Trade

Approximately twenty years after their initial public offerings (IPOs) in the United States, which was seen as a symbol of China’s aspiration for its economy and corporations to achieve global recognition, five major state-owned enterprises (SOEs) from China, namely PetroChina, Sinopec, Aluminum Corporation of China (Chalco), and China Life Insurance, have recently declared their intention to remove their shares from the New York Stock Exchange (NYSE). The synchronized nature of the action, with all companies making the statement on August 12, clearly implies that Beijing approved or possibly mandated their delisting. And it occurred with little isolation. For more than ten years, the United States and China have been engaged in a dispute on the requirement for Chinese companies listed on U.S. stock exchanges to allow auditors designated by the Securities Exchange Commission (SEC) to access their financial records. Although none of the firms directly addressed the audit issue, PetroChina acknowledged the significant administrative cost associated with fulfilling disclosure responsibilities. However, it is evident that the auditing needs were the main driving force behind the decision to collaborate.

The disagreement gained increased importance following the enactment of the Holding Foreign Companies Accountable Act (HFCAA) by Washington in late 2020, and subsequent finalization of the Act’s regulations in December of the same year. They require companies that refuse to disclose their financial records to be banned from trading their stocks, which could possibly impact 273 Chinese corporations, including Alibaba, JD.com, Baidu Inc., and the five state-owned enterprises (SOEs). Furthermore, it has a direct impact on American investors: Goldman Sachs estimated in March that American institutional investors possess Chinese company American Depositary Receipts (ADRs) valued at $200 billion. Last year, China Mobile, China Telecom, and China Unicom were delisted as a result of a previous decision made by the Trump administration. The intention behind this action was to cut off financial support to Chinese technological businesses. Proponents argue that the removal of the state-owned enterprises (SOEs) from the listing allows for a potential agreement to proceed unimpeded.

They contend that Beijing consistently refused to grant American auditors access to scrutinize the internal financial operations of its critical state firms, particularly those involved in sectors that could potentially impact national security, such as the oil and gas industry. They highlight the fact that the state-owned enterprises (SOEs) that were delisted had low trading activity on U.S. exchanges, which makes their departure predictable. PetroChina explicitly said that it has never engaged in any subsequent funding after its initial listing in the United States, and that the exchanges in Shanghai and Hong Kong are capable of fulfilling its requirements. Furthermore, it is seen that the stocks of Chinese private enterprises listed in the U.S. exhibit far higher levels of activity, which implies that their exit could be more distressing. China’s regulators are now expected to approve increased transparency for non-state enterprises.

“I believe that Beijing considers large State-Owned Enterprises (SOEs) to be too sensitive to undergo audit inspections.” Therefore, the announcements of delisting by PetroChina and others do not indicate significant possibilities for a more comprehensive agreement on audits,” tweeted Michael Hirson of the Eurasia Group.

The fallacies of the optimists

I am predicting that the optimists will be incorrect. To begin with, the recent moves taken by private firms are hardly indicative of progress. Alibaba, a prominent ecommerce business in China, which has been identified by the SEC as a company of concern, said in July its intention to pursue a dual primary listing in Hong Kong. This move will enable Mainland investors to purchase its stock through the Southbound Connect program. Alibaba has expressed its intention to maintain its listing in New York, but, it is uncertain whether the business genuinely intends to do so or if it is even feasible. The primary factor that casts doubt on the feasibility of a significant agreement, however, is the realm of politics. Given the deteriorating bilateral relationship, it becomes highly improbable that either Beijing or Washington will be willing to reach a compromise about the auditing deadlock. During a recent interview with Bloomberg, Erica Williams, the Chair of the SEC’s Public Company Accounting Board, expressed a firm position by proposing that the regulations might be applied retrospectively. This means that firms may be required to undergo audits even after they have delisted from U.S. exchanges.

“Whether a firm or issuer chooses to delist this year is inconsequential to me, as my primary concern is whether you were involved in fraudulent activities in the previous year,” stated Williams on August 2nd. Given Beijing’s continued display of profound resentment towards House Speaker Nancy Pelosi’s recent trip to Taiwan, it is likewise improbable that China will make any conciliatory gestures.

In 2000, while PetroChina was making preparations for its listing in the U.S., it was widely regarded as an indication of China’s desire to acquire knowledge from the Western countries and make significant progress towards a market-oriented economy. PetroChina’s parent firm, China National Petroleum Corporation (CNPC), enlisted a group of experts to assist them, which included of investment bankers from Goldman Sachs, 50 consultants from McKinsey & Co, and 700 auditors from PricewaterhouseCoopers. If management can successfully transform this colossal entity, it will serve as a significant model for revamping state-owned firms. “Furthermore, this occurrence could signify the rise of China’s novel corporate behemoths on the global stage,” stated in Businessweek during that period. China’s major corporations may be permanently leaving.