Our note earlier today with 22V’s Washington Policy Research team previewed positive news on the US-China audit dispute and worsening tensions in other areas, including technology competition (please see US-CHINA: Delisting risks are falling, but broader tensions remain high, 15 December). After we published, US agencies made announcements that confirmed both expectations.
Audits:
The Public Company Accounting Oversight Board (PCAOB) issued a statement that the agency received “complete access” to inspect and investigate Chinese and Hong Kong audit firms during recently concluded pilot programs. It added that the agency’s Board voted today to vacate its previous determination that China and Hong Kong had not provided the necessary access – effectively saying that China is now compliant with the requirements of the Holding Foreign Companies Accountable Act (HFCAA).
This development will stop, and probably soon reset, the three-year deadline for China and HK to comply with the HFCAA or see all Chinese firms delisted from US exchanges beginning in early 2024. It still isn’t clear to us when exactly that resetting of the timeline becomes official: immediately or as US-listed Chinese companies file their annual reports in calendar year 2023.
The PCAOB statement cautions that this is the beginning and not the end of the PCAOB’s work, and that the agency plans a further round of inspections in early 2023. It is possible that audit cooperation could break down in the future, in which case the march to delisting would resume. Still, those risks are much lower today. On the whole the PCAOB’s statement was quite positive in tone, suggesting that after a breakthrough agreement in August, paving the way for the pilot inspections, regulatory cooperation is off to a smooth start.
Technology controls:
As the FT and other media had scooped, the Biden administration imposed export controls on 36 Chinese entities (see link here to the notice in the Federal Register). This follows, and builds on, sweeping controls on China’s access to advanced semiconductor technology in October.
Some highlights:
- Commerce added Yangtze Memory Technologies Co. (YMTC), China’s largest memory chip maker, to the “entity list,” meaning US exports need a license from Commerce to sell to the company. Only a few weeks ago it looked like YMTC might escape this move, but the Biden administration appears to have acted on fears that YMTC is diverting tech to Huawei. The full impact of the move depends on licensing decisions, but it will be a big blow to one of China’s key domestic chipmakers. Another company added is Shanghai Micro Electronics Equipment (SMEE), China’s leading lithography company, for diversion of controlled technology to the military.
- Commerce also applied the foreign direct product rule (FDPR) to several key AI and chip companies, such as chip designer Cambricon Technologies. This is even more devastating than the entity list as it effectively restricts even non-US companies, such as Taiwan’s TSMC, from selling to those firms. The FDPR was initially used against Huawei but has become more of a staple for the US as it looks to tighten the noose on China’s AI and supercomputing sectors.
It is worth emphasizing how dramatic recent moves have been: since October, the Biden administration has moved into a stance of explicitly seeking to contain China’s development in chips and AI, in particular. Beijing lacks few attractive tools to directly retaliate without harming China’s own interests – particularly amid a still fragile economic environment – but these actions are very difficult for the leadership to take lying down. At the very least they further intensify Xi’s determination to reduce reliance on the US in critical areas of technology. They also underscore that while Xi and Biden are seeking to maintain “guard rails” that prevent an acute crisis, the underlying dynamics in the rivalry remain intense.
