PremiumAmerican authorities want unfettered access to the financial books of Chinese companies without government interference while China insists on having government agencies play a role in the audit process. Should the deal fall apart, it would signal that even common-sense cooperation between both countries is increasingly unlikely.
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NEW DELHI: The United States and China have ended months of tension and concluded an agreement on accounting standards that will prevent Chinese firms from being delisted from US stock exchanges. While some see it as a move that many take as a sign of declining tensions between the two super-powers, others believe it to be a temporary ceasefire.
Mint breaks down this development.
What is the background?
Historically, American financial regulators have been limited in their ability to conduct audits into Chinese companies listed in Hong Kong and mainland China. While most regulatory jurisdictions cooperate with US authorities when their firms list in the latter’s exchanges, Chinese authorities do not citing national security concerns.
As tensions between Washington and Beijing have ratcheted up in recent years, American regulators are increasingly worried about the influence the Chinese government and the Chinese Communist Party (CCP) exercise over ostensibly independent Chinese firms in American markets.
In order to unearth government influence and financial control exercised by the CCP over these companies, the US passed the Holding Foreign Companies Accountable Act of 2020 which sought to cut access to American exchanges and capitals for those companies that did not fully comply with US regulatory standards. If such companies choose not to open their books to scrutiny by regulators, American authorities will stop the exchange and sale of their securities on US exchanges.
What are the stakes?
According to estimates, 248 Chinese companies trade on US exchanges with a total market cap of $2.1 trillion. Already, five large state-owned Chinese enterprises have announced their intention to de-list from American exchanges. Chinese ride-sharing behemoth Didi also chose to take itself off US exchanges while Alibaba, the e-commerce giant, chose to switch its primary listing to Hong Kong.
The US law states that Chinese companies would be delisted only after they fail to comply with inspections for three consecutive years. As such, these companies are facing a deadline that looms uncomfortably close. In the absence of a workable deal, experts fear that the process of financial decoupling between America and China may accelerate.
What does this new deal signal?
On 26 August 2022, regulatory authorities from both sides signed an agreement that will allow American financial regulators to inspect the books of Chinese firms listed in US exchanges. A team of regulators will now land in Hong Kong to begin inspections.
The deal signals that many Chinese companies continue to rely on American capital and benefit from access to US financial markets. More importantly, it reveals that the Chinese government still sees value in financial exchanges and cooperation with the United States.
Does this signal a broader rapprochement between the US and China?
Unlikely. To begin with, it is unclear if the deal will lead to any larger successes. There are clear differences between both sides. American authorities want unfettered access to the financial books of Chinese companies without government interference while China insists on having government agencies play a role in the audit process. Should the deal fall apart, it would signal that even common-sense cooperation between both countries is increasingly unlikely.
China’s larger goals, which involve weaning itself off dependency on the US, will lead to greater decoupling between the two powers. For its part, America’s bipartisan consensus on the economic security threat posed by China is likely to place ever increasing pressure on Chinese firms operating in the US.