Can an audit deal soften up two superpowers?

Washington and Beijing reached a landmark agreement on Friday that, if it holds, would allow U.S. regulators to vet the audits of Chinese companies that are listed on American exchanges, potentially allowing around 200 firms like Alibaba to stay on Wall Street.

The Public Company Accounting Oversight Board (PCAOB) — a Washington, D.C.–based nonprofit corporation created in 2002 to oversee the audits of public companies to protect investors — said that the deal was “an important step” and “the most detailed agreement the regulator has ever reached with the China Securities Regulatory Commission (CSRC),” per Reuters. PCAOB inspectors could be in Hong Kong by mid-September to begin inspections, the agency said.

• Under the agreement, PCAOB inspectors would have independent discretion to inspect any Chinese company audit, get direct access to interview all personnel of those audit firms, and view complete audit work papers with no redactions.
• “There are no special arrangements with China. We are not providing them anything we don’t provide [other countries around the world],” PCAOB Chair Erica Williams told Bloomberg.
• “Make no mistake, though: The proof will be in the pudding,” said Securities and Exchange Commission Chairman Gary Gensler. “This agreement will be meaningful only if the PCAOB actually can inspect and investigate completely audit firms in China.”
• State-run media outlet the Global Times stated in an op-ed that the agreement was a “symbolic case of China-U.S. cooperation,” but separately quoted Chinese analysts’ reservations that it was not a “‘once-for-all’ antidote.”

The preliminary deal may bring to an end a decades-long dispute between Washington and Beijing, and bring relief for Chinese firms listed in the United States. China and Hong Kong have remained as the only two jurisdictions that have refused to allow PCAOB inspections, citing national security and confidentiality concerns, but they have been under greater pressure since Congress passed legislation in 2020 that threatened to kick companies out of U.S. exchanges by 2024 if they refused to comply.

• U.S. shares from Chinese companies, known as American depositary receipts (ADRs), buoyed up immediately after news of the deal was released.

But some doubt that the rare compromise will thaw icy relations between the United States and China, especially as tensions ratchet up over the fallout of U.S. House Speaker Nancy Pelosi’s controversial visit to Taiwan earlier in August.

• “The real meaning of it will require some time to see if the access and the process and the real review of auditing trails can be done in the way that satisfies the requirements of U.S. law,” Hung Tran, a senior fellow at the Atlantic Council, said per Reuters.
• “Both sides are writing for their own citizens and trying to position it as a win…But the significance of the agreement is that the U.S. [and] China can actually work on something together despite all that hostility hovering in the background,” said tech analyst Rui Ma in reference to an op-ed published (in Chinese) by Caixin.

The deal may also come too late to stop some Chinese companies from departing Wall Street:

• Five Chinese state-owned companies — Sinopec, China Life Insurance, Aluminum Corporation of China (Chalco), PetroChina, and Sinopec Shanghai Petrochemical (a separate Sinopec entity) — announced that they will voluntarily delist from the New York Stock Exchange two weeks ago.
• Last month, Chinese tech giant Alibaba announced that it will apply for a dual primary listing in Hong Kong, potentially signaling the start of a new gold rush as Chinese firms seek mainland funds amid the looming risk of being booted from the U.S.