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US tightens pressure on Chinese firms listed on Wall Street

(ATF) Chinese firms listed in the USA are feeling the heat as senior US regulators are investigating why Chinese firms listed on US stock exchanges don’t have ‘open books,’ with their accounts open to scrutiny by auditors like other listed companies are required to do.

But news out of China late last week suggests that senior regulators in Beijing may be seeking to find a solution for this predicament, as ties between the world’s two biggest powers become increasingly strained.

On Friday November 20, the official website of the China Securities Regulatory Commission announced that the heads of relevant departments at the CSRC answered questions on Sino-US audit supervision cooperation.

Earlier this month, US Senator Rick Scott (Republican-Florida), sent an open letter to all Chinese companies listed in the United States, asking them to explain how to they will comply with the relevant regulatory requirements of the Public Company Accounting Oversight Board (PCAOB).

There have also been media reports saying the US Securities Regulatory Commission is drafting new regulations that require companies listed in the United States to undergo a second audit by a US inspectable accounting firm, otherwise they will face delisting.

Asked about this, the CSRC said that they had noted the open letter from the US Senator and related news reports.

“Two points are clarified here: First, when Chinese companies are listed in the United States, they must prepare financial statements and perform information disclosure obligations in accordance with relevant US laws and regulations, otherwise they will not be able to register with US regulatory agencies.

“US regulators are temporarily unable to inspect Chinese accounting firms that provide audit services to Chinese companies listed in the US. This is a cross-border regulatory cooperation issue, and it does not mean that Chinese companies have not complied with relevant US laws and regulations,” it said.

Supervision cooperation

The second issue concerned China-US audit supervision cooperation.

The CSRC said its consistent position was to conduct audits by accounting firms through cross-border supervision cooperation mechanisms.

On August 4, 2020, on the basis of actively considering the demands of the United States, the Chinese regulatory authority sent a fourth version of a proposal on joint inspection of accounting firms to the American Public Company Accounting Oversight Board (PCAOB).

The PCAOB confirmed receipt of the proposal and told the CSRC it will actively research the issue.

“The CSRC looks forward to the US regulators’ consultation on specific plans as soon as possible. It is believed that the two parties will adopt an open and professional attitude to reach a consensus on the joint inspection plan, to effectively promote China-US audit supervision cooperation, and jointly create a good regulatory environment for cross-border listed companies,” the Chinese watchdog said.

About a decade ago, China passed legislation that allowed Chinese nationals to work as auditors and accountants, even in large multinational accounting firms such as KPMG. But, to date, there has been little transparency from Chinese firms listed in the US, and that considered unfair by other US-listed firms.

‘Ban on military-linked firms to be expanded’

Meanwhile, the Trump administration is allegedly close to declaring that 89 Chinese companies in aerospace and other sectors have military ties, according to a report by Reuters. The military links would mean they face will restrictions if they seek to buy US goods or technology.

The list, if published, could further escalate trade tensions with Beijing and hurt US companies that sell civil aviation parts and components to China, among other industries.

A spokesman for the US Department of Commerce, which produced the list, declined to comment. 

Speaking in Beijing, Chinese Foreign Ministry spokesman Zhao Lijian said China “firmly opposes the unprovoked suppression of Chinese companies by the United States.”

He claimed that any such move by the US would severely violate the principle of market competition and international norms for trade and investment.

Chinese companies always operated in accordance with the law and strictly followed local laws and regulations when operating overseas, including in the US, he said.

Comac may face ban on US goods

Commercial Aircraft Corp of China (COMAC), which is spearheading the country’s efforts to compete with Boeing and Airbus, is reportedly on the list, as is Aviation Industry Corporation of China (AVIC) and 10 of its related entities.

The list is included in a draft rule that identifies Chinese and Russian companies the US considers “military end users,” a designation that means US suppliers must seek licences to sell a broad swathe of commercially available items to them. Under the rule, applications for such licences are more likely to be denied than granted. 

President Donald Trump has stepped up his actions in recent months against China. Ten days ago, he unveiled an executive order prohibiting US investments in Chinese companies that Washington says are owned or controlled by the Chinese military.

The pending list comes after the Commerce Department expanded the definition of “military end user” in April to include not only armed service and national police, but any person or entity that supports or contributes to the maintenance or production of military items – even if their business is primarily non-military.

The export restriction applies to items as disparate as computer software like word processing, scientific equipment like digital oscilloscopes, and aircraft parts and components. In terms of aircraft, the items include everything from brackets for flight control boxes to the engines themselves. 

News of the list comes at a sensitive time for the US aerospace industry as Boeing seeks Chinese approval of its 737 MAX after it was cleared by US regulators last week. In March 2019, China was the first nation to ground the jet following two fatal crashes and it is already expected to wait months to lift the ban. A spokesman for Boeing declined to comment.

Washington trade lawyer Kevin Wolf, a former Commerce official, said Commerce had shared the draft rule with a technical advisory committee of industry representatives, and it should have been kept confidential.

Wolf said the rule and list still could be modified and that the clock was running out for it to go into effect under the Trump administration since it would need to be cleared and sent to the Federal Register, the official US publication for rules, by mid-December. 

In the draft rule seen by Reuters, the Commerce Department said being able to control the flow of US technology to the listed companies was “vital for protecting US national security interests”.

‘Provocation could spur retaliation’

But a former US official who did not want to be identified, said “merely creating a list and populating it is a provocative act.” An aerospace industry source said it could spur China to retaliate. 

The inclusion of Comac would come as a surprise to at least one major US supplier, which had determined the company was not a military end user, the industry source said. 

A list also would provide European competitors with an opening to promote their manufacturers, by pointing out they do not have to clear such hurdles, even if the US grants the licenses, the source said.

General Electric Co and Honeywell International, both supply COMAC and have joint ventures with AVIC.

A GE spokesperson said its global joint ventures operate in compliance with all laws, and that the company has worked to obtain licenses related to military end users. But a Honeywell spokeswoman declined to comment.

Besides the 89 Chinese listings, the draft rule also designates 28 Russian entities, including Irkut, which is also aiming to break into Boeing’s market with its MC-21 jetliner development. 

The 117-company list is “not exhaustive,” the draft rule said, and is considered an “initial tranche.” 

With reporting by Reuters

Chris Gill

With over 30 years reporting on China, Gill offers a daily digest of what is happening in the PRC.

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