A Chinese flag flied in front of buildings in Pudong’s Lujiazui Financial District in Shanghai on Oct. 17, 2022.

A Chinese flag flied in front of buildings in Pudong’s Lujiazui Financial District in Shanghai on Oct. 17, 2022. (Qilai Shen/Bloomberg)

U.S. audit officials completed their first on-site inspection round of Chinese companies ahead of schedule, according to people familiar with the matter, a sign of progress in the closely watched process to prevent the delisting of hundreds of stocks from Alibaba Group Holding to Yum China Holdings.

Dozens of U.S. Public Company Accounting Oversight Board inspectors are set to leave Hong Kong as soon as this weekend, earlier than the original schedule of mid-November, said the people, who asked not to be identified because the information is private. The work has progressed despite requests from Chinese counterparts to redact certain information, the people added.

Chinese stocks in Hong Kong rallied as much as 8.5% on Friday, building on a 3.2% gain in the Nasdaq Golden Dragon China Index in New York. The offshore yuan rose more than 1%, tracking the equity gains. Shares of Alibaba surged as much as 21% in Hong Kong while Meituan and Tencent Holdings Ltd both up more than 10%.

"If the U.S.-China audit woes are resolved, indeed it will be a positive for stocks, especially ADRs and tech," said Hao Hong, a partner at Grow Investment Group. "This is the reason why they are doing well, despite a Hawkish Fed and plunging U.S. stocks. The market often buys on hopes and sells on news."

Still, it's too early to determine whether Chinese firms will pass muster. PCAOB may file an initial report on key findings over the coming weeks, which could point out deficiencies or room for improvements in areas such as internal controls and record keeping, said the people.

The inspection got off to a tense start in September as Chinese officials asked to black out names, addresses and salary levels in company documents, people familiar with the matter have said. The U.S. has said it will determine if the Chinese presence has hindered their access to audit papers and personnel, emphasizing they must have full access to documents without redactions.

A PCAOB spokesperson didn't respond to an email sent outside U.S. office hours. The China Securities Regulatory Commission didn't immediately respond to a request for a comment.

Officials of the CSRC and the PCAOB will continue online communications after on-site check was completed, one of the people said.

Audit inspections of publicly traded firms in the U.S. were mandated by law in 2002, but China had long denied giving full access despite there being hundreds of listed Chinese firms worth more than a $1 trillion combined. The U.S. ratcheted up pressure with a new law in 2020 that threatened delistings, which forced a rare compromise by Beijing after years of insisting that allowing access to working papers could harm national security.

Still, the standoff has already had an impact. Two weeks before August's agreement, five major state-owned firms, including China Life Insurance Co. and PetroChina Co., said they would delist, while ride-hailing giant Didi Global Inc. was forced to delist amid pressure from Chinese regulators who feared the firm's vast troves of data would be exposed to foreign powers. Alibaba has said it would seek a primary listing in Hong Kong to hedge against the threat of getting kicked out of New York.

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