PCAOB chairman James Doty recently did an important interview with Caijing, which I have had translated into English. There has been little news on the PCAOB’s struggles with China since a deal was cut to allow sharing of documents with respect to investigations. The more important issue of inspections remains outstanding, and the interview exposes Doty’s increasing frustration with lack of results after nine years of negotiations. Doty indicates the nuclear option of deregistering accounting firms and kicking Chinese companies off the U.S. exchanges is very much alive. “We don’t want to come to this situation, but unfortunately there’s not much time left”
Doty expresses hope that the comprehensively deepening reforms that come from China’s Third Plenum will break the deadlock. I share that hope. The Third Plenum announcements say nothing about the PCAOB, or overseas listed Chinese companies either, but I they set a framework that might allow for resolution of two of the major overhangs for Chinese companies listed in the U.S. – regulatory standoffs with the PCAOB and SEC, and variable interest entities.
The Third Plenum reforms promise to give the market a decisive role in the allocation of resources. Following that principle, privately owned Chinese companies should be allowed to decide which markets they choose to list, whether U.S., Hong Kong, or Shenzhen. At present, companies that choose to list overseas set up offshore companies to get around Chinese regulations. Hopefully the reforms will include enabling laws and regulations to allow Chinese companies to directly list overseas.
The best way to solve the PCOAB/SEC issues is for those enabling laws and regulations to put the approval of overseas listings under the exclusive control of the CSRC. One of the obstacles to a resolution has been infighting between Chinese regulators. Let the CSRC set the conditions for overseas listing, which should include compliance with foreign laws. Let the CSRC make deals with foreign regulators to help them do their job.
The Third Plenum reforms also give hope for resolution of the VIE issue. Barriers to foreign investment in certain sectors, including e-commerce and education will be lowered. That makes sense, especially since the widespread use of the VIE structure has made present restrictions meaningless. If Chinese companies are permitted to directly list abroad and companies in e-commerce and education are allowed to have foreign investment, there will be no need for VIEs.