Chinese companies facing HFCAA delisting seeking alternatives

Some affected firms are getting a dual listing on the Hong Kong Stock Exchange; finding an independent, U.S.-based accounting firm to audit their books; or even delisting voluntarily to avoid the potential of being delisted in 2024.

On the negotiation front, it is looking unlikely that the United States and China will forge an agreement that would submit Chinese public companies to the same audit scrutiny as other publicly traded companies before the deadline.

Gary Gensler, chair of the U.S. Securities and Exchange Commission (SEC), told reporters after a rulemaking meeting Wednesday he is “not particularly confident” a resolution will be reached on the issue.

“It’s quite possible that there’s no deal here,” Gensler said, according to the Wall Street Journal.

More than 150 Chinese public companies listed on U.S. stock exchanges have been identified by the Public Company Accounting Oversight Board (PCAOB) as not being in compliance with the provisions of the HFCAA, passed by Congress in December 2020. Two were added Thursday.

On the list are companies including social media giant Weibo, restaurant chain Yum China Holdings, tech company Baidu, e-commerce company JD.com, video game publisher NetEase, video platform Bilibili, e-commerce platform Pinduoduo, and electric car makers Li Auto and NIO. Also listed are companies where allegations of accounting fraud have surfaced, including Luckin Coffee and video streaming service iQIYI.

The SEC previously estimated as many as 273 companies could be identified under the law based on a review of registrants in calendar year 2020.

Chinese public companies listed on U.S.-based exchanges are supposed to let the PCAOB audit their books, but those inspections have always been blocked by the Chinese government, citing national security concerns.

Under the terms of the law, publicly traded companies in countries that block audit inspections by U.S. regulators can be delisted after three years of noncompliance, beginning in 2021. The earliest a company could be delisted would be 2024.

A handful of Chinese public companies have indicated they are not planning to wait for a diplomatic resolution. Companies including JD.com and NIO are dual listed on the Hong Kong Stock Exchange, providing their listing with a home should it be delisted in the United States.

Zai Lab Limited, a biotech company flagged by the PCAOB, announced in June it had converted from a secondary to a primary listing on the Hong Kong Stock Exchange. It is now dual listed in Hong Kong and Nasdaq, the company said. The press release said the move opened “new ways to attract potential investors” but said the move was not related to the HFCAA. 

Chinese ridesharing company DiDi Global, which is also on the list, announced in May its shareholders voted to voluntarily delist from the New York Stock Exchange. The company did not cite the HFCAA as a reason. A spokesman for the China Securities Regulatory Commission, which has consistently said the United States and China are making progress in their negotiations, said in April that DiDi’s plan to voluntary delist has “nothing to do with the ongoing negotiation between Chinese and U.S. regulators over audit oversight cooperation, nor will it affect the advancement of such cooperation.”

Another tactic used by flagged companies is to hire a U.S.-based independent accounting firm to audit their books.

ACM Research, a Chinese manufacturer of semiconductor process equipment, announced in May it hired U.S.-based Armanino to be its independent registered public accounting firm. Armanino will audit ACM’s consolidated financial statements for the fiscal year ending December 2022.

“ACM expects that, upon issuance of consolidated financial statements for the fiscal year ended December 31, 2022, that have been audited by Armanino, ACM would no longer appear on the SEC’s ‘conclusive list of issuers identified under the HFCAA’ and would no longer be subject to the related delisting guidelines of the HFCAA,” the company said. It was scheduled to formalize the change at its annual stockholder meeting held June 30.

Zai Lab announced in June it hired KMPG, a U.S.-based auditor. “Zai Lab believes it should not be delisted by the SEC from Nasdaq as a result of its identification under the HFCAA for 2022,” the company said in its release.

Chinese biotech firm BeiGene is using the same tactic. In March, BeiGene hired U.S.-based Ernst & Young to be its independent accounting firm for the fiscal year ending December 2022, replacing an EY subsidiary based in China, according to a filing with the SEC.

Editor’s note: This story was updated July 15 to add details of Zai Lab’s hiring KPMG.