UK to Relax Audit Rules to Attract Chinese Listings | FT
- The United Kingdom is seeking to attract listings from Chinese companies by potentially easing auditing rules, a move prompted by a government push to revitalize the City of...
- Currently, Chinese companies listing global depositary receipts (GDRs) in London are required to adhere to UK-approved auditing standards to ensure investor protection.
- The move comes as the UK attempts to bolster its equity markets, which have seen flagging activity compared to Wall Street.
The United Kingdom is seeking to attract listings from Chinese companies by potentially easing auditing rules, a move prompted by a government push to revitalize the City of London’s stock market. The Financial Reporting Council (FRC) launched a consultation on , proposing a temporary amendment to its “third country auditor” policy.
Currently, Chinese companies listing global depositary receipts (GDRs) in London are required to adhere to UK-approved auditing standards to ensure investor protection. The proposed change would allow Chinese-registered entities to utilize domestic auditing standards when offering GDRs. This adjustment aims to address what the FRC describes as a “perceived barrier” discouraging Chinese issuers from choosing London as a listing venue.
The move comes as the UK attempts to bolster its equity markets, which have seen flagging activity compared to Wall Street. Concerns over the waning attractiveness of the UK market for both companies and investors are driving the government’s efforts. The consultation follows a recent visit to Beijing by UK Prime Minister Sir Keir Starmer, where he signaled a desire to thaw relations with the world’s second-largest economy. “Engaging with China is how we secure growth for British businesses, support good jobs at home and protect our national security,” Starmer stated following his visit, advocating for an end to the “diplomatic ice age” with Beijing.
The proposal reflects a broader pattern of Western financial regulators grappling with the complexities of auditing Chinese companies. Historically, concerns have centered on restrictions to access documentation, a point of contention between Beijing and Washington during the Biden administration. The FRC acknowledged this history, noting that it previously concluded in that Chinese auditing standards were not equivalent to those used in the UK and that divergence may have increased since then.
The proposed amendment would initially apply to companies registered in China that are already listed on Stock Connect, a program established in to facilitate cross-border investment between the UK and Chinese markets. The FRC emphasized that the change is narrowly scoped, time-limited, and includes safeguards designed to maintain investor protection and market integrity while a longer-term legislative solution is sought.
The government requested the consultation, seeking to remove obstacles for Chinese companies considering a London listing. The FRC stated that allowing the use of Chinese auditing standards temporarily would “encourage eligible Chinese registered entities to list on the London Stock Exchange.”
However, the move is not without precedent or risk. Past accounting scandals involving US-listed Chinese companies, such as Luckin Coffee, which was fined $180mn in for misstating financial results, serve as a cautionary tale. Similarly, a wave of delistings and suspensions from the New York Stock Exchange occurred in and following instances of fraud and accounting irregularities linked to Chinese companies utilizing reverse-merger listings to bypass traditional IPO scrutiny.
The FRC’s consultation comes after hopes for a London listing of the online fast-fashion retailer Shein were dashed last year. The Chinese-founded company ultimately filed for an initial public offering (IPO) in Hong Kong after UK and Chinese regulators failed to reach an agreement on the wording of risk disclosures in its prospectus. This highlights the ongoing challenges in navigating regulatory differences and ensuring transparency for cross-border listings.
The regulator is now seeking feedback on whether the proposed changes appropriately balance the need to foster economic growth with the imperative of maintaining audit quality. The consultation period will be crucial in determining whether the UK can successfully attract Chinese listings while safeguarding the integrity of its financial markets. The FRC’s warning that Chinese auditing standards may have diverged further from UK standards since underscores the need for careful consideration and robust safeguards.