American and Chinese financial regulators said Friday that they had reached an agreement to allow accounting firms in China to share more information with American regulators about the finances of Chinese companies listed on U.S. stock exchanges.
The agreement is a potentially big step toward resolving a conflict that had appeared likely to force some of China’s largest companies to leave American stock exchanges in the coming years.
Wall Street leaders had been strongly opposed to pushing Chinese companies out of American financial markets, and the exclusion of big Chinese companies from access to American markets, the world’s largest and deepest markets for accessing global investment, also would have been a setback for China.
Officials in Beijing are struggling to manage a sharply slowing economy as the country’s real estate market falters and consumers curtail spending in response to lockdowns and other measures taken to stop the spread of Covid-19. Those worries appear to have resulted in a new willingness by Chinese leaders to compromise on sharing more financial information about their companies, despite abiding concerns that China’s national security not be undermined by providing too much information to the United States.
American officials remained wary on Friday about whether the agreement would actually resolve the two countries’ many differences over whether China has provided adequate access to audits of its companies.
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Erica Y. Williams, the chair of the Public Company Accounting Oversight Board, said in a statement that her board had signed an agreement with the China Securities Regulatory Commission and Ministry of Finance that would be “the first step toward opening access” to inspect and investigate public accounting firms that were registered in mainland China and Hong Kong. She said that she had directed her team to prepare to begin the inspections by mid-September.
On paper, the agreement would give U.S. officials complete access to audit work papers, audit personnel and other information, with no loopholes or exceptions. However, she added, “now we will find out whether those promises hold up.”
A series of questions and answers released by the China Securities Regulatory Commission on Friday emphasized that more audit information would be shared in Hong Kong. Mainland China regained sovereignty over Hong Kong from Britain in 1997, and has greatly tightened control over the territory in the past two years following the imposition of stringent national security legislation and the detention of many democracy advocates.
The questions and answers were cautiously optimistic that the pact on Friday would allow Chinese companies to continue to be traded on American exchanges.
“If the follow-up cooperation can meet their respective regulatory needs, it is expected to solve the audit supervision problem of Chinese concept stocks, thereby avoiding passive delisting from the United States,” one of the answers said. “We look forward to actively promoting cooperation with the U.S. regulatory authorities in a professional and pragmatic manner and working together to achieve positive results.”
More than 200 Chinese companies are now listed on American stock exchanges. More than 30 accounting firms in China are now registered with the Public Company Accounting Oversight Board in the United States. The agreement on Friday represents a laboriously negotiated agreement on the extent to which accounting firms would share the details of their audits with American regulators.
The U.S. Congress has passed legislation that would ban the trading in securities of Chinese companies that did not give U.S. auditors access to their finances. Under the current law, if a company’s finances remain inaccessible to U.S. auditors for three consecutive years, the Securities and Exchange Commission is required to prohibit the company’s stocks from being traded on any U.S. exchange, including over-the-counter trading.