Takedown risk for US-listed Chinese stocks nearly halved after regulators reach audit agreement, Goldman says

BEIJING — The risk of Chinese stocks being delisted from US stock exchanges has nearly halved after regulators reach an audit agreement, Goldman Sachs analysts said in a report Monday.

The China Securities Regulatory Commission and the US Public Company Accounting Oversight Board announced Friday that both sides have signed an agreement to cooperate in inspecting the audit working papers of US-listed Chinese companies. The Chinese Ministry of Finance has also signed the agreement.

“This is without a doubt a regulatory breakthrough,” Goldman Sachs’ Kinger Lau and a team said, warning that there is still a lot of uncertainty.

They pointed out that the PCAOB said the deal was just a first step, while the Chinese side said they would provide “assistance” with the inspections.

The PCAOB said it planned to have inspectors on site in China by mid-September and determine in December whether China was still blocking access to audit evidence.

Goldman Sachs analysts said Monday that their model “suggests that the market is pricing in a roughly 50% probability” that Chinese companies could be exited from the US.

That’s a 95% drop in mid-March — the highest record going back to January 2020.

At the end of 2020, the US Holding Foreign Companies Accountable Act came into effect. It allows the US Securities and Exchange Commission to remove Chinese companies from US exchanges if US regulators fail to review corporate audits for three consecutive years.

Since March, the SEC has started to declare Alibaba and other specific US-listed Chinese stocks for non-compliance with the new law.

If US-listed Chinese stocks, known as US certificates, are forced to delist, the shares could fall by 13%, Goldman Sachs analysts estimate.

MSCI China could fall by 6% in such a scenario, the report said. The index’s main positions are Chinese stocks primarily listed in Hong Kong, such as Tencent and Alibaba.

A “no-delisting” scenario could push ADRs and MSCI China 11% and 5% higher, respectively, the report said.

Few China-based companies have been listed in the US following Beijing’s scrutiny of the IPO of Chinese taxi company Didi in late June 2021. Since then, regulators have tightened restrictions on Chinese companies – especially those with at least 1 million users – that want to register abroad.