New Delhi: Beijing and Washington signed a deal allowing US authorities to inspect accounting firms in China and Hong Kong, which was a significant step toward resolving a disagreement that threatened to ban Chinese companies, including Alibaba, from US stock exchanges.
Since more than a decade, US regulators have wanted access to the audit records of Chinese companies that are listed on US exchanges, but Beijing has been reluctant to allow foreign regulators to check out its accounting firms due to national security concerns.
The agreement, which comes as a relief to hundreds of Chinese businesses, investors, and US exchanges, signals a partial thawing in US-China relations amid tensions over Taiwan. If it goes through as planned, China will have the opportunity to continue accessing the deepest capital markets in the world.
Gary Gensler, the chair of the US Securities and Exchange Commission (SEC), warned that 200 Chinese companies would face a ban from US markets in the absence of this. Alibaba Group, JD.Com Inc., and NIO INC. were among entities previously named by the government as being at danger.
When announcing the agreement, US officials were circumspect, stressing that it was only the beginning and that their assessment of China's compliance would depend on whether they could carry out their inspections without interference, as the agreement provides.
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However, Gensler cautioned, "The evidence will be in the pudding. "This agreement will only have value if the PCAOB can actually inspect and thoroughly investigate audit companies in China."
The Public Company Accounting Oversight Board (PCAOB), which is responsible for supervising the audits of US-listed companies, claimed that despite this, it was the most comprehensive agreement that the regulator had ever reached with China.
The agreement, according to the China Securities Regulatory Commission (CSRC), benefited investors, businesses, and both nations while also being a significant step toward resolving the auditing issue.
In theory, the agreement appears to grant the PCAOB what it has long requested, including complete access to Chinese audit working papers with no redactions, the opportunity to interview employees of audit organizations in China, and complete control over which businesses it inspects.
The selected companies were informed on Friday morning, according to US authorities, and they anticipate arriving in Hong Kong, where the inspections will take place, by mid-September.
NEEDS FOR REGULATION
The long-running dispute was finally resolved in 2020 after the US passed the Holding Foreign Companies Accountable Act, which required the SEC to be more aggressive with Chinese companies listed on US exchanges. In December, the SEC published the final regulations for the law, which set the deadline for possible delistings of Chinese companies.
Republican US Senator John Kennedy, a main creator of the 2020 law, said in a statement on Friday that "we have to hold China to the same standards as every other corporation and every other country that listings on American exchanges."
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By early 2024, according to US regulations, China's corporations might be banned from US exchanges if they are found to be in violation, though that deadline could be pushed back. If the inspections are hindered, Chinese companies still risk delisting, according to Gensler.
According to officials, the PCAOB and SEC anticipate making a decision regarding China's compliance by the end of the year.
"This is seen as a successful initial step. However, not everything has yet been decided "Samuel Siew, a market expert at CGS-CIMB, remarked
Before succumbing to the widespread sell-off on Wall Street due to concerns over Federal Reserve rate hikes, major Chinese businesses listed in the United States surged in premarket trade, with Alibaba up 2.6%, Pinduoduo up nearly 6%, and Baidu Inc. up 3.3%.
According to the SEC, the market capitalization of US issuers with operations in China currently ranges from $1 trillion to $2 trillion.
According to Lynn Martin, president of the New York Stock Exchange, "this agreement is a major development for the global economy and our US capital markets, which remain preeminent partly because of their ability to balance investor protections and access to the world's leading corporations."
The other significant US exchange, Nasdaq, declined to comment.
CHALLENGES TO COME
The inspections will be carried out in Hong Kong due to stringent COVID-related limitations in China, according to PCAOB officials, with the option of moving to the mainland in the future.
According to a previous story from Reuters, Beijing has instructed several US-listed Chinese companies and their auditors to get ready to move their audit records and personnel to Hong Kong.
Although there were still difficulties, according to Kai Zhan, senior counsel at the Chinese legal firm Yuanda, the deal shows "both sides have strong wills to solve" the conflict.
Despite Sino-US antagonism, cooperation hasn't entirely collapsed, according to Zhan, an expert in topics including finance markets and US sanction compliance.
There is still uncertainty because there may easily be disagreements on some technical matters during implementation.