The August 26 preliminary agreement between China’s CSRC (China Securities Regulatory Commission) and America’s PCAOB (Public Company Accounting Oversight Board) on cross-border audit inspections is welcome and encouraging news. The well-telegraphed agreement was hardly a surprise breakthrough. But it demonstrates a willingness on the part of senior leaders and regulatory bodies in both nations to draw the line between financial frictions and mounting disputes over trade, technology, and geostrategic issues. This continues a long-standing pattern of both nations to prioritize financial integration over a further relaxation of linkages in their increasingly conflict-prone real economies.
To be sure, the agreement only establishes a framework that allows for joint investigations of audit firms by both nations. PCAOB inspectors could arrive in Hong later this month, and there are indications that their efforts will focus initially on Alibaba (e-commerce) and Netease (gaming), with Baidu. JD.Com, and Yum China to follow. These are all privately controlled firms that are actively traded in US markets.
Significantly, the preliminary agreement does not guarantee resolution of thorny compliance issues and other areas of dispute; findings of the initial inspections won’t be announced for several months, possibly by December 2022. Among the more contentious issues from the US perspective are disclosure of Chinese state support to so-called private companies and greater transparency of shell companies dubbed variable interest entities (VIEs) that are the preferred trading vehicle of Chinese companies in US markets. From the Chinese perspective, the potential disclosure of “sensitive information” as a national security risk remain of paramount concern.
The agreement tempers what had been the more immediate possibility of the delisting of nearly 200 Chinese companies in US security markets as stipulated in bipartisan congressional passage of the Holding Foreign Companies Accountable Act (HFCA) of 2020. Many feared this worst-case scenario would come to pass had the audit standoff persisted. While this is a positive development in an otherwise disconcerting five-year period of Sino-American conflict escalation, it does not rule future setbacks that may arise in an increasingly treacherous era of Accidental Conflict.
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