Looking forward to the opening of a new model of equal consultation for Sino-US audit supervision cooperation

Recently, China and the United States jointly announced that the two sides have signed an audit and supervision cooperation agreement on August 26, and will start related cooperation in the near future. The China Securities Regulatory Commission publicly stated that “the cooperation agreement is based on the laws and regulations of the two countries, respects international common practices, and follows the principle of reciprocity and mutual benefit.” The signing of the cooperation agreement has brought hope to the cross-border audit supervision issues that have plagued the two countries for many years, and has also greatly boosted market confidence. Affected by the good news, Chinese concept stocks rose collectively before the market on August 26. Among them, Alibaba, JD.com, Pinduoduo and other Chinese concept stocks once rose by more than 8%.

Since the US Congress formally passed the “Foreign Company Accountability Act” in December 2020, the fate of Chinese stocks in the US market has been heavily clouded. The Act stipulates that foreign companies listed in the United States must meet the requirements of the Public Company Accounting Oversight Board (PCAOB) for accounting firms to inspect the audit papers of listed companies, otherwise the company will be prohibited from listing and trading. On July 29, Alibaba, which has the largest market capitalization among Chinese stocks, was also included in the “pre-delisting” list by the U.S. Securities and Exchange Commission (SEC). Since then, 159 Chinese concept stocks have been included in the “pre-delisting” list. The Chinese concept stocks that once enjoyed great popularity in the U.S. stock market are facing the risk of collective delisting.

Today, there are 286 Chinese concept stocks listed in the United States, with a total market value of US$1.18 trillion. Chinese concept stocks have become a force to be reckoned with in the U.S. capital market. However, it is undeniable that due to the different legal systems of China and the United States, there are still areas where China and the United States need to work together on cross-border audit supervision issues. The repeated exposure of the credit crisis of Chinese stocks has made the importance of cross-border audit supervision between China and the United States increasingly prominent. Since 2007, the China Securities Regulatory Commission, the Ministry of Finance and the PCAOB have held many talks on cross-border audit supervision issues, and in 2013, the China-US Law Enforcement Cooperation Memorandum was officially signed. Regarding the issue of audit papers that both parties are most concerned about, the memorandum stipulates that before PCAOB obtains audit materials of Chinese companies listed in the United States, it must complete a written request report and obtain the consent of the Chinese side. This content not only complies with the relevant provisions of China’s securities law, but also is a common international practice. Around 2010, PCAOB had signed joint inspection agreements with France, Germany, the United Kingdom, Finland and other countries to ensure that the content and methods of PCAOB entry inspections were determined in advance through negotiation between the two parties.

However, the issue of cross-border audit supervision between China and the United States, which had already made positive progress, was once deadlocked due to the pan-politicized operation of the United States in recent years. In 2020, against the backdrop of escalating trade frictions between China and the US, the PCAOB requested the right to directly review the audit papers of Chinese companies listed in the US, and this unreasonable request is unacceptable to the Chinese side. Subsequently, the promulgation of the “Foreign Company Accountability Act” in the United States directly pushed the issue of audit supervision to the forefront of political confrontation. The bill directly targets China and is full of hegemonic overtones and ideological prejudice. Some of these clauses even require U.S.-listed companies to disclose the list of Chinese Communist Party members on their board of directors, and whether the company’s articles of association contain the contents of the Chinese Communist Party’s constitution. It can be said that the bill completely deviates from the regulatory logic of the free market.

Under the suppression of the “Foreign Company Accountability Law”, the stock price of Chinese stocks plummeted. As of March this year, the total market value of Chinese concept stocks has evaporated by 4.17 trillion US dollars, causing heavy losses to American investors. Freeman, a professor at Harvard Law School, once told the media that Wall Street investment banks had made a lot of profits from the listing of Chinese stocks in the United States. In fact, they did not want the bill to be passed. Although the “Foreign Company Accountability Act” is under the banner of protecting investors, it has seriously harmed the actual interests of investors. The U.S. government’s forcible “decoupling” of China’s finances is detrimental to others, resulting in a lose-lose situation.  Instead of making the U.S. a winner, the Foreign Corporation Accountability Act kidnapped investors to pay for Washington’s ideological bias. Cooperation between China and the United States will benefit both, while confrontation will hurt both. This has been confirmed again on the issue of cross-border audit supervision between China and the United States. Economic issues will ultimately have to come back to the negotiating table to be resolved. After China and the United States signed the audit supervision cooperation agreement, the relevant person in charge of the China Securities Regulatory Commission emphasized in response to a reporter’s question that the agreement established the “reciprocity principle”, the two sides will communicate and coordinate the inspection and investigation plan in advance, and the United States must pass the Chinese supervision. The department obtains documents such as audit papers. Because the US can put aside its ideological prejudice and adopt a pragmatic attitude this time, the cross-border regulatory cooperation between China and the US has a chance to get back on track.

Facts have proved that it is not feasible for the United States to try to issue orders and ask for anything and everything at will against China from the so-called “status of strength”. As the two countries with the largest economies in the world, the interests of China and the United States are intertwined and interdependent. Therefore, dialogue with an equal attitude is the best choice to solve the problem. However, at present, it is only the first step to solve the cross-border audit supervision problem between China and the United States. In the future, whether the United States will carry out cooperation with China in accordance with the content of the agreement still needs to “listen to its words and observe its actions.” In any case, the large-scale delisting of Chinese stocks is something neither China nor the United States wants to see. The two countries have common interests in maintaining financial market stability. It is hoped that China and the United States can take the signing of this cross-border supervision cooperation agreement as an opportunity to open up a new model of mutual respect and equal consultation, and properly resolve frictions between the two sides in many other fields.