The delisting of five Chinese SOEs from the NYSE shows Beijing may be prepared to compromise to resolve a decade-long conflict, experts and advisors said on Monday.
Five SOEs, including oil behemoth Sinopec (NYSE:SHI) and China Life Insurance, indicated they will voluntarily delist from the NYSE on Friday.
The U.S. Securities and Exchange Commission (SEC) highlighted the five other firms in May for failing to fulfill U.S. auditing requirements. The delisting implies China may compromise on allowing U.S. auditors to examine the accounts of private Chinese companies listed in the U.S.
Beijing and Washington are in discussions to settle a disagreement that threatened to delist hundreds of Chinese corporations from New York if China didn’t give Washington full access to their books.
“Not listing state-owned firms in the U.S. helps China to compromise in discussions,” said a Hong Kong capital markets lawyer who declined to be identified due to the topic’s sensitivity.
“They were more anxious about accessing SOE accounts,” stated the lawyer. “Private enterprises’ data isn’t as sensitive as SOEs’.”
Some commentators were skeptical about the delistings’ effect.
“Removing state-owned firms would offer the Chinese greater opportunity to make compromises,” said Paul Gillis, a retired professor at Peking University’s Guanghua School of Management.
With the U.S. and China’s political climate, achieving an agreement is challenging.
Everything You Need to Know
U.S. officials have asked for years to see audit working documents of New York-listed Chinese businesses, but China has refused on national security concerns.
In May, an SEC official suggested China may agree to the voluntary delisting of businesses judged “too sensitive” to comply with U.S. regulations, ensuring the remaining companies and audit firms could fulfill U.S. inspection and investigation procedures and escape trading limitations.
Since then, the PCAOB, which monitors audits of U.S.-listed corporations and is controlled by the SEC, has stated delisting companies would not bring China into compliance since U.S. standards require the agency to have retroactive access to corporate audit information.
Monday, a PCAOB representative said the board’s opinion hasn’t changed. SEC representative didn’t immediately comment.
Monday afternoon, CSRC didn’t reply to an inquiry.
The PCAOB identified more than 270 Chinese firms in danger of trading restrictions because they lacked comprehensive audit paperwork.
In recent months, global fund managers holding U.S.-listed Chinese equities have shifted towards Hong Kong-traded counterparts.
Alibaba (NYSE:BABA) Group Holding stated it will transform its Hong Kong secondary listing to a dual main listing, which experts said would make it more straightforward if the e-commerce giant ever delisted in the U.S.
“Whether U.S.-listed private companies are given greater freedom to assist with the PCAOB depends on the sensitivity of their audit documents,” says Weiheng Chen, head of Wilson Sonsini’s Greater China Practice.
Chen said sensitive private firms control enormous quantities of geospatial data and data that tracks the location, movements, and social actions of persons and corporations.
After delisting, only China Eastern Airlines (NYSE:CEA) and China Southern Airlines will remain US-listed.
“China should collaborate with the U.S. SEC to guarantee Chinese firms without sensitive information may access U.S. capital markets,” Jefferies analysts said.
Alibaba Is Amongst the Stocks With a Risk of Delisting From NYSE
For the last few days, Alibaba (NYSE:BABA) investors have also been worried about their investment. But the delisting doesn’t mean that investors won’t be able to trade them. Even if a stock is delisted from NYSE or NASDAQ, it still can be traded on OTC markets. Although stocks listed on OTC markets are more vulnerable than being listed on NYSE or NASDAQ.
Alibaba (NYSE:BABA) will still be doing business no matter where they are listed. But one thing is for sure investing in vulnerable stocks on OTC markets is not a cup of tea for everyone, but the ones who take risks sometimes win a great reward.
Featured Image: Megapixl @Gary718
Author Shariq Khan 
