Beijing and Washington on Friday took a major step toward ending a dispute that has threatened to push Chinese companies, including Alibaba, off U.S. stock exchanges by signing a pact that allows U.S. regulators to audit accounting firms in China and Hong Kong.

US regulators have demanded access to audit documents of US-listed Chinese companies for more than a decade, but Beijing has been reluctant to allow foreign regulators to audit its accounting firms, citing national security concerns.

The deal marks a partial warming in US-China relations amid tensions over Taiwan and will be a relief for hundreds of Chinese companies, investors and US exchanges, giving China the chance to retain access to the world’s deepest capital markets if it works in practice. .

Otherwise, about 200 Chinese companies could be banned from US exchanges, said the chairman of the US Securities and Exchange Commission (SEC) Gary Gensler. The agency previously identified Alibaba Group, JD.Com Inc and NIO INC among the risk groups.

U.S. officials struck a note of caution in announcing the deal, warning that it was only the first step and that their view of China’s compliance would be determined by whether it could carry out its inspections without hindrance, as promised in the deal.

“But make no mistake: the proof will be in the pudding,” Gensler said. “This agreement will only make sense if the PCAOB can actually inspect and fully investigate audit firms in China.”

However, the Public Company Accounting Oversight Board (PCAOB), which oversees audits of US-listed companies, said it was the most detailed agreement the regulator had ever reached with China.

The China Securities Regulatory Commission (CSRC) said the agreement was an important step towards solving the audit problem and benefited investors, companies and both countries.

Basically, the deal appears to give the PCAOB what it has long demanded, namely full access to Chinese audit working papers without redactions, the right to take testimony from the audit firm’s employees in China and the right to choose the companies it audits. .

US officials said they notified the selected companies on Friday morning and plan to land in Hong Kong, where inspections will take place, by mid-September.

REGULATORY REQUIREMENTS

The long-running dispute came to a head in 2020 when the United States passed the Foreign Companies Accountability Act, which forced the SEC to crack down on US-listed Chinese companies. The SEC finalized the rules for applying the law in December, starting a countdown to potential delistings of Chinese companies.

“We should hold China to the same standards as every other company and every other country listed on American exchanges,” Republican U.S. Sen. John Kennedy, a key architect of the 2020 law, said on Friday.

U.S. rules stipulate that if China fails to comply, its companies could be delisted from U.S. exchanges by early 2024, but that deadline could be pushed back. Gensler said Chinese companies still face delisting if the inspections get in the way.

The PCAOB and SEC plan to rule on China’s compliance by the end of the year, officials said.

“This is seen as a positive first step. However, things are still not completely set in stone,” said Samuel Sue, market specialist at CGS-CIMB.

Major U.S.-listed Chinese companies rose in early trade, with Alibaba up 2.6%, Pinduoduo ( PDD.O ) up nearly 6% and Baidu Inc up 3.3% before succumbing to a broad sell-off on Wall Street due to concerns about the Federal Reserve rate hike.

Chinese U.S. issuers currently have a combined market capitalization of $1 trillion to $2 trillion, according to the SEC.

“This agreement is an important development for the global economy and our U.S. capital markets, which remain premier largely because of their ability to balance investor protection and access to the world’s leading companies,” said Lynn Martin, president of the New York Stock Exchange. statement.

Nasdaq, the other major US exchange, declined to comment.

CHALLENGES AHEAD

PCAOB officials said inspections will be conducted in Hong Kong due to China’s strict COVID-related restrictions, with the possibility of a move to the mainland in the future.

Reuters previously reported that Beijing had ordered some Chinese firms and their auditors to prepare to transfer audit documents and personnel to Hong Kong.

Kai Zhang, senior counsel at Chinese law firm Yuanda, said the agreement shows that “both sides have a strong will to resolve” the dispute, although challenges still exist.

“Cooperation has not completely stopped despite the Sino-US rivalry,” said Zhang, who specializes in areas such as capital markets and US sanctions enforcement.

“In implementation, both sides could easily run into some technicalities, so uncertainty remains.”

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