Doubts persist about how much protection American oversight would actually afford investors
Save time by listening to our audio articles as you multitaskOn April 2nd the China Securities Regulatory Commission indicated that it will allow American inspections of Chinese accounting papers. The concession from the Chinese government is a breakthrough in one of the costliest regulatory spats in capital-markets history.
Without the reviews, an American law from 2020 could eventually force nearly $1trn-worth of Chinese stocks off New York’s exchanges. Although this would not happen until 2023 at the earliest, the mere prospect has exacerbated a sharp sell-off in Chinese technology stocks abroad, already battered by a broad clampdown on the tech industry at home. TheGolden Dragon China Index, which tracks Chinese firms listed in New York, is down by two-thirds from its peak in February 2021.
One reason is growing concern over geopolitical friction between China and the West. This, reckons Deutsche Bank, “has permanently impaired” valuations of Chinese stocks in America. It is also unclear how China’s newfound fondness for information-sharing will work in practice. Theproposes setting up a “cross-border regulatory co-operation mechanism” to conduct the inspections. This may fall short of American demands for independent reviews.
And doubts persist about how much protection American oversight would actually afford investors. Chinese regulators with full access to accounts have failed to spot many a fraud. Chinese executives seldom face punishment in their home country for defrauding American shareholders, says Soren Aandahl of Blue Orca Capital, a Texan short-seller which has uncovered mischief at some Chinese firms. Until that changes, an incentive to fiddle with the numbers will remain.
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