U.S.-China Audit Deal in the Works, Though Potential for Delisting Remains

Despite a preliminary agreement that would permit U.S. officials to review audit documents of Chinese companies that trade in the States, Goldman Sachs Group Inc. analysts say a 50% chance of delisting those businesses still exists. The expectation for delisting was 95% in March.

The potential deal is welcome news, as Beijing and Washington have been butting heads over the audits for decades. The agreement would permit inspectors from the Public Company Accounting Oversight Board to access audit work papers and personnel documents and keep the stocks trading. A 2020 law prohibited companies from trading on American stock exchanges if they didn’t reveal such documents.

If the agreement comes to fruition, U.S.-listed Chinese companies and the MSCI China Index may see valuation gains of 11% and 5%, respectively, Goldman Sachs said. If the deal fails, Goldman estimates a 13% loss for American Depositary Receipts and a 6% downside for MSCI’s China gauge.

U.S.-China tensions remain more broadly, with concerns about China’s mixed corporate earnings, according to Fortune. Investors suspect Beijing’s tech crackdown has ended, but still see shares reacting to small regulatory developments and believe firms will continue to want to list in Hong Kong.

“Although the audit inspection agreement may reduce the risks of broad-based delisting, it doesn’t alter our view that the uncertainty around U.S.-China tensions across key strategic domains — trade, technology, capital markets, and geopolitics — would continue to motivate Chinese ADRs to diversify their listing risk away from the U.S.,” the Goldman Sachs strategists told Fortune.

Chinese stocks rallied in the U.S. and Hong Kong in late August upon news of the possible deal.