What happened
Shares of Chinese stocks rose today on news that Chinese regulators may cooperate with U.S. financial regulators and allow them to audit the current financials of Chinese stocks listed on U.S. exchanges, potentially ending a feud that has lasted for decades.
Shares of DiDi Global (DIDI 0.20%) had risen roughly 9% and shares of Alibaba Group Holding (BABA 0.64%) traded nearly 3% higher as of 12:27 p.m. ET today. Shares of Futu Holdings (FUTU -1.53%) were up nearly 11.5% earlier in the day before giving back much of those gains, likely due to broader market trends.
So what
U.S. regulators have long been frustrated with Chinese companies that trade on U.S. exchanges because they want access to audit their full and current financials. However, Chinese regulators have barred Chinese firms from sharing their working financials with foreign accountants due to national security concerns.
In 2020, U.S. lawmakers passed the Holding Foreign Companies Accountable Act (HFCAA), which said that if U.S. regulators could not review the financials of Chinese public companies for three consecutive years, those companies would be delisted. As many as 200 Chinese stocks could be delisted due to the HFCAA, according to the U.S. Securities and Exchange Commission (SEC). In recent weeks, the SEC has started naming specific Chinese companies that are in danger of being delisted. That growing list now includes Yum China Holdings, ACM Research, BeiGene, Zai Lab, Hutchmed, Weibo, Futu, Nocera, iQIYI, and CASI Pharmaceuticals.
Image source: Getty Images.
After the SEC started naming specific companies, Chinese regulators came out in support of foreign-listed Chinese stocks, which have been hammered over the last year, and said they would work with U.S. regulators to sort the auditing dispute out. That sparked a big rally in Chinese stocks. Since, then, however, it's been a bit of a roller-coaster ride, with the SEC continuing to name specific Chinese stocks that face being delisted. U.S. regulators have also maintained that Chinese companies would have to be in full compliance with U.S. accounting and auditing laws, making an impending deal seem less likely.
But today, the conflict took an unexpected positive turn, with Bloomberg reporting that Chinese regulators are planning to make the financials of Chinese companies available to U.S. regulators. This may happen by the middle of the year. Bloomberg also reported that Chinese regulators are planning to design a system that allows most companies listed in the U.S. to remain listed. However, some Chinese companies with "sensitive data" may still end up being removed. Furthermore, CNBC reported that a statement it received from the Chinese Securities Regulatory Commission said the agency has told accounting firms it works with to be ready for audits with both sets of regulators.
This is obviously great news for Futu, one of the stocks specifically named by the SEC. I also think it's quite good for DiDi, which has had its plans to delist from the New York Stock Exchange (NYSE) and list its shares in Hong Kong shut down by Chinese regulators, so staying on the NYSE might be the ride-hailing company's best option right now.
Now what
This situation has been evolving by the day, so things could certainly change, but I don't think Chinese financial regulators have ever seemed so willing to work with the U.S., particularly as U.S. regulators take a hard line on the auditing issue.
I think China may see it's in its best interest to have some of its largest, most successful companies be known globally, as the country continues to be a hot spot for foreign investment. Overall, while things are unpredictable and near-term volatility is likely, I am getting more optimistic about a potential deal between U.S. and Chinese financial regulators, which bodes very well for these U.S.-listed Chinese stocks.
