China is setting up a system to screen US-listed Chinese companies into groups based on the sensitivity of the data they hold, in a possible concession by Beijing to try to prevent US regulators from targeting hundreds of groups for to delete the list.
The system is designed to get some Chinese companies to comply with U.S. rules that require public companies to allow regulators to review their audit files, according to four people familiar with the situation.
Two people said Chinese companies listed in the U.S. would fall into three broad categories. The groups will be companies with non-sensitive data, those with sensitive data and others with “confidential” data to be crossed out.
One person said Beijing was discussing whether companies in the “sensitive data” category could restructure their operations to become compliant, including by outsourcing information to a third party.
The category system will be the second major concession Beijing is offering to remove barriers allowing the US to gain full access to audits. In April, it’s Change, a decade-old rule that limited third-party companies’ data-sharing practices.
The timetable, which is up for debate and subject to change, comes after months of deadlocked negotiations between Beijing and Washington over a US demand that Chinese companies and their auditors provide detailed audit documents or write off by 2024.
A collective write-off could be an important step toward economic decoupling between the U.S. and China, threatening $1.3 trillion in shareholder value. About 260 of China’s biggest companies, including tech group Alibaba, fast food company Yum China and social media Weibo, could be delisted from New York exchanges if they fail to comply.
The China Securities Regulatory Commission, the top securities watchdog in Beijing, has not commented.
Beijing has traditionally opposed allowing Chinese companies to provide data to foreign regulators for national security reasons.
But under the staged arrangement, “low-risk” data companies could make their audit data available to the Public Company Accounting and Oversight Board, two people said. The lower risk category is likely to include retailers and restaurant chains.
The head of a major Hong Kong-based investment firm said, referring to the taxi group, that: He was last week fined more than $1 billion by Beijing for cyber security breaches.
US officials are skeptical that Chinese companies will meet the full transparency standards required under the Foreign Companies Accountability Act, the 2020 law that forced Chinese and Hong Kong companies to open their audit files.
Although there are ongoing and fruitful discussions between the US and Chinese authorities. . . “Substantial issues remain and time is running out,” YJ Fischer, director of the SEC’s Office of International Affairs, said in a speech in May.
The agreement to provide access to audit files “will be just the beginning,” Fisher said. PCAOB officials must also travel to China and audit any Chinese issuer listed in the United States.
“I don’t know how we’re ever going to solve this,” the head of the investment firm said. He added that Beijing and Washington were using the dispute over control for “political gain” and that relations were at their worst in 40 years.
“As an investor, I hope that both sides are practical enough.”
The PCAOB said in a statement that it should have “full access to the audit records of any company it chooses to inspect or investigate — no loopholes, no exceptions.”