US delisting risk for Chinese ADR stocks halves after deal

The China Securities Regulatory Commission and US Public Company Accounting Oversight Board announced Friday both sides signed an agreement for cooperation on inspecting the audit work papers of US-listed Chinese companies. Pictured here is the CSRC building in Beijing in 2020.

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BEIJING — The risk of Chinese stocks delisting from US exchanges has nearly halved after regulators reached an audit agreement, Goldman Sachs analysts said in a report Monday.

The China Securities Regulatory Commission and US Public Company Accounting Oversight Board announced Friday that both sides signed an agreement for cooperation on inspecting the audit work papers of US-listed Chinese companies. China’s Ministry of Finance also signed the agreement.

“This is no doubt a regulatory breakthrough,” Goldman Sachs’ Kinger Lau and a team said, while cautioning that much uncertainty remains.

They pointed out the PCAOB said the deal was only a first step, while the Chinese side said they would provide “assistance” in the inspections.

The PCAOB said it planned to have inspectors on the ground in China by mid-September, and make a determination in December on whether China was still obstructing access to audit information.

The Goldman Sachs analysts said Monday their model “suggests that the market may be pricing in around 50% probability” that Chinese companies could be delisted from the US

That’s down from 95% in mid-March — the highest on record going back to January 2020.

In late 2020, the US Holding Foreign Companies Accountable Act became law. It allows the US Securities and Exchange Commission to delist Chinese companies from US exchanges if American regulators cannot review company audits for three consecutive years.

Since March, the SEC has started to call out Alibaba and other specific US-listed Chinese stocks for failing to adhere to the new law.

Outlook for China stocks

If US-listed Chinese stocks, known as American depositary receipts, are forced to delist, the shares could plunge by 13%, the Goldman Sachs analysts estimated.

MSCI China could fall by 6% under such a scenario, the report said. The index’s top holdings are Chinese stocks listed mostly in Hong Kong, such as Tencent and Alibaba.

A “no-delisting” scenario could send ADRs and MSCI China 11% and 5% higher, respectively, the report said.

Read more about China from CNBC Pro

Few China-based companies have listed in the US following Beijing’s scrutiny of Chinese ride-hailing company Didi’s IPO in late June 2021. Regulators have since tightened restrictions on Chinese companies — especially those with at least 1 million users — wanting to list overseas.

CSRC’s recent moves

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