As the U.S. Securities and Exchange Commission (SEC) presses Chinese companies to comply with U.S. requirements when they seek to list on a U.S. stock market, it remains unclear how China would handle its disagreements with the United States in this area, especially with regard to U.S. government access to Chinese companies’ audit books. Without a resolution to the issue soon, we may see Chinese companies, including Alibaba and Baidu, delist from the U.S. stock market, although the details have not been finalized.

The Chinese government seems to be sending out positive signals that the issue could be resolved. After the initial response from the China Securities Regulatory Commission (CSRC) that “strengthening regulatory cooperation is an inevitable choice,” the CSRC reiterated (link in Chinese) in late August that one of the goals for work in the second half of this year is to “create favorable conditions to promote China-US audit supervision cooperation, enhance the communication of the markets, and stabilize policy expectations and institutional environment.”

This came during the recent mid-year working conference on August 20. The CSRC also stated that it would “unswervingly promote the institutional opening of the capital market.” It also said: “ [We should] balance development and security, steadily introduce policies and measures to further expand the opening of the capital market, and actively strengthen regulatory capacity while remaining open,” according to an unofficial translation of the meeting record.  

Several days later, on August 23, China’s State Council issued the Opinions on Promoting the Healthy Development of the CPA Industry and Regulating Financial Auditing (国务院办公厅关于进一步规范财务审计秩序促进注册会计师行业健康发展的意见) (link in Chinese). The document states that the agencies would “carry out cross-border cooperation on accounting audit supervision in accordance with laws and regulations, safeguard the security of national economic information and the legitimate rights and interests of enterprises, and enhance international credibility and influence.”

Some reports considered this a “strong signal” of China’s willingness to resolve the outstanding issues with the United States. But it is worth noting that the State Council document sets an overall goal of “effectively strengthening the supervision of accounting firms, curb financial fraud, and effectively playing the role of certified public accountants in auditing.” The document seems to have a heavy focus on regulating the accounting and auditing sector. Any international cooperation will have to serve the purpose of “safeguard[ing] the security of national economic information” as well as “the legitimate rights and interests of enterprises.”

China and the United States signed an MOU on audit document access in 2013 and started a trial inspection in 2016 and 2017, but they were not able to resolve the disagreement.

The SEC noted in 2018 that

The SEC and the PCAOB have sought constructive dialogues with Chinese officials and regulators over recent years, emphasizing the importance of investor protection and the quality of financial reporting and audit services.  Despite these efforts, we have not yet made satisfactory progress.  Our principal goal is to achieve a level of cooperation with the Chinese authorities that both (1) respects Chinese and U.S. sovereignty, and (2) enables the SEC and PCAOB to have timely access to the information necessary to conduct investigations or inspections.

During a CSRC press conference (link in Chinese) last year, the spokesperson said that the agency had been in contact with the PCAOB with regard to further cooperation. The CSRC reportedly (link in Chinese) sent another proposal to the PCAOB in August 2020.

Accounting disclosure is only one of the obstacles facing Chinese IPOs. Other issues include the required disclosure of the use of variable interests entities (VIEs) as well as the Chinese government’s tighter rules on data security. With regard to the latter issue, the Wall Street Journal recently reported that China is working on new rules to restrict Chinese companies from going public in the United States. In particular, it is reported that China will set up a new mechanism, in which companies with large amounts of sensitive data would have to obtain regulatory approval from a multi-agency committee in order to have a foreign listing. Before the rules are finalized, the CSRC has reportedly asked companies to halt overseas IPOs.

The new rules may be part of the CSRC carrying out the regulatory goals set by the State Council. Previously in July, China’s State Council issued a document (link in Chinese) to set goals to improve laws with regard to the capital market, especially to revise the regulations on confidentiality and file management related to the issuance and listing overseas.