US regulators have long demanded access to audit documents of Chinese companies listed in the United States, but Beijing has been reluctant to let foreign regulators inspect accounting firms, citing security concerns. The decision marks a major turnaround in US-China business relations and will come as a huge relief to hundreds of Chinese companies and investors who have invested billions of dollars in companies that have a chance to maintain access to the world’s deepest capital markets. As of Friday, 163 companies, including Alibaba ( BABA ), JD.com ( JD ) and Nio ( NIO ) had been identified by the US regulator as facing risks of being banned from trading for failing to comply with audit requirements. In a statement, the PCAOB said the agreement would allow it “sole discretion to select the companies, audit work and potential violations it inspects and investigates — without consultation with, or input from, Chinese authorities.” The US regulator added that its inspectors will be able to “view full audit work papers with all information included and the PCAOB to retain the information as required”. “The PCAOB has direct access to interview and take depositions from all personnel related to the audits the PCAOB inspects or investigates,” it said. The Securities Regulatory Commission (CSRC) said the deal was an important step towards addressing the issue of control. He added that keeping Chinese companies listed in the United States benefited investors, companies and both countries. The signing of the protocol between China and the United States signals that both sides have “taken a critical step to resolve the regulatory control issue of Chinese companies listed in the US through enhanced cooperation,” according to the CSRC statement. “It is in line with the hopes and expectations of the markets … if the cooperation then meets the regulatory needs of each side, there is hope that the control issue will be resolved and the passive write-off will be avoided.” Current U.S. rules stipulate that Chinese companies that do not comply with requests in the control working papers will be suspended from trading in the U.S. beginning in 2024, but that deadline may be extended. Securities and Exchange Commission (SEC) Chairman Gary Gensler said Chinese companies still faced delisting if US authorities could not access their accounts. “Make no mistake, though: The proof will be in the pudding,” he said. “This agreement will only make sense if the PCAOB can actually fully inspect and investigate audit firms in China.” Major Chinese companies listed in the United States rose in premarket trade, with Alibaba up 2.6 percent, Pinduoduo gaining nearly 6 percent and Baidu up 3.3 percent. “This is seen as a positive first step. However, things are not yet fully done as shown by the various sudden reversals in the past,” said Samuel Siew, market specialist at CGS-CIMB.
