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Delisting risk for U.S.-listed Chinese stocks nearly halves after regulators reach audit agreement, Goldman says

The China Securities Regulatory Commission and U.S. Public Company Accounting Oversight Board announced Friday both sides signed an agreement for cooperation on inspecting the audit work papers of U.S.- listed Chinese companies. Pictured this is actually the CSRC building in Beijing in 2020.

Emmanuel Wong | Getty Images News | Getty Images

BEIJING The chance of Chinese stocks delisting from U.S. exchanges has nearly halved after regulators reached an audit agreement, Goldman Sachs analysts said in a written report Monday.

The China Securities Regulatory Commission and U.S. Public Company Accounting Oversight Board announced Friday that both sides signed an agreement for cooperation on inspecting the audit work papers of U.S.- listed Chinese companies. China’s Ministry of Finance also signed the agreement.

“That is without doubt a regulatory breakthrough,” Goldman Sachs’ Kinger Lau and a team said, while cautioning that much uncertainty remains.

They described the PCAOB said the offer was just a first step, as the Chinese side said they might provide “assistance” in the inspections.

The PCAOB said it planned to possess inspectors on the floor in China by mid-September, and create a determination in December on whether China was still obstructing usage of audit information.

The Goldman Sachs analysts said Monday their model “suggests thatthe market could be pricing in around 50% probability” that Chinese companies could possibly be delisted from the U.S.

That’s down from 95% in mid-March the best on record heading back to January 2020.

In late 2020, the U.S.Holding Foreign Companies Accountable Act became law. It allows the U.S. Securities and Exchange Commission to delist Chinese companies from U.S. exchanges if American regulators cannot review company audits for three consecutive years.

Since March, the SEC has began to call out Alibaba and other specific U.S.-listed Chinese stocks for failing woefully to adhere to the brand new law.

Outlook for China stocks

If U.S.-listed Chinese stocks, referred to as American depositary receipts, are forced to delist, the shares could plunge by 13%, the Goldman Sachs analysts estimated.

MSCI China could fall by 6% under this type of scenario, the report said. The index’s top holdings are Chinese stocks listed mostly in Hong Kong, such as for example Tencent and Alibaba.

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

Read more about China from CNBC Pro

Few China-based companies have listed in the U.S. following Beijing’s scrutiny of Chinese ride-hailing company Didi’s IPO in late June 2021. Regulators have since tightened restrictions on Chinese companies especially people that have at the very least 1 million users attempting to list overseas.

CSRC’s recent moves

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