To understand what China is today and how it makes decisions, you must know its recent past.
The ruling Party chafes at how the modern world is constructed. It seethes at how the Qing dynasty was fragmented and disbanded, after years of occupation. And of how after the Second World War, the scarred sovereign was, to invert Dean Acheson’s words, ‘missing’ at the creation, playing little role in the formations of institutions such as the UN and IMF.
Simply put, no one in the People’s Republic, from the noble street-sweeper to Beijing’s elite political caste, likes to be told what to do by an outside force – ever.
Which makes its decision on August 26 to agree to let US regulators audit Chinese companies listed in New York so curious.
This story begins in 2013, when Beijing let the Public Company Accounting Oversight Board (PCAOB) – a non-profit that oversees all US-listed corporates – inspect the audit work of four mainland firms, all then under investigation.
Two years later, it did an about-face.
Beijing bridled at having to open the books on big tech firms such as Alibaba and Baidu, with their troves of personal data, to its geopolitical rival. Washington, in turn, took umbrage when auditors were told by state officials to redact any data China didn’t like.
Both sides walked away, though not very far, and the underlying issue – that China still doesn’t let the US regulator inspect its firms, citing state secrecy – was never resolved.
In 2020, Congress passed legislation that gave the 261 Chinese and Hong Kong firms listed in New York a stark choice: let the PCAOB audit you or delist by 2024.
Impasse followed, and a mass exodus of mainland firms – another nail in the coffin of Sino-US relations – seemed inevitable. On August 9, Alibaba issued plans to make Hong Kong the primary listing venue for its shares this year. Five big industrial firms, including PetroChina and China Life Insurance, then pledged to delist from the NYSE.
The main winners in this slow-moving spat seemed clear.
Hong Kong, with its chance to monopolize offshore China stock listings – much to the delight of local investment bankers – was one. So were Chinese investors, finally getting a chance to buy, via a stock-connect link with Hong Kong, shares in its best companies.
Foreign scrutiny
Then came Beijing’s latest about-face, a decision that begs any number of questions.
What prompted entente between the PCAOB and its mainland counterpart, the China Securities Regulatory Commission (CSRC)? Why now? And are state officials serious about opening China Inc’s books to the beady-eyed scrutiny of a powerful Western regulator?
The answer to the first is as old as the hills. “They want capital. Specifically, risk capital,” says a senior Hong Kong investment banker.
Take electric vehicles (EVs). China has a surfeit of exciting EV firms, some of which – Xpeng, Nio – are US-listed. Yet for real long-term solutions – not least, to its crippling pollution – it needs to foster a technological and market-grabbing arms race between them.
The big question is what happens when PCAOB inspectors arrive in Hong Kong in mid-September, to conduct on-site inspections of Chinese firms
To achieve that, it needs a deep and diversified capital market. That’s something it doesn’t have and that only the US does. Hence its willingness to embrace foreign scrutiny.
As to the timing, it’s partly due to Congress moving the deadline for compliance up a year, but also because of China’s deteriorating investment picture.
Yes, its primary capital markets are shockingly frothy. In the year to September 7, $45.81 billion was raised via primary listings on the Shenzhen ChiNext and Shanghai Star markets combined, according to data from Dealogic. Compare that to the $13.73 billion raised during the same timespan on the Nasdaq, or the $2.75 billion on Hong Kong’s main board.
But hindered by an enfeebled property sector and strict Covid lockdowns, the economy barely grew in the second quarter, and on Tuesday, Nomura downgraded its 2022 GDP target to 2.7%. The Party’s – still unchanged – full-year growth target of 5.5% now looks deluded. This is a country in need of money, whatever its flavour.
Signs of fracture
Finally: what of the audits?
The big question is what happens when PCAOB inspectors arrive in Hong Kong in mid-September, to conduct on-site inspections of Chinese firms.
Will they encounter a spirit of collaboration and cooperation, or find prickly officials determined to give them the kind of run-around experienced by WTO officials, seeking evidence of the origins of the pandemic, on arrival in Wuhan in early 2021.
Already there are signs of fracture. In a statement, the PCAOB claimed it had “sole discretion” to select the firms it wished to audit, and to do so “without consultation with, nor input from, Chinese authorities”.
The CSRC in turn said US regulators could only conduct inspections with the aid of Chinese officials – which was one of the original stumbling blocks from a decade ago.
The mainland regulator also claimed – unrealistically – that audit papers on its companies do not in general contain state secrets, or data related to its citizens. Both appear to be pre-emptive defensive strikes in case US investigators discover those very things.
Some mainland firms, including industrial and digital giants, will surely delist from the US or choose to retain a Wall Street ticker while moving their primary listing to Hong Kong. But many more will stay – and expect a new generation of innovative Chinese corporates to seek and find funding and favour with US investors and regulators, just as past generations did.
Succumbing on this issue to outside forces is in no way a humiliation, but it is a climbdown, and an unusual one at that. It’s a reminder that for all its astonishing modern achievements, at least in the financial realm, China remains a work in progress.
