U.S. and China strike landmark audit deal for Chinese tech firms


  • Washington and Beijing sign first audit agreement
  • U.S.-listed Chinese stocks initially rally to deal
  • Chinese regulator says deal is ‘an important step forward’

HONG KONG/WASHINGTON, Aug 26 (Reuters) – Beijing and Washington took a major step on Friday toward ending a dispute that threatened to drive Chinese companies, including Alibaba, from U.S. stock exchanges by signing a pact allowing U.S. regulators control accounting firms. in China and Hong Kong.

U.S. regulators have demanded access to U.S.-listed Chinese companies’ audit documents for more than a decade, but Beijing is reluctant to let foreign regulators inspect its accounting firms, citing national security concerns. Read more .

The deal marks a partial thaw in U.S.-China relations amid tensions over Taiwan and will relieve hundreds of Chinese companies, U.S. investors and exchanges, giving China an opportunity to retain market access in deepest capitals in the world if it works in practice. . Read more

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Otherwise, some 200 Chinese companies could be banned from US stock exchanges, said US Securities and Exchange Commission (SEC) Chairman Gary Gensler. The agency previously identified Alibaba Group, JD.Com Inc and NIO INC among those at risk.

In announcing the deal, US officials issued a cautious note, warning that it was only a first step and that their opinion on China’s compliance would be determined by their ability to conduct their inspections without hindrance. , as the agreement promises.

“Make no mistake though: the proof will be in the pudding,” Gensler said. “This deal will only make sense if the PCAOB can actually fully inspect and investigate auditing firms in China.”

Still, the Public Company Accounting Oversight Board (PCAOB), which oversees audits of U.S.-listed companies, said it was the most detailed deal the regulator has ever struck with China.

The China Securities Regulatory Commission (CSRC) said the agreement is an important step towards resolving the audit issue and benefits investors, companies and both countries.

In principle, the agreement appears to give the PCAOB what it has long requested, namely full access to Chinese audit working papers without redactions, the right to take testimony from audit firm staff in China, and sole discretion to select the companies it inspects. . Read more

US officials said they informed the selected companies Friday morning and expect to land in Hong Kong, where the inspections will take place, by mid-September.

REGULATORY NEEDS

The long-running dispute came to a head in 2020 when the United States passed the Foreign Company Liability Act, which forced the SEC to get tough with Chinese companies listed in the United States. The SEC finalized enforcement rules in December, setting the clock ticking to potential delistings of Chinese companies.

“We need to hold China to the same standards as every other company and every other country listed on American stock exchanges,” Republican U.S. Senator John Kennedy, a key architect of the 2020 law, said on Friday.

US rules state that if China is found not to be compliant, its companies could be debarred from US exchanges by early 2024, but that deadline could be brought forward. Gensler said Chinese companies still face debarment if inspections are hampered.

The PCAOB and SEC plan to rule on China’s compliance by the end of the year, officials said.

“This is seen as a positive first step. However, things are not completely set in stone yet,” said Samuel Siew, market specialist at CGS-CIMB.

Major Chinese companies listed in the US rose in pre-market trading, with Alibaba up 2.6%, Pinduoduo (PDD.O) up nearly 6% and Baidu Inc up 3.3% , before succumbing to the broad sell-off on Wall Street on concerns about the Federal Reserve’s rate hike. Read more

Currently, China-based U.S. issuers have a combined market capitalization of between $1 trillion and $2 trillion, the SEC said.

“This agreement is an important development for the global economy and our U.S. capital markets, which remain preeminent in large part because of their ability to balance investor protection and access to leading global companies,” said Lynn Martin. , President of the New York Stock Exchange. A declaration.

Nasdaq, the other major US stock exchange, declined to comment.

FUTURE CHALLENGES

PCAOB officials said the inspections would be conducted in Hong Kong due to strict COVID-related restrictions in China, with the possibility of moving to the mainland in the future.

Reuters reported earlier that Beijing had asked some U.S.-listed Chinese companies and their auditors to prepare for the transfer of audit documents and personnel to Hong Kong. Read more

Kai Zhan, lead attorney at Chinese law firm Yuanda, said the agreement shows “both sides have a strong will to resolve” the dispute, although there are still challenges.

“Cooperation has not completely broken down despite the Sino-US rivalry,” said Zhan, who specializes in areas such as capital markets and compliance with US sanctions.

“In the implementation, the two sides could easily clash over some technical details, so uncertainty remains.”

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Reporting by Samuel Shen in Shanghai; Scott Murdoch, Xie Yu, Julie Zhu and Selena Li in Hong Kong, Michelle Price in Washington, Tom Westbrook in Singapore. Additional reporting by John McCrank; Editing by Tomasz Janowski, Kirsten Donovan

Our standards: The Thomson Reuters Trust Principles.

scott murdoch

Thomson Reuters

Scott Murdoch has been a journalist for over two decades and works for Thomson Reuters and News Corp in Australia. He has specialized in financial journalism for most of his career and covers equity and debt markets across Asia from Hong Kong.

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