Chinese IPOs and auditing

Posted on April 29, 2021 by Florian Buschek

This FT piece (paywall) is actually about how the big 4 are between a rock and a hard place (US and China) when it comes to auditing Chinese companies because China does not allow financials to be submitted to PCAOB, which the US requires. The US finally seems to push back:

My sympathy with the big 4 is limited (they are not even liable at this point having legally separated entities in China or Hongkong), the point of writing this post is the following

So Chinese issuance is through the roof despite non compliance with US laws and regulations. There are frauds in China and no auditor would catch it. See Wirecard. See Luckin Coffee. See what happened with Alibaba and Ant Financial (which technically should belong to Alibaba shareholders and essentially got mostly stolen from them). I could go on. PCAOB having no oversight will only increase the likelihood of shady things happening.

Now either it all works out in the end for the investors (no major frauds or at least not many) and the US is basically giving in to China and keeping this game going. In case of frauds, well, the shareholders should have done more due diligence, but index funds that are forced to buy will suffer along (retirement funds for example).

Or the US really pushes back and the Chinese stocks get delisted (China will never give in). Then substantially all western buyers will suffer catastrophic losses even in otherwise fantastic businesses, of which there are many in China, no doubt. Some of the more sophisticated (hedge) funds will be able to keep their shares on foreign exchanges like Hongkong or Shanghai but index funds with mandates of holding US stocks would be left holding the bag.

So in the end either the US gives in or pushes back at the cost of US investors. How could America come into this situation with no end in sight?

Disclosure: no position in any stock mentioned.

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