Investors applaud a groundbreaking agreement that grants U.S. regulators access to the financial records of Chinese companies, but they caution that before much more capital can be expected to flow to China, markets must first witness successful inspections and an improvement in the country’s economy.
The agreement, which was announced on Friday, at least in theory addresses a long-standing American demand for unrestricted access to Chinese audit files, significantly reducing the danger that Chinese companies may be delisted from U.S. bourses for non-compliance.
But U.S. officials cautioned that the agreement was simply the first step, and the financial markets have taken similar prudence. Investors are awaiting evidence of genuine cooperation and are concerned that, while the agreement is good, it will not be sufficient to lift the economic doldrums or ease ongoing Sino-American tensions.
Gains in share price based on rumours prior to the audit agreement were restrained on Monday by a fresh wave of risk aversion brought on by growth forecasts for global interest rates.
Shares of once-popular Chinese internet companies like Alibaba and Baidu that are listed in the United States are currently trading for less than half of their 2021 highs and only slightly above recent lows.
Sam Lecornu, fund administrator Stonehorn Global Partners’ co-founder and chief investment officer in Hong Kong, expressed optimism based on the fact that China and the U.S. can communicate effectively and look for common ground.
However, the audit issue is not the main cause of unfavourable attitudes toward China. Greater agreements between the two nations remained to be made that would support improving that sentiment.
Investors are primarily concerned about a severe downturn in the Chinese economy, which has increased unemployment and caused a decline in confidence and expenditure. This concern is partially reflected in the 2.5% decline in the value of the Chinese yuan this month.
Additionally, there are continuous concerns about regulatory strengthening in China, particularly for internet enterprises, as well as rapidly rising U.S. interest rates, which encourage U.S. investors to remain at home.
According to George Boubouras, director of research at K2 Capital Management in Melbourne, this announcement was a positive consequence.
However, the (U.S.-China) divide will persist. The West and China’s desire to impose their narrative on the world are too different from one another. There will still be tension.
Although the deal’s statement on Friday has provided significant comfort for investors in Chinese businesses with U.S. listings, legal experts & China observers have cautioned that the two sides may still disagree on the specifics.
According to HSBC, the majority of funds with a global or even an Asian emphasis are underweight on China, and this year’s foreign institutional investment flows into the nation have been cautious and just marginally positive.
The spotlight will soon move to the deal’s first actual audit inspections and a planned revision to Chinese regulations governing mainland companies’ access to outside financing.
The focus will soon move to the first actual audit reviews required by the agreement and to an expected revision of Chinese regulations governing mainland enterprises’ access to international financing.
Due to COVID restrictions in mainland China, the U.S. Public Company Accounting Oversight Board (PCAOB) announced that inspections would begin in Hong Kong. According to officials, informed companies have already been chosen.
Daniel Tu, the director of Active Creation Capital in Hong Kong, said that a great deal will depend on the results of the thorough and comprehensive audits and the current geopolitics.
Institutional investors in the United States, in particular, are currently sitting this one out.
Markets are also awaiting the China Securities Regulatory Commission’s (CSRC) final regulations governing mainland Chinese companies’ ability to list abroad.