The Future of China-U.S. Financial Cooperation in the View of Cross-Border Listing Audit

The ideas on China’s future opening of the financial industry and the China-U.S. financial cooperation are tractable from the recent audit policies of Chinese companies’ overseas listings.

On April 2, the China Securities Regulatory Commission (CSRC) issued the “Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies (hereinafter referred to as the ‘Provisions’)”. The Provisions is now open to publicly soliciting comments for its revisions. According to the CSRC, to accommodate the new circumstances and developments concerning the overseas securities listing and offering in recent years, the revision has been intended to make some amendments primarily to the initial regulations.

Among the specific amendments include: First, “adding the Accounting Law of the People’s Republic of China, the Law of the People’s Republic of China on Certified Public Accountants and others as its superordinate laws and regulations”; Second, “expanding the scope to govern both direct and indirect overseas listing, as is consistent with the Draft Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies”; Third, “setting clear requirements on companies’ duty of information security by introducing clearer guidance to domestic companies, relevant securities companies and securities service providers on confidentiality and archives administration concerning overseas securities offering and listing within China”; Fourth, “laying a solid institutional foundation for secure and efficient cross-border regulatory cooperation and improving relevant arrangements”.

The person-in-charge of the CSRC mentions that “in compliance with Article 177 of the Securities Law, the revised Provisions stipulates that the overseas securities regulators or relevant competent authorities may request to investigate, including to collect evidence for investigation purpose or inspect Chinese companies that have been listed or offered securities in an overseas market, or securities service providers that undertake securities business for such domestic companies”. At the same time, by “referencing international common practice in cross-border audit oversight cooperation, the revised Provisions deletes the stipulation that on-site inspections shall be dominated by domestic regulators or depend on the conclusions of inspections by domestic regulators.”

The CSRC reveals that the revised Provisions stipulates a procedure that domestic Chinese companies shall undertake to provide confidential and sensitive information for maintaining national information security. The revised Provisions would be helpful for relevant regulatory authorities and overseas regulatory agencies to safely enhance cross-border regulatory cooperation activities including joint inspections, and jointly safeguard the rights and interests of global investors. The CSRC’s officials emphasize further that the domestic companies are free to determine their listing place on their own.

The revised Provisions cannot be taken as a single policy as it involves audit supervision authority of Chinese companies ensuing overseas listing. Among the main issues to be resolved are the willingness and means of both China and the United States to cooperate in audit supervision, which is the so-called “audit sovereignty”. In the past practice of Chinese-funded companies’ listing and financing in the United States, the matter has not been a great subject of concern to the two sides. Venture capital seeks money from the United States — VC and PE invest in Chinese enterprises — Chinese-funded companies go public in the U.S. capital market — investment institutions withdraw; this circulation is tacit for both sides. On the auditing process, China’s policies have not been literally opened to the United States, and the American regulatory authority has not been perturbed.

In recent years, however, with the tide of anti-globalization, principally under former U.S. President Donald Trump, U.S.-China relations have deteriorated remarkably. The frictions between the two countries span from trade to technology, finance, culture, and education. Disagreement between both sides widens over the audit information disclosure and supervision of Chinese companies after their listing in the United States. With the current pattern of geopolitical friction, there is no literal great solution. In the recent financial decoupling between China and the United States, some Chinese concept stocks have often been suppressed in the United States, and partly have returned to listing in Hong Kong. However, regardless how deteriorates the U.S.-China relations is, in terms of policy, the Chinese government has never supported the decoupling of the two countries’ economic and trade relations, and it is difficult for such to occur anyway.

Regarding the China-U.S. audit and supervision cooperation, both countries have gradually become more willing to come to a solution. The information disclosed by the two sides is similar. Since August 2021, the CSRC’s chairmen and the U.S. Securities Regulatory Commission have held several meetings to resolve issues related to the audit cooperation. As early as August 2020, Yi Huiman, the CSRC’s chairmen revealed that China has never prohibited or prevented relevant accounting firms from providing auditing documentation to overseas regulators. The CSRC discerns that in the essence of Chinese laws and regulations, information including audit work should be exchanged through regulatory cooperation channels and comply with relevant regulations on security and confidentiality. This has been common in line with international practices. The Public Company Accounting Oversight Board (PCAOB) states that by adhering to the basic principles of being able comprehensively appraise the auditing documentation, China and the United States should be able to reach practical solutions. As the inspections and investigations of accounting firms based in Mainland China and Hong Kong are consistent with the collaboration that the United States has achieved in other countries, PCAOB aspires to reach such a progressive partnership relation with the Chinese authority.

In March this year, the Financial Stability and Development Committee under the State Council pointed out that regarding the Chinese concept stocks, the regulatory agencies of China and the United States have maintained good communication with positive progress in forming a cooperation program. Overall, China and the U.S. are rarely improving well in auditing and supervision cooperation, given the friction and sanctions in their bilateral relations in recent years. As pointed out by ANBOUND, China is looking forward to cooperate with the United States in finance industry. The development of the Chinese market and companies are open to cooperation on the basis of rules and regulations, and this direction might become China’s future policy orientation. Although there might still be economic-trade-geopolitical frictions in the two countries’ relations, judging from the current cross-border audit cooperation, there might still be a possibility for further economic and financial cooperation between China and the United States in the future.

Final analysis conclusion:

The “Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies” has recently been issued by China Securities Regulatory Commission. This is one measure that China applies to regulate China-U.S. audit cooperation. This rare progress in the bilateral relations, given the existing economic frictions and inhibitions, provides an insightful reference for future cooperation between the two countries in the finance industry.

Writer by He Jun
Partner, Director of China Macro-Economic Research Team and Senior Researcher. His research field covers China’s macro-economy, energy industry and public policy.

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ANBOUND is a multinational independent think tank, specializing in public policy research, incl. economy, urban and industry, geopolitical issues. Est. 1993.

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ANBOUND is a multinational independent think tank, specializing in public policy research, incl. economy, urban and industry, geopolitical issues. Est. 1993.

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