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US, China reach deal in dispute over Chinese company audits

WASHINGTON — The U.S. and China reach a tentative agreement to permit U.S. regulators to inspect the audits of Chinese companies whose stocks are traded on U.S. exchanges. In a long-festering dispute, U.S. regulators have threatened on top of that several Chinese companies off the brand new York STOCK MARKET and Nasdaq if China doesn’t permit inspections.

The offer announced Friday by market regulators in the U.S. and China is preliminary. Securities and Exchange Commission Chairman Gary Gensler said, The proof will undoubtedly be in the pudding.

While important, this framework is only a step along the way, Gensler said in a prepared statement. This agreement will undoubtedly be meaningful only when (U.S. regulators) actually can inspect and investigate completely audit firms in China. If (they) cannot, roughly 200 China-based issuers will face prohibitions on trading of these securities in the U.S. should they continue steadily to use those audit firms.

An agreement means that U.S. investors will maintain usage of shares of important Chinese companies while at exactly the same time being protected by the integrity of company audits.

That is unequivocally positive news and a significant step toward averting mass delisting of Chinese companies in the U.S.,” analyst Tobin Marcus at Evercore ISI said in an email to clients. However, he said, a deal is the initial step toward avoiding delisting. What ultimately must happen is that (U.S.) Inspectors have to arrive and complete inspections.” He said the inspections could take months.

The U.S. regulators intend to have inspection teams on the floor in China by mid-September. THE GENERAL PUBLIC Company Accounting Oversight Board is because of determine by year’s end if the Chinese government is continuing to block usage of the audit books. A poor finding you could end up U.S. actions such as for example trading bans.

Although it’s preliminary, the agreement is really a rare instance of accord at the same time when relations between your U.S. and China are fraught by sparring over trade, the war in Ukraine and human rights. The tension was ratcheted higher by U.S. House Speaker Nancy Pelosi’s recent visit to Taiwan, the self-governing island that China claims as its territory. The Chinese taken care of immediately the visit by Pelosi, second in line to the U.S. presidency, with military drills round the island.

U.S. regulators had warned that lacking any agreement, some 200 companies including Alibaba Group, the worlds biggest e-commerce competitor, may be ejected from U.S. exchanges or face trading restrictions. The Americans said that other governments have decided to allow such audit reviews, which are needed by U.S. law, and that China and Hong Kong will be the only holdouts.

Three of Chinas biggest state-owned companies announced this month they might remove their shares from the brand new York STOCK MARKET but gave no indication that the action was linked to the audit dispute. PetroChina Ltd., China LIFE INSURANCE COVERAGE Ltd. and China Petroleum & Chemical Co. cited the tiny level of trading of these shares in the brand new York market and the trouble of complying with regulations in a foreign market. The firms said their shares still will be traded in Hong Kong, that is Chinese territory but available to non-Chinese investors.

The dispute over audits of Chinese companies goes back greater than a decade. Scores of Chinese companies were suspended or kicked off U.S. exchanges, many of them for failing woefully to file timely financial reports. At the very least two dozen were hit with SEC fraud or accounting charges, but investigations stalled as the companies audit papers were in China beyond the SECs reach.

Under terms of the brand new agreement, U.S. accounting inspectors in the PCAOB could have independent discretion to choose any Chinese company audit for inspection or investigation, plus they would get immediate access to interview all personnel of the audit firms whose work has been inspected. The inspectors could see complete audit work papers without redactions.

In Beijing, the China Securities Regulatory Commission called the agreement a significant part of resolving the problem of common concern of audit and regulatory cooperation. Investors and companies on both sides will reap the benefits of keeping Chinese shares trading on U.S. exchanges, the commission said.

The terms the commission outlined would give Chinese officials a job in virtually any possible investigations. China won the proper to conduct similar reviews of U.S. audit firms where relevant, based on the Chinese regulators, allowing Beijing to portray the agreement as mutually positive instead of an example of China giving directly into American pressure. China has yet expressing any have to perform such reviews of its.

Chinese regulators also will be allowed to take part in interviews with audit personnel.

McDonald reported from Beijing.

Follow Marcy Gordon at https://twitter.com/mgordonap

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