Officials from the United States and China announced on Friday that they have reached an agreement that could allow Chinese accounting firms to share more financial information of Chinese companies listed in the US with US regulatory agencies.
This agreement is seen as a significant step towards resolving a conflict that could potentially lead to the delisting of some major Chinese companies from US stock exchanges starting in 2024. Wall Street executives have strongly opposed the exclusion of Chinese companies with a combined market value of $1.3 trillion. For China, the exclusion of major companies like Alibaba, Baidu, and Yum China from the US market would be a significant setback as the US offers the world’s largest market for global investments.
The long-standing dispute originated from regulations enacted in the US after the Enron accounting scandal in 2001, allowing regulatory agencies to review the financial audits of companies listed in the US from around the world. While the US and China reached an agreement on how to implement audit oversight in 2013, Chinese regulatory agencies have never fully opened up to US authorities, citing national security concerns. In 2020, Congress passed legislation that would require delisting a company if its full financial information is not made available to regulatory agencies within three years.
The newly announced agreement appears to reflect recent concerns among Beijing officials as China’s real estate market faces a downturn and consumers reduce spending due to lockdowns and measures to curb the spread of COVID-19. These concerns may have led Chinese leaders to make concessions in sharing more company financial information, although they have been cautious about not compromising China’s national security by providing too much information to the US.
Over 200 Chinese companies are listed on US stock exchanges, with more than 30 Chinese accounting firms registered with the Public Company Accounting Oversight Board (PCAOB), a non-profit organization established by Congress to oversee the audits of publicly traded companies. However, the Chinese government prohibits accounting firms from sharing certain financial information with the PCAOB. US regulatory agencies have been skeptical of China’s national security justifications, as they are able to inspect registered companies from over 50 other countries. In recent years, tensions in trade and geopolitics between the US and China have prompted some Chinese companies to voluntarily withdraw their plans for US listings and instead raise funds in Hong Kong or mainland China.
The agreement announced last Friday was reached after difficult negotiations on how accounting firms would share audit details with US regulatory agencies. Nonetheless, US officials remain concerned about whether this agreement will address the diverging views on whether China will provide sufficient audit access. Erika Williams, the Chair of the PCAOB, stated in a declaration that the organization has signed an agreement with the China Securities Regulatory Commission and the Ministry of Finance, which represents the “first step toward open access” for inspections and investigations of accounting firms registered in mainland China and Hong Kong. She mentioned that she has instructed her team to prepare for on-site inspections in Hong Kong starting in mid-September and complete the assessment of China’s compliance by the end of the year.
Williams stated that theoretically, this agreement will grant US officials full access to audit work papers, auditors, and other information without any loopholes or exceptions. However, she added, “We will see in the future whether these commitments are effective.”
An unnamed US government official, who spoke on the condition of anonymity, mentioned that inspections will begin in Hong Kong due to COVID-19 related measures but the agreement also provides the capability for inspections in mainland China.
A document released by the China Securities Regulatory Commission emphasized that more audit information sharing would take place in Hong Kong. Since China resumed sovereignty over Hong Kong from the UK in 1997, it has significantly strengthened control over Hong Kong in the past two years through the implementation of strict national security legislation and the detention of numerous pro-democracy advocates.
The statement from the Chinese regulatory commission expressed cautious optimism about the agreement, allowing Chinese companies to continue trading on US stock exchanges. The commission stated, “We look forward to actively promoting cooperation with US regulatory authorities in a professional and pragmatic manner and working together to achieve positive outcomes.”
Lynn Martin, the President of the New York Stock Exchange, described the agreement as a “significant development for the global economy and our US capital markets,” stating that the US capital markets maintain their excellence because they have the ability to balance investor protection and opportunities to invest in leading global companies.
Under US law, companies that fail to provide their financial status within three years face delisting, although many lawmakers support stricter provisions. Both houses of Congress have approved a provision to reduce this timeline to two years, which would mean that large Chinese enterprises could face trading restrictions starting in 2023, but this change has not yet become law.