Washington and Beijing are close to an agreement that would give US regulators access to audits of Chinese companies listed on US stock exchanges, a potential breakthrough in talks that have dragged on for more than a decade.
Bankers in Hong Kong were informed this week of a possible deal, according to acquaintances. US certificates pegged to shares in Chinese companies, including Baidu, JD.com and Pinduoduo, started trading higher on Tuesday, suggesting a resolution is in the works.
The US has demanded that Chinese companies and accountants disclose their financial audits every three years by the Public Company Accounting and Oversight Board, a watchdog for accountants, or be banned from listing on Wall Street.
But Beijing does not allow foreign regulators to inspect audits of Chinese companies, citing a desire to protect state secrets. This month, five Chinese state-owned companies said they would voluntarily delist from US stock exchanges before being ousted in 2024 as a result of the pending ban.
The prospect of avoiding massive withdrawals from Wall Street boosted US-listed Chinese stocks, with the Nasdaq Golden Dragons index of major Chinese technology groups traded in New York rising more than 6 percent on Thursday.
Additional information about the potential deal and the timing of an announcement was not available, but the PCAOB has said any agreement would include full US access to Chinese auditors.
The PCAOB declined to comment on Thursday.
The news was first reported by The Wall Street Journal and surprised some accounting professionals. But this year there were signs that the countries were working on a solution.
In May, a senior official at the Securities and Exchange Commission said in a speech that Chinese companies could try to protect state secrets by exiting US markets. This was followed this month by the announcement of voluntary delisting by companies such as PetroChina and China Life Insurance Company.
Taken together, these actions suggest that the U.S. has provided a way for Chinese officials to cooperate by removing certain state-secret companies from the scope of the PCAOB, said Paul Leder, a former head of the bureau for international affairs at the United Nations. SEC, which oversees the PCAOB.
“The fact that five companies affiliated with the Chinese government have taken that step” [to delist] indicates progress is being made on a deal that would give the PCAOB access to audit working papers in China and Hong Kong,” said Leder, now counsel at Miller & Chevalier. “[This] certainly suggests a deal with the PCAOB is in the works.”
Any agreement would be a first step to access Chinese audit documents, PCAOB chairman Erica Williams said.
“Our team needs to be able to go to China and test whether what’s on paper works in practice,” Williams said in a July speech.
An agreement would depend on cooperation between US and Chinese officials, said Lynn Turner, a former SEC chief accountant.
“Until we see the terms of the deal, it would be difficult to judge whether it will be a success or not,” he said.
Additional reporting by Hudson Lockett in Hong Kong
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