Inspection Rights / Regulatory Risk Discussion Thread
Dr. Gillis is great. Who I am to disagree with a professor at the prestigious Peking University and former partner at PWC?
As Dr. Gillis would agree, we are both just laowai. We do not know and are just looking at tealeaves. He looks at the tealeaves and says there is a 10 % chance the Chinese agree to PCAOB oversight of the auditing firms in China. I look at the tealeaves and say there is over a 50 % chance. He thinks that the Chinese will do what the Chinese love to do when not everything is perfectly in their favor, wait for another day. I think the SEC and the Big 4 will not let it go that far. Those are some powerful players and they will be losing money in China until this issue is resolved. They will bring in the politicians to get the job done. Dr. Gillis pedigree exceeds mine both in accounting and Chinese business. I have a self-interest, as I have money in play, while we do not know Dr. Gillis’s proclivities.
CRSC, the Shenzhen, and Shanghai exchanges are far away from being able to handle even one of the NYSE listed Chinese companies. For example, one day of trading China Mobile would shut down the Chinese financial markets for months. The Chinese being grown up enough to bear the yoke of a modern financial market is impossible. It is just not a regulatory issue. It is also an infrastructure issue. It just does not exist in China and cannot be purchased. It has to be homegrown or imported there are no other options. Imported would be repugnant to the Chinese people. Homegrown is a multi-generational project.
A couple huge steps would have to be completed before that China could consider a modern financial market. The RMB would have to become a reserve currency. An actively traded yuan is one of the few things that scare Chinese. The banks would have to be privatized. This is more a political than an economic question. The politics are complicated. I believe that a generation will have to pass in China for it to occur. I believe once the Chinese work through all those issues, they will concluded what everyone else has concluded it is much better to stick with the establish markets. However, this will be done on China’s timeline, perhaps 50 years.
I believe that the Chinese will allow US regulators sufficient oversight of audit firms and listed companies before the end of the year.
If the SEC cannot perform it mandated duty, regulating the United States financial markets, then it has no choice. It has to deregister all the Mainland CPA firms. The political fallout of a Chinese listed company melting down next audit season would be too much to bear. No listed companies can obtain an audit and delisting will follow quickly. The companies will not wait to be delisted the ex-Big 4 Mainland firms will help them list in Hong Kong.
Hong Kong is China, granted, a weird hybrid of China but China. They have designated officials within every China’s government agency with marching order from Beijing to make it work. They also have public promises from the Premier on the business independence of Hong Kong. Most importantly, they have a population that is willingly to actively protest intrusions by Beijing in Hong Kong’s economic activity. There a couple places WWIII could start. Hong Kong is one. There is nothing more intimidating than a Chinese, who is determined to stand his ground. Hong Kong has the will and the expertise to force the Chinese companies to comply. The market will value risk differently in Hong Kong.
There is two cases to watch on how this plays out, Longtop and Standard Water. As I feel it will get resolved by the end of the year, I think the Longtop case is more important of the two. The Standard Water case has a longer history, they delisted in Hong Kong in 2010, than Longtop, trading suspended in 2011, but the SEC has moved quicker. The SFC has only escalated Standard Water to an up or down decision in the last couple of weeks. The SEC has some specific deadlines tied to the end of the year and the MOF May 2012 regulations have to be dealt with before December. The resolution of Longtop will tell the tail. If the SEC is not satisfied, then how Standard Water resolves is the bell weather case for Hong Kong.
The difference between Dr. Gillis’ and my assessment might be location. He is in northern China far removed from the influences of Shanghai and Hong Kong. I am in southern China where the activities of Shanghai and Hong Kong are immediately felt. If the Chinese acknowledge this difference, high noses should also.