China could make a U-turn to stop its companies being kicked off Wall Street

China is extending an olive branch to the United States in a bid to prevent Chinese firms from being kicked off the US stock market.

The China Securities Regulatory Commission, the country’s top securities watchdog, has proposed changing a decade-old rule that forbids Chinese firms from sharing sensitive data and financial information with overseas regulators.

The amendment might allow US regulators to inspect audit reports of Chinese companies listed in New York. That could end a dispute between the two countries that threatened more than 200 Chinese firms with possible expulsion from the New York Stock Exchange or Nasdaq.

In the new draft rule published Saturday, the regulator struck out a requirement that examination of the financial documents of overseas-listed Chinese firms must be “mainly conducted by Chinese regulatory agencies.”

Instead, it says that inspections shall be “conducted through cross-border regulatory cooperation,” and the CSRC will provide assistance during the process.

The CSRC also said that all companies listed overseas will be responsible for properly managing confidential and sensitive information and protecting national security.

The draft rule has been issued for public consultation until April 17.

Chinese tech stocks plunge after US names companies for potential delisting

“The revision could potentially offer a long-term solution to the disputes on the audit requirement between China and the US, reducing the delisting risk of Chinese companies from US exchanges,” wrote Ken Cheung Kin Tai, chief Asian FX strategist at Mizuho Bank, in a note on Monday.

US regulators have long complained about the lack of access to the books of Chinese companies. But Beijing, citing national security concerns, has resisted such scrutiny. It requires companies that are traded overseas to hold their audits in mainland China, where they cannot be examined by foreign agencies.

In late 2020, the Holding Foreign Companies Accountable Act was signed into law, giving the Securities and Exchange Commission power to kick foreign companies off Wall Street if they fail to allow US regulators to review their audits for three straight years.

Chinese tech stocks rebound

Last month, the Securities and Exchange Commission named a few Chinese companies that could be delisted from the United States for failing to meet those requirements, including Baidu (BIDU) and Yum China (YUMC). The move triggered a sharp sell-off in Chinese equities, as investors feared more companies could be put on the list.

The Nasdaq Golden Dragon China Index, a popular index that tracks more than 90 Chinese companies that are traded in the United States, lost a quarter of its value within four trading sessions last month.

Markets welcomed the CSRC amendment, with Chinese tech stocks rallying in Hong Kong.

Tech giant Baidu (BIDU) soared 7.8%. Its US-traded stock ended up more than 6% on Friday on rumors that China was weighing giving US officials more access to Chinese audits.

Video-sharing site Bilibili (BILI) shot up 13%, while Alibaba (BABA) and JD.com (JD) jumped 3.7% and 7.7% respectively.

“The overhang on US-listed Chinese companies was partially removed,” said Mike Shiao, chief investment officer for Asia (excluding Japan) at Invesco.

Chinese authorities have been trying to soothe investor nerves after the recent market rout. Last week, the CSRC said its chairman Yi Huiman and SEC chairman Gary Gensler had held several meetings to discuss the audit issues and there had been “good progress.” Earlier last month, Chinese Vice Premier Liu He, one of President Xi Jinping’s top economic advisors, said at a key government meeting that Beijing will continue to support Chinese companies that want to list abroad.

However, Gensler told Bloomberg last week that only total compliance with US audit inspections would allow Chinese companies to keep trading on New York markets.