Friday, December 7, 2012

China listings may flee U.S - Discussion Topic 12/5/2012

http://articles.marketwatch.com/2012-12-04/markets/35597450_1_chinese-firms-audit-firms-chinese-companies
Do you think the accounting discrepancy will be solved in the end? Do you think Chinese companies should share accounting data with U.S. regulators? 


9 comments:

  1. Tim Shoji
    China needs to have its own sovereignty, and no foreign financial regulator should be able to supersede Chinese authorities to regulate Chinese citizens. However, what seems to be the issue here is that Chinese companies that are listed in the U.S. aren't playing by U.S. rules. If the Big Four auditing firms can't produce the data that SEC requires while also complying with Chinese rules, then it's the Chinese companies' responsibility to find some other way to make the SEC happy. Alas, as the article suggests, many of these companies may find that it's just easier to delist. (In fact, there has already been a trend in Chinese companies delisting from U.S. exchanges in recent times, due to disappointing stock performances.)

    Transparency and reliable data are paramount to a well-functioning financial market. In the short term, Chinese authorities need to work with American authorities to figure out how to resolve this through diplomacy. In the long term, I believe the companies will figure out their own solutions to this problem, whether it's through a mass migration toward the Asian exchanges, through ADR, or some other new innovative way that allows them to continue being listed in the U.S.

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  2. Xiao Zhong
    The accounting irregularity issue must be resolved for a free capital market worldwide, otherwise Chinese firms would be confined within their home market and would not be able to enjoy larger capital injection from foreign investors. Though it might take a long time to finally achieve consensus between the two governments, actions at both government and firm level are a must for a smooth transition.

    However, I think the issue is somewhat politicized: US regulators argue that not having proper accounting and reliable audit review for listed firms is not acceptable, while Chinese government opposes by raising up national security concern. When politics gets involved into financial or economic issue, a simple situation may become complicated and sensational. So I think in order to achieve a consensus with the US regulators, Chinese government should firstly be less politically sensitive,and US regulators should cool down the pressure on Chinese government for an early resolution.

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  3. Mengyao Kong
    I’m obsessed about this topic since yesterday I am losing money because of this issue. Yesterday, SEC issued a statement that the Chinese branches of big 4 and another American auditing firm have to provide their audit paper works otherwise they won't be qualified to audit these Chinese ADR firms. However, it is against the Chinese law because Chinese government thinks this is related to national interest. To be honest, I don’t know the level severity this is. Is it really at the dead corner that the governments cannot work things out? Or if the worst scenario happened, these Chinese ADR companies delisted from US exchanges, they usually will pay the market price for your stocks. However, it will also cause trouble for these companies who have cash shortage, which means the investors cannot get the equal amount they intend to.

    There is no doubt that this issue is catastrophic to these Chinese ADR companies. However, I don’t think companies like Baidu, Sina and New Oriental are not worth what they have been valued now. Maybe those small caps firms like Soufang.com, a Chinese rental website, is overvalued and might have auditing issues. I think this issue is all about the investors are freaked out because all these scandals happened these years and they kind of cannot stop thinking those Chinese firms must have something going on. At the end, I think the Chinese government and SEC will have something on the table and have a final agreement. Otherwise, it is a huge loss for both those chinese companies and American exchanges.

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  4. Kalyan Kanakamedala
    As a brainstorming exercise, and based on the comments below, I thought it might be helpful to create an interest map for the various parties to possibly elicit sources of alignment and conflict in the negotiations.

    Securities and Exchange Commission:
    -corporate transparency as achieved by disclosure
    -proper accounting practices as verified by third-party and SEC review
    -address accounting irregularities

    Public Companies Accounting and Oversight Board:
    -provision of audit work papers
    -completeness and timeliness of submission

    Chinese American Depositary Receipts:
    -compliance with Chinese laws
    -compliance with US laws
    -access to foreign and domestic equity financing

    Chinese Companies Listed Solely in the US:
    -compliance with Chinese laws
    -compliance with US laws
    -access to foreign equity financing
    -small vs. large

    Accounting Firms:
    -compliance with US laws
    -compliance with Chinese laws
    -Chinese corporate clients

    Chinese Government:
    -protection of state secrets
    -national-sovereignty concerns

    US Markets:
    -access to Chinese investments on US exchanges
    -creation of value through exchange of Chinese securities

    It seems most parties have a significant interest in Chinese securities being traded on US exchanges except for the Chinese government whose priorities may be more conflicted. My question to our Chinese team members is: How can Chinese American Depositary Receipts and other companies sufficiently convince the Chinese government of the value provided by access to US equity financing? Where will regulators be able to compromise? How can we adequately address state secret and national-sovereignty concerns? Looking forward to the phone call!

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  5. Tian Tan
    I can share something about big 4 in China. Big 4 is having a rough time in recent years in China. Chinese government has no trust on them now. They are introduced into China at early 1990s to help Chinese financial market establish accounting standard. However Chinese market are much more mature and many domestic accounting firm has the same the ability to conduct audit jobs for huge State Owned Enterprises. Now big 4 have very limited access to those SOEs once gave them huge profit. The government never trusted them. Although all big 4 firms are independent of each other.

    Now big 4's revenue are counting on MNC's China sub-branches and US listed Chinese companies. Now it seems that US government has little on big 4 either. In fact, those Chinese listed companies don't like big 4 either. Big 4 have much more audit procedures and always want more data than domestic audit firms which annoys Chinese companies a lot. If they are transferred from US stock exchange to Chinese stock exchange, big chances are that they will change audit firms. Further, with global economic recession and the increase of labor cost in China. We cannot expect more investment of MNCs in China. So for me, the future for big 4 in China is pretty gloomy. That's one of the reasons I quit from there...

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  6. Glenn Alpert
    As much as globalization is encouraged, this is one of the friction points when it comes to national interests. China is interested in becoming a global player, but it seeks to protects its businesses as well. I think this was inevitable, but it goes back to the point that when you allow regulators to come in and document your business, you have to be able to relinquish power and allow them to run the show. One of the issues that China will eventually have to face if it wants to fully participate in western economies. But, maybe Chinese companies don't need to participate and list themselves on US exchanges and do business without it... I think that Chinese companies will prefer to de-list themselves rather than allow regulators from the US to come in. This is going to create more economic friction and work against globalization.

    Why would a Chinese company be reluctant to allow a US regulator / auditor to come in and audit and make sure regulations are being followed? In exchange, they get to list in the US... is that a fair trade?

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  7. Pian Li
    To create a better global accounting enviroment, it is fair to have an unified standard to regulate international stocks. But this issue seems more like a political issue instead of an economic one. Now the stock is listed on US, so US asks Chinese companies to reveal some financial and accounting reports. I think it is partly because the US government wants to share some information from Chinese companies. But what if US stocks are listed on Chinese exchange, Chinese government asks US stocks to reveal some information? US companies are not willing to reveal as well. It is a strategy to protect domestic companies and wants to get benefit from the foreign companies.

    Also, another reason for US to ask big 4 to reveal reports may be due to a bad economy. They want to make sure that the economy will go better without any potential risks.

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  8. Zhishuo Zhang
    I have to agree that if Chinese firms decided to finance themselves in US markets, they have to play by the US rules. I don't know it for sure, but I think in China, auditing for listed company is not as transparent as in US, which give companys many opportunity to find loop holes in the policy and hide information from the investors. In additon, investors can not short the stocks which give more motivation for companys to do these things. Chinese companys are having hard time to get use to the US rules and I think that's the reason why they want to leave.
    However, is it true that the cost of delisting is smaller than the benefits of staying and finance themselves.

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