Market upbeat despite US identifying 12 Chinese firms for possible delisting

China and the United States could still find a way out of the ongoing audit dispute regarding US-listed Chinese companies despite the US Securities and Exchange Commission adding 12 such companies to a provisional delisting list on Tuesday, experts said on Wednesday.

The 12 Chinese companies were identified to face delisting risks in accordance with the US Holding Foreign Companies Accountable Act.

If the 12 companies fail to provide evidence within 15 business days that they still meet US requirements for listed companies, they will likely be conclusively identified under the HFCAA and may have to delist in 2024. Unconfirmed reports suggested the 15-day period would end on May 3.

The list includes Sohu.com Ltd, a prominent name in China's media and entertainment industry. Other companies include Noah Holdings Ltd, a wealth and asset management service provider, and China Automotive Systems Inc, a power steering components and systems supplier.

The move marked the fourth batch of Chinese issuers to face such action. In the previous three batches, 11 companies figured in the provisional delisting list since March, with five being moved to the conclusive delisting list.

Most of the 12 companies identified on Tuesday closed in the red on Tuesday, with Sohu down 0.68 percent to $19.01 on Nasdaq.

Some observers cautioned the market should not interpret Tuesday's SEC move as a worsening of the audit issue.

Ren Zeyu, an associate professor at the China University of Political Science and Law in Beijing, said it is not a surprise that more Chinese firms are added to the delisting list as US authorities routinely implement the HFCAA, and the list could further grow in the near future.

Being added to the list does not necessarily lead to delisting in 2024 as China and US regulators are still seeking solutions to the audit dispute, Ren said.

"On the other hand, the growing delisting list indeed highlights the pressure on both sides to resolve the dispute before 2024."

The HFCAA, which was enacted in 2020, allows the SEC to delist foreign companies from US exchanges if they are found to be not in compliance with US audit requirements for three consecutive years.

Chinese issuers listed in the US have since landed in a dilemma if they should comply with domestic laws or open their audit books to US regulators.

China has made headway in resolving the dispute by launching a draft revision of confidentiality rules for overseas listing on April 2.This is expected to pave the way for possible on-site inspections related to US-listed Chinese companies' auditing work that are acceptable to both sides, experts said.

The draft revision, released by the China Securities Regulatory Commission and other authorities, scraps a requirement that on-site inspections should be mainly conducted by Chinese regulators or rely on their inspection results.

"The revised provisions indicate China's willingness to collaborate with but not necessarily lead cross-border audit inspection, in contrast to the previous version," said a Morgan Stanley report.

With the draft revised provisions reflecting China's proactive moves, the likelihood of a final agreement being reached over the audit dispute is now higher, the report said.

Yet, experts still called for positive responses from the US to promote a final resolution of the dispute, which will be in the interests of both the companies and international investors concerned.

Dong Dengxin, director of the Wuhan University of Science and Technology's Finance and Securities Institute, said the delisting and compliance risks facing US-listed Chinese companies cannot be mitigated as long as the HFCAA remains effective.

"For these companies to avoid the risks, the ultimate choice would be to shift their listing venues to other exchanges, such as those in Hong Kong and the Chinese mainland, or to go private," Dong said.

Shi Jing in Shanghai and Kaifusai Julaiti in Beijing contributed to this story.