The UK accounting regulator is exploring potential modifications to its stringent auditing regulations in a bid to attract more Chinese companies to list in London. This initiative, proposed by the Financial Reporting Council (FRC), comes as part of a broader government effort to revitalize the UK’s struggling stock market.
The proposed changes would allow Chinese-registered entities to utilize domestic auditing standards when issuing global depositary receipts (GDRs) in London. GDRs are a financial instrument permitting investors to buy shares in foreign companies. Currently, Chinese firms must adhere to UK-approved auditing standards when seeking to raise funds via GDRs in London, an expectation perceived as a barrier deterring some issuers.
This review of auditing rules coincides with heightened concern regarding the dwindling appeal of UK equity markets compared to those in the United States. For years, Western regulators have faced challenges in managing Chinese audits, largely due to issues surrounding access to necessary documentation, a contentious point in the ongoing tensions between Beijing and Washington noted during the Biden administration.
In launching a consultation on its “third country auditor” policy, the FRC aims to create a more welcoming environment for Chinese firms, especially following Prime Minister Sir Keir Starmer’s recent trip to Beijing, which sought to improve relations with China. Starmer emphasized that engaging with China is crucial for fostering growth in British businesses, supporting domestic employment, and safeguarding national security.
Despite previous optimism about Chinese companies like the online fast-fashion retailer Shein potentially listing in London, those hopes were dashed last year when talks between UK and Chinese regulators failed to reach an agreement on the language to be included in Shein’s risk disclosure documents.
The FRC stated that allowing the temporary use of Chinese auditing standards could significantly encourage eligible entities from China to seek listings on the London Stock Exchange. The proposal is said to be limited in scope and time, equipped with safeguards aimed at maintaining both investor protection and market integrity while a more enduring legislative solution is pursued.
Specifically, the changes would apply to Chinese companies that are already listed on Stock Connect – a framework established to facilitate capital flow between the UK and Chinese markets. The FRC positioned this proposed amendment as a strategic move aligned with the government’s objectives to bolster economic growth and enhance the competitive stature of the London market.
However, the FRC also noted previous findings highlighting the lack of equivalency between Chinese auditing standards and those employed in the UK, signaling that this gap could widen over time. The regulator pointed to past controversies involving several US-listed Chinese firms, such as Luckin Coffee, which faced significant penalties for revenue misstatements, and instances of Chinese companies being delisted from US exchanges due to fraud allegations.
In light of these historical issues, the FRC’s approach balances the urgency of fostering economic growth with the necessity of preserving audit quality and investor trust in the UK market.
