Three Chinese companies facing delisting risks in New York

HONG KONG Reuters - The list of Chinese companies facing delisting risks in New York continues to expand with the addition of three more on Friday after the inclusion of e-commerce giant Alibaba in July.

As the talks between Beijing and Washington drag on, the U.S. regulators and politicians have been ratcheting up calls for a resolution, hammering out a message to China that time is running out for both sides to reach a deal.

Here's what you need to know about the deal talks so far, and what you should watch out for in the coming months.

The audit papers of New York-listed Chinese companies, essentially documents that were put together during the audit of financial statements, has been demanded by U.S. regulators. There are security concerns that Chinese authorities have refused to let overseas regulators inspect domestic accounting firms.

The ban on trading in Chinese companies was brought to a head in December when the U.S. Securities and Exchange Commission SEC finalized rules that allow the prohibition of trading in Chinese companies' shares.

In March, Goldman Sachs estimated that U.S. institutional investors held around $200 billion of American Depositary Receipts ADRs in Chinese firms.

Regulators from the United States and China have been in negotiations for a deal since last year. Washington has been cautious about the outlook, while Beijing has stated in recent months that both sides are committed to reaching a deal.

By August 7, the SEC identified 162 Chinese firms listed in New York as facing delisting risks. A company that fails to meet audit paper requests for three consecutive years will be subject to a trading prohibition, starting from spring, 2024.

The chair of the U.S. corporate auditing watchdog said last week that it would not accept any restrictions on access to the audit papers for New York-listed Chinese companies.

In March, China's vice-premier Liu He said that both sides are working on specific cooperation plans, and that they had made progress between Chinese and U.S. regulators. A vice chairman of China's securities watchdog said in April that he expected a deal soon, but SEC Chair Gary Gensler said last week he would not send public accounting inspectors to China or Hong Kong unless Washington and Beijing can agree on complete audit access.

The U.S. Senate passed a bill that was designed to boost the country's ability to compete with China last week. Some analysts and investors think the legislation will give both sides another year to solve the audit impasse. The finalized bill removed a provision that would have accelerated the deadline for China to meet audit requirements from early 2024 to early 2023.

The SEC said that the U.S. accounting regulators will have to complete on-site inspections and investigations in China by early November. The watchdog needs to do that in order to draw a conclusion on whether or not it can investigate accounting firms in mainland China and Hong Kong registered with the U.S. regulators.

It is not immediately clear what the SEC will do after receiving the watchdog's annual assessment for 2022. The SEC began identifying public companies with trading suspension risks after the 2021 annual assessment.

There is still a chance that the US Congress may choose another legislative vehicle to increase the deadline for China to comply on access to audit papers in the spring of 2023.