensitive industries.
  • The Sarbanes-Oxley Act provides strong confidentiality protections and creates a privilege for any information received or prepared by the PCAOB in connection with an inspection or investigation. The strength of these protections has provided a strong foundation for cross-border cooperation with other audit regulators around the world, including full access to the documentation of the work and conclusions of auditors under inspection or investigation.
  • It is important to note that reaching an agreement, while an important and necessary first step, will not alone satisfy the requirements of the HFCAA. If an agreement is reached, we will then proceed with our inspection and investigation activities to determine if the agreement operates as intended such that we are actually able to inspect and investigate completely, in the long term, in mainland China and Hong Kong. An agreement without successful execution will not satisfy US law.
  • The PCAOB’s mandate includes overseeing the audits of public companies and SEC-registered brokers and dealers in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports. Public companies that have chosen to avail themselves of the US capital markets are required to be audited by audit firms registered with the PCAOB. The PCAOB must be able to inspect and investigate these audit firms completely, regardless of where the audit firms or the public companies they audit are located. All firms auditing public companies must play by the same rules.

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