E-commerce giants Alibaba Group and JD.com are among US-listed Chinese companies selected by US regulators for audit inspections in Hong Kong next month, sources say.
Alibaba, JD.com and Yum China Holdings have been told they are among the first batch of Chinese companies whose audits will be inspected by American accountants from the US Public Company Accounting Oversight Board (PCAOB), the sources said.
The news follows a landmark audit deal reached on Friday between Beijing and Washington that will allow US regulators to vet accounting firms in mainland China and Hong Kong.
The agreement could end a long-running dispute that threatened to boot more than 200 Chinese companies from US stock exchanges.
Yum China Holdings Inc is the owner of KFC (Kentucky Fried Chicken), Taco Bell and Pizza Hut restaurants in China.
The accounting firms of Alibaba, JD.com and Yum China – PwC, Deloitte and KPMG, respectively – have also been informed of the audit work inspection, according to the sources, who declined to be identified due to confidentiality constraints.
Alibaba Shares Drop
Alibaba’s US-listed shares closed down nearly 3% on Tuesday after the Reuters report, having been up about 1% in pre-market trade. Its Hong Kong shares narrowed losses to nearly 1% on Wednesday afternoon after slumping more than 3% in morning trade.
Alibaba, JD.com and Yum China did not respond to requests for comment, while spokespeople for PwC and Deloitte said it was company policy not to comment on client matters.
A PCAOB spokesperson said the board did not comment on inspections, while the China Securities Regulatory Commission (CSRC) did not immediately respond to requests for comment.
US regulators have demanded access to audit papers of US-listed Chinese companies for more than a decade, but Beijing has been reluctant to let US regulators inspect its accounting firms, citing national security concerns.
Alibaba, which went public in New York in 2014 in what was at the time the largest listing in history, is the most valuable Chinese firm listed in the United States with a market value of $248 billion as of Tuesday.
No Special Treatment
The PCAOB said on Friday that the watchdog had notified the selected companies, without naming them, and its officials are expected to land in Hong Kong, where the inspections will take place, by mid-September.
The regulator, which oversees audits of US-listed companies, would select companies based on risk factors, such as size and sector, and that no companies could expect special treatment.
It is not yet known how many and what other Chinese companies are in the first batch of US inspections.
Alibaba was founded in 1999 with e-commerce as its key business. It has expanded into fast-growing sectors such as cloud services and internet of things in recent years and also owns AutoNavi, a large Chinese digital mapping and navigation firm.
In July, Alibaba was added to the US Securities and Exchange Commission’s (SEC) list of Chinese companies that might be delisted if they did not comply with audit requirements.
The list now has more than 160 Chinese companies including JD.com, Yum China and and electric vehicle maker Nio.
Current US rules stipulate that Chinese companies that are not in compliance with audit working papers requests will be suspended from trading in the United States in early 2024.
Days before being added to the SEC’s delisting watchlist, Alibaba said it planned to add a primary listing in Hong Kong to its New York presence, targeting investors in mainland China.
Already present on the Hong Kong bourse with a secondary listing since 2019, the tech behemoth said it expects the primary listing to be completed by the end of 2022.
Yum China said in mid-August it had also applied for a primary listing in the city, as it looks to circumvent a risk of delisting from New York.
The company expects conversion from its current secondary listing status to primary to be completed in October, subject to shareholder approval.
- Reuters with additional editing by Jim Pollard
NOTE: This report was updated with further details on August 31, 2022.