China, US reach audit agreement in major breakthrough

China and the US have reached a longstalled agreement on the year-long audit dispute for listed companies, based on the principles of equality and reciprocity and respecting each other’s laws, the Chinese securities regulator announced on Friday, marking a significant breakthrough in bilateral auditing cooperation that partially helps to clear delisting clouds hanging over 280 Chinese companies listed in the US.

Some investors hailed the preliminary agreement as a partial reconciliation between the Chinese and US sides and a thaw in downward spiraling bilateral relations. Such optimistic sentiment was reflected by a bull run for US-listed Chinese companies at the opening of the Friday trading session in the US.

But some Chinese observers also warned that the deal does not equate to a “once-for-all” antidote, given the deep political undertone of the US audit law that specially targets China, and Washington’s maximum pressure approach to keep putting Chinese firms on a list of potential bans since the end of last year.

As more New York-listed Chinese companies embarked on a homecoming trend amid the US’ deeply politicized environment, the US could attempt to save its reputation and market status by speaking loudly of the deal, observers said, while warning of further US malicious full-scope decoupling moves to contain China, and the readiness of Beijing to be physically and mentally prepared for the worst-case scenario.

“The signing of the agreement marks a key step for the two sides to strengthen cooperation to solve the audit supervision, which is in line with market expectations,” the China Securities Regulatory Commission (CSRC) said in a statement posted on its website on Friday.

It noted that if the subsequent cooperation can meet the respective regulators’ needs, it is expected to solve the audit inspections issue of Chinese stocks

listed in the US and avoid passive delisting from the US.

News of the agreement was a boon for US-listed companies, fueling an across-the-board rally after relevant news emerged on Wednesday.

NASDAQ Golden Dragon China Index surged 3.5 percent on Friday opening despite an overall gloomy performance of major US indexes. Shares of iQiyi Inc were up more than 2.77 percent. Shares of JD.com were up 0.34 percent. The US-listed shares of Tencent Music Entertainment Group surged 4.42 percent.

According to the CSRC, the cooperation agreement has three important aspects: the first is equality, as the terms apply to both sides, allowing both China and the US to conduct inspections and investigations into the accounting offices of their jurisdiction, and the one being asked shall provide abundant assistance within the legally permitted scope.

Second, the agreement also stipulates the scope of cooperation, under which Chinese assistance includes inspection into relevant audit firms, which also include some Hong Kong audit firms that provide audit services to US-listed Chinese firms that have papers stored in the Chinese mainland.

Third, the US needs to acquire documents including audit papers through Chinese regulators, and conduct interviews and inquiries with the participation and assistance of the Chinese side. The US cannot enter the border alone, or conduct investigations and obtain evidence against Chinese accounting firms. This is in line with Chinese securities law.

Maximum protection

“It is vitally important to acknowledge that the cooperation is based on the principle of equality, abiding by Chinese laws, and it is in line with international norms, which means both the interests of China and the US are guaranteed to the utmost,” Dong Dengxin, director of the Finance and Securities Institute of the Wuhan University of Science and Technology, told the Global Times on Friday.

Facilitating cross-border audit supervision cooperation and maintaining the openness of channels through which firms are listed abroad is beneficial to the capital markets in both countries, listed firms and global investors, and is a win-win choice, the CSRC said.

Chen Da, chief advisor with Shanghai-based HHSC Capital, told the Global Times on Friday that he believes the result, after an extended period of negotiations despite the inconvenience of international travel during the COVID-19 pandemic, comes from reconciliation from both the Chinese and the US sides.