As an agreement has been reached between the United States and China over the issue of the audit of Chinese concept stocks, the fate and prospects of these stocks appear to see a turn of events.
However, judging from the statements released by the two countries and their positions on this, both sides have shown a cautionary attitude. The China Securities Regulatory Commission (CSRC) said that in the next step, the two countries will cooperate with relevant accounting firms, so as to carry out daily inspections and investigations according to the cooperation agreement. This is also to make an objective assessment of the effect of the said cooperation. If the follow-up cooperation can meet their respective regulatory needs, it is expected to solve the audit and supervision problems of Chinese concept stocks, thereby avoiding their passive delisting from the United States. Meanwhile, Securities and Exchange Commission (SEC) Chair Gary Gensler, did not rule out the possibility of delisting Chinese concept stocks. "While important, this framework is merely a step in the process. This agreement will be meaningful only if the PCAOB actually can inspect and investigate completely audit firms in China", he said. The focus of the dispute between the two sides is shifting to the implementation of the future agreement, indicating that the related disputes and games will continue in the future.
Despite of the new agreement, there remains many differences between the United States and China, according to researchers at ANBOUND. The Chinese side focuses on ensuring joint supervision under audit sovereignty and the security of sensitive data, while the U.S. side emphasizes the authenticity of the audit and demands that review be unrestricted and constrained. This shows that it will take time for the disputes between the two to be completely resolved, which has lasted for nearly 20 years. As the competition between these two countries continues in the financial field, it is still highly uncertain whether the Chinese concept stocks can escape the risk of being delisted from the U.S. stock market.
In any case, the decoupling of China and the U.S. capital markets will not be beneficial to either side. This is also the reason why while there remains competitions, both countries are still unwilling to be completely decoupled from each other. For China, maintaining access to the U.S. capital market enables Chinese companies to obtain the support of U.S. capital and take advantage of the U.S. stock market, as well as of the value discovery in the U.S. financial industry. This not only allows China to continue promoting financial and economic opening, but also the building of the "dual circulations" of economic development. This, in turn, could bring huge benefits in improving the efficiency of resource allocation in the Chinese financial system. For the U.S. market, the departure of Chinese concept stocks has made it a global financial center without the second largest economic market. This practically means the weakening of the competitiveness and influence of the U.S. financial industry. It is precisely based on their huge interests that the securities regulators of both sides are working hard to resolve their differences, aiming to achieve a compromise while obtaining the greatest outcomes. It is also because of the integration and development of the two sides for decades that the financial decoupling between the United States and China has become nothing short of a "lose-lose" final result.
Currently, China has successively taken some measures to solve historical problems such as cross-border audit and VIE structure of Chinese concept stocks, and established relevant institutional arrangements for data security, file management and related audit processes. On the other hand, the U.S. has also limited the dispute to more of focusing on protecting the interests of investors and sought some feasible workarounds. The consequences of these compromises may be the differentiation of Chinese concept stocks. Although the cooperation between the two sides has brought many benefits for each side, in the context of increasingly fierce geopolitical competition between them, the gray areas where the two sides had tacit understanding in the past are becoming increasingly clear. With this, the Chinese and American regulators are redefining the boundaries. Under such circumstances, Chinese stock companies will face different situations.
As far as the types of Chinese concept stocks are concerned, there is no doubt that companies with a state-owned background will withdraw from the U.S. market. These companies are not short of money, but also constitute competition against the U.S. They have, in effect, achieved decoupling, and will not return to the U.S. stock market. On the other hand, the Chinese companies with unsatisfactory development, as well as the newly listed innovative companies, which occupy the majority, do not have disputes and hidden dangers in the audit. They will benefit from the agreement between the two parties and continue to stay in the U.S. stock market.
The focus of both parties will be on some large private internet companies with important market positions, including more than 20 companies with market and competitive advantages, like Alibaba, JD.com, and Baidu. These companies also hold a large amount of Chinese market data with strategic and security significance. Hence, this may still be the focus of the issue between the two sides in the future audit execution process. Most of these Chinese concept stocks have achieved secondary listings outside the U.S. stock market, thereby avoiding the huge impact of uncertain risks on the future of the company. Under the regulatory disputes between the U.S. and China, if the differences between data security and audit authenticity cannot be resolved, the possibility of China's concept stocks being decoupled from the U.S. stock market and returning to China is still very high. Alternatively, these internet companies might have to split up and separate their own business operations.
Judging from the current market situation, investors are also cautious about the future of Chinese concept stocks. After the announcement of the agreement between the two sides, the Chinese concept stocks ushered in a wave of rises, but compared with the market value that has shrunk significantly, with the degree of market recovery is still limited. This also reflects the expectations and hedging attitudes of international institutions, including American investors, for the future of Chinese concept stocks. Uncertain factors are still one of the main reasons for the stability and further development of the market value of Chinese concept stocks. In fact, whether it is the delisting of several Chinese state-owned enterprises from the U.S. stock market or the "return" of large Chinese internet companies to Hong Kong and the mainland, this shows that the return of Chinese stocks will still be a major trend.
At the same time, some market participants have noticed that in recent years, with the continuous development of audit issues in the U.S. and China, the stock price and market value of Chinese concept stocks are not only reflected in the U.S. stock market, but also have a linkage effect on the Hong Kong and mainland stock markets. In the context of deepening globalization in the financial sector and capital still seeking global investment opportunities, the return and differentiation of Chinese concept stocks is insufficient to bring about a complete cut-off of the Chinese and American capital markets. The intensification of U.S.-China geopolitical competition will still allow both sides to build their own geopolitical patterns and achieve a new balance in the capital market game.
Final analysis conclusion:
The reaching of the U.S.-China cross-border audit agreement has not completely resolved the disputes between the two sides. Under the circumstance that the uncertainty of delisting still exists, Chinese concept stocks will face the trend of regression and differentiation. In the process of compromise between the two countries, the competition and cooperation in the capital markets of the U.S. and China will form a new balance.
