U.S.-listed American depositary shares of Alibaba have lost 55% of their value over the past 12 months.
Photo: Qilai Shen/Bloomberg News
NEW YORK—The U.S. Securities and Exchange Commission on Friday added
Alibaba Group Holding Ltd.
to a list of Chinese companies at risk of being delisted from the U.S. exchanges if their auditors can’t be inspected before spring 2024.
Under the Holding Foreign Companies Accountable Act of 2020—which took effect in 2021—the U.S. can ban the trading of securities of companies whose auditors can’t be inspected by the American audit watchdog for three consecutive years.
The move comes days after Alibaba said it would apply for a primary listing in Hong Kong, where it obtained a secondary listing in 2019. Securing a primary listing in the Asian financial hub would allow Alibaba’s shares to continue to be traded even if it is booted from the American bourse.
U.S.-listed American depositary shares of Alibaba fell 11% on Friday and have lost 55% of their value over the past 12 months.
The Wall Street Journal recently reported that Alibaba’s founder,
plans to cede control of Ant Group Co. as the fintech heavyweight moves to cut ties with Alibaba under regulatory pressure from the Chinese government.
Three other Chinese companies were added to the HFCAA list on Friday following the release of their latest annual reports. The SEC has so far identified more than 150 companies as noncompliant, including Chinese e-commerce powerhouses
as well as restaurant operator
Yum China Holdings Inc.
According to the U.S.-China Economic and Security Review Commission, there were 261 Chinese companies listed in the U.S. with a combined market value of roughly $1.3 trillion as of March this year.
The U.S. regulators this week hardened their narratives on audit requirements as Beijing and Washington remain at loggerheads over whether the U.S. Public Company Accounting Oversight Board, or PCAOB, will gain full access to companies’ audit papers in China. Chinese authorities have long cited national security concerns to restrict such access.
In a speech to the Center for Audit Quality on Wednesday, SEC Chairman
said the U.S. wouldn’t send inspectors to China unless there is an agreement on a framework that allows the PCAOB to inspect and investigate audit firms completely.
“The proof will be in the pudding,” Mr. Gensler said. “While important, any framework is merely a step in the process.”
On Thursday, PCAOB Chair Erica Williams noted that “time is of the essence” for the audit negotiations. “Access to the U.S. capital markets is a privilege, not a right,” Ms. Williams said. “Our team must be able to go to China and test whether what’s written on paper works in practice.”
Congress is weighing bipartisan legislation that would shorten the 2024 deadline by a year, though time is running short for the House and Senate to hammer out compromises and pass the legislation this year.
The PCAOB, however, emphasized that companies would still be subject to scrutiny after delisting, which could take more than a year. “PCAOB inspections and investigations are retrospective,” a PCAOB spokesperson told the Journal. “So even if a company were to delist today, their audited financial statements over the last year are still subject to inspection or investigation.”
Nonlisted companies will also be required to file audited financial statements with the SEC if they have more than 300 U.S. shareholders, or if they trade securities in the U.S. above a certain threshold off-exchange, the spokesperson said.
Ronald Cheung, a partner at Optimas Capital Management in Hong Kong, said he expects more Chinese companies will follow in the footsteps of Alibaba and pursue primary listing in the city to hedge the delisting risk.
Mr. Cheung’s firm invested in Chinese companies via both American depositary receipt holdings and Hong Kong-listed shares. “It’s too early to make a full conversion,” he said. “We trade where the liquidity is and across time zones.”
Mark Martyrossian, the director at U.K.-based Aubrey Capital Management, said although foreign investors prefer trading ADRs, which they are more familiar with, those who want China exposure would be perfectly happy to invest in companies listed in Hong Kong and mainland China.
“The reality is that people still own China,” Mr. Martyrossian said. “It’s too big to ignore.”
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