Bloomberg is reporting today that U.S. and Chinese securities regulators are planning to meet next week to discuss the details of a proposal that would allow for U.S. feds to directly investigate companies within China (NYSE:FXI). An agreement would mark the first time American economic officials have been granted such a privilege. Reps. from the American Securities and Exchange Commission and the Public Company Accounting Oversight Board will meet with members of the Chinese Securities Regulatory Commission next week in Beijing.
If reached, a deal between the economic rivals would serve as a landmark achievement for China’s global integration and a strong token of confidence for its publicly traded businesses. Many international investors remain wary of Chinese stocks because they are not subject to intl. regulation; accusations of funny accounting and confabulated earnings are commonplace, though allowing audits by U.S. officials would do much to silence those critics.
Companies such as China-Biotics (NASDAQ:CHBT), Heli Electronics Corp (HELI), and more than 12 others have been suspended from trading on American exchanges this year due to concerns with accounting. Officials say access to the businesses’ home operations in China would expedite the investigation processes for firms of this ilk.
According to PCAOB Chairman James Doty, the need to give investigators access to China (NYSE:FXI) is more important now than ever, and would resolve “a gaping hole” in protecting investors. A former SEC lawyer added, “We’re at a time where the integrity of the financial statements of so many companies has been challenged, that the natural place to look for some reassurance is the regulator with oversight responsibility… But if the regulator cannot oversee, that in and of itself diminishes confidence.”
Bloomberg estimates there were roughly 200 Chinese companies to start trading on American stock exchanges such as the New York Stock Exchange (NYSE:NYX) and Nasdaq (NASDAQ:NDAQ) in the last four years. 150 of those entered trading through reverse mergers (buyouts of a ‘shell company’ that already trades publicly to avoid having to do an IPO), compared to 50 that went with IPOs. If an investigative deal is reached between the nations, Chinese companies might opt less for market entry through the back-door of reverse mergers, and look more towards filing for IPOs on American exchanges.
A potential deal holds promise for both parties, and investors at large, though questions will linger until the details of an arrangement are disclosed.