What happened
Shares of several Chinese companies that trade on U.S. Exchanges jumped today after U.S. and Chinese financial regulators announced a preliminary agreement for a long-standing auditing dispute between the two countries.
Shares of the online education company TAL Education Group (TAL -1.89%) traded nearly 7.7% higher as of 12:07 p.m. ET today. Shares of the online used car dealer Uxin (UXIN) traded roughly 5.2% higher and shares of the online tutoring company Gaotu Techedu (GOTU -1.41%) traded nearly 10% higher.
So what
Congress created the Public Company Accounting Oversight Board (PCAOB) in 2002 to audit publicly traded companies on U.S. exchanges in order to protect investors. But the Chinese government has prevented Chinese and Hong Kong-based companies trading on U.S. exchanges from adhering to these audits, often citing data and privacy concerns.
Image source: Getty Images.
In 2020, Congress passed the Holding Foreign Companies Accountable Act, which states that foreign companies that do not submit to an audit for three consecutive years could get delisted from U.S. stock exchanges. Earlier this year, to show the seriousness of the matter, the U.S. Securities and Exchange Commission (SEC) started keeping a list of Chinese companies that could soon get delisted.
On Friday, the PCAOB announced a deal with the China Securities Regulatory Commission and the Ministry of Finance of the People's Republic of China. U.S. auditors will now be allowed to travel to Hong Kong and begin audits next month, a massive leap forward in what has been an ongoing dispute for close to two decades.
"The real test will be whether the words agreed to on paper translate into complete access in practice," PCAOB Chair Erica Williams said in a statement. She also said there are "no loopholes and no exceptions" in the deal.
Still, this is certainly a big deal considering that Chinese regulators and the PCAOB have been negotiating for several months and there has been a lot of doubt about whether a deal would materialize at all. It also seems like the PCAOB has held firmly and not been willing to budge on much, making the deal more meaningful, in my opinion.
Following the news, analysts at Goldman Sachs issued a research note saying they have lowered the chance of Chinese stocks being delisted from 95% to 50% as a result of the deal.
It's not entirely clear why some Chinese companies are benefiting from this news today more so than others, but the online education sector in China appears to be performing particularly well, with TAL and Gaotu up nicely today.
Now what
The agreement between the PCAOB and Chinese financial regulators is a big deal for all Chinese stocks trading on U.S. exchanges. I am also cautiously optimistic that the Chinese government will hold up its end of the bargain, given that the rumors regarding this news have been progressively getting better all year leading up to the deal.
Furthermore, tech companies have become a big part of the Chinese economy, which has been struggling lately, and the U.S. exchanges offer a good source of liquidity.
Of these three companies, I think TAL Education Group is the best positioned, given its size. Uxin and Gaotu have much smaller market caps. In May, Uxin received a notice of noncompliance because it has traded below $1 since April, so the smaller Chinese stocks could be more volatile in an already volatile sector.
