China Securities Regulatory Commission (CSRC) in Beijing Photo:VCG

China and the US have reached a long-stalled agreement on the year-long audit dispute for listed companies, based on the principles of equality and reciprocity and abiding by 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. 

For example, while the agreement allows US securities authorities to inspect the audit papers of US-listed Chinese companies, such investigators need to be accompanied by the Chinese side. The Chinese securities authorities are also authorized to inspect the global auditing firms - some of which are from the US - that undertake Chinese firms' US IPO plans, and assess their work quality, Dong explained. 

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. 

It also laid a solid foundation for further fair and efficient cooperation in accordance with the legal and regulatory requirements of the two sides.

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.

"The result is actually a win-win outcome, and it avoided a lose-lose situation if the two sides continued to lock horns," Chen said. 

The CSRC said the cooperation framework coordinates openness with security, while also improving a mechanism to maintain information security. 

The deal also includes specific terms on how to handle and use certain pieces of sensitive information, and methods to address specific data such as personal information, which provide a viable roadmap for both sides to carry out legal supervision responsibility while protecting information security at the same time, according to the CRSC.

The agency stressed that wherever enterprises list, they're obligated to abide by the information and security laws of their home country. 

"In order to not violate Chinese laws such as information and privacy protection laws, some extremely confidential data and underlying enterprise data will not be included in the audit papers, further providing protection to Chinese companies," Dong said.

'The sword of Damocles' 

The deal came after the US Securities and Exchange Commission (SEC) added group after group of US-traded Chinese companies to a register for possible delisting since March, if no agreement was reached between the two countries' regulators on resolving their audit dispute.

As of August 7, a total of 162 US-traded Chinese companies, out of 280, had been put on the list. The threat of delisting in 2024 fueled a homecoming momentum of Chinese state-owned firms and internet titans including Alibaba and JD.com, either to the Chinese mainland or Hong Kong bourses.

In the latest move, five Chinese state-owned giants on August 12 separately announced plans to delist their American depository shares (ADS) from the New York Stock Exchange (NYSE).

Analysts said that for the US, its reputation as a highly inclusive exchange has received widespread skepticism and mockery, and the regulator must make efforts to avoid its reputation being tarnished. Also, closing the cooperation door is depriving US investors of the growth opportunity of the world's second-largest economy, a situation that the US does not want to risk. 

Dong said that the preliminary agreement, with some details still needing to be finalized, carries special weight in bilateral relations, but it's neither a truce nor a reversal in the US' overarching decoupling push from China, ranging from finance and the economy to industry chains.

"Chinese companies need to prepare for a more hostile financing environment in the US and Washington's further attempt to contain their rise," Dong warned. 

The CSRC, China's Ministry of Finance, and the US Public Company Accounting Oversight Board have maintained communication and consultation in the past 10 years, and tried multiple methods of cooperation, but they were unable to reach an acceptable and sustainable cooperation arrangement before the deal.  

Some observers compared the preliminary agreement to "the sword of Damocles," as Washington has shown no signs of stopping its drive to ramp up pressure on Beijing, both politically and economically. 

"Chinese companies need to prepare for a more hostile financing environment in the US and Washington's further attempt to contain their rise. Chinese authorities should also mull over preventive measures in advance," Dong warned. 

The CSRC said that in the past two decades, Chinese companies have actively sought overseas listings and taken advantage of foreign capital to develop. In return, they rewarded global investors. "Under the new development landscape, Chinese firms' global resource allocation won't stop, and the overall direction of using global capital markets won't change."

In the first half of this year, a number of Chinese companies including GEM, Gotion High-tech, Keda Industrial Group, and Ningbo Shanshan got listed in Europe, indicating that the US clampdown won't dampen China's enthusiasm for overseas listings.