Bloomberg News

SEC-Deloitte Agreement Spurs Rally Led by Baidu: China Overnight

January 28, 2014

Chinese stocks trading in New York rebounded as an accord between U.S. regulators and Deloitte Touche Tohmatsu CPA Ltd. damped concern that a ban on the Asian nations’ accounting firms would delay earnings reports.

The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. climbed 1.5 percent to 98.73 in New York, after plunging 6.6 percent in the previous three days. Baidu Inc. (BIDU:US), China’s biggest web search engine, rose the most in a month and online bookseller E-Commerce China Dangdang Inc. (DANG:US) jumped 8.7 percent. TAL Education Group (XRS:US) surged 15 percent, the most since 2011.

Deloitte Touche Tohmatsu and the Securities and Exchange Commission agreed to end a lawsuit related to the China-based firm’s audits of Longtop Financial Technologies Ltd, according to a Jan. 27 filing. Chinese stocks plunged last week after the SEC barred local affiliates of the four largest accounting firms from conducting audits, sparking concern that the companies wouldn’t be able to produce their earnings reports in time to meet U.S. listing requirements.

“The market overreacted to the original deal, because I don’t think the worst scenario was likely to take place, that firms wouldn’t have been able to file their annual reports,” Greg Lesko, who oversees $800 million in assets as managing director at Deltec Asset Management LLC, said by phone from New York yesterday. “China Internet stocks in particular have been very popular; it’s been a very exciting space. It’s an area that has clear growth, which is difficult to find these days.”

Deloitte Agreement

The iShares China Large-Cap ETF (FXI:US), the largest Chinese exchange-traded fund in the U.S., added 1.1 percent to $34.55. The Standard & Poor’s 500 Index rose 0.6 percent as earnings at companies from Pfizer Inc. to D.R. Horton Inc. topped estimates and consumer confidence increased ahead of a Federal Reserve policy meeting.

The firms receiving six-month bans are Deloitte Touche Tohmatsu, an affiliate of New York-based Deloitte & Touche LLP, Ernst & Young Hua Ming LLP, KPMG Huazhen and PricewaterhouseCoopers Zhong Tian CPAs Ltd. If finalized, the ruling by U.S. Administrative Law Judge Cameron Elliot could impact the 425 Chinese companies with market capitalization of $185 billion traded in New York.

Deloitte will provide work papers related to Longtop to China’s securities regulator when thee documents will be requested, according to the agreement dated Jan. 27 and filed in federal court in Washington. The SEC said it received a “substantial volume” of documents related to Longtop from China’s securities regulator. The U.S. agency has deregistered more than 60 China-based issuers, including Longtop, which the SEC says defrauded investors of $1 billion.

‘Key Milestone’

JPMorgan Chase & Co. said the agreement was a “key milestone” in the resolution of the accounting dispute in a research note published yesterday.

“We view the event as a positive development for the China ADRs accounting issue,” wrote Alex Yao, a Hong Kong-based analyst for JPMorgan. “We expect an accelerated recovery of sector share prices from the recent pull-back.”

American depositary receipts of Baidu, based in Beijing, added 3.5 percent to $164.24 in the biggest gain since Dec. 27. They had tumbled 9 percent in the previous three days.

Morgan Stanley said in a note yesterday that the Deloitte agreement offered “buying opportunities” on certain Chinese Internet stocks including Baidu and Dangdang.

Dangdang, based in Beijing, surged to $9.61 after sinking 20 percent in the previous three days. TAL, a tutoring service provider, jumped to $24.41, its biggest advance since July 2011.

The Hang Seng China Enterprises Index (HSCEI) in Hong Kong slipped 0.3 percent to 9,763.97,the lowest since August, while the Shanghai Composite (SHCOMP) climbed 0.3 percent to 2,038.51.

To contact the reporter on this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net

To contact the editor responsible for this story: Tal Barak Harif at tbarak@bloomberg.net


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Companies Mentioned

  • BIDU
    (Baidu Inc)
    • $223.79 USD
    • 4.71
    • 2.1%
  • DANG
    (E-Commerce China Dangdang Inc)
    • $12.94 USD
    • 0.12
    • 0.9%
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