In a significant development, the Trump Administration plans on scrapping a 2013 U.S.-China agreement on auditing, said a senior State Department official. The move could potentially foreshadow a broader crackdown on U.S.-listed Chinese firms which routinely side step U.S. accounting disclosure norms and rules.
The purpose of the 2013 agreement was to set up a process for U.S. auditing watchdog to seek documents in enforcement cases against Chinese auditors; initially it was seen as a breakthrough in U.S. efforts to gain access to closely guarded Chinese financial information. Chinese companies gained from it since it bestowed them with a mark of legitimacy.
However, the U.S. watchdog, the Public Company Accounting Oversight Board (PCAOB), has long complained of China’s failure to grant requests, amounting to Washington continuing to remain almost blind on the financial positions of U.S. listed Chinese firms.
The lack of basic transparency has prompted the U.S. administration to lay the groundwork to exit the deal soon, said Keith Krach, undersecretary for economic growth, energy and the environment.
“The action is imminent,” said Krach. “This is a National Security issue because we cannot continue to afford to put American shareholders at risk, to put American companies at a disadvantage and allow our preeminence of being the gold standard for financial markets to erode.”
The White House declined comment.
The Chinese Embassy in Washington and the PCAOB did not immediately respond to requests for comment.
It is to be seen, how the U.S. administration will extract itself from the agreement, which incidentally requires a 30-day notice by either party; furthermore its will not directly threaten the listed status of Chinese companies on U.S. exchanges, including Alibaba Group Holding Ltd, and Baidu Inc.
Nevertheless, the move underscores signs of growing frustration by U.S. authorities over a lack of disclosure by Chinese companies which are widely held by U.S. investors, and can potentially lead to a direct crackdown.
The development comes in the wake of the U.S. administration successfully applying pressure on an independent board that oversees a $40 billion international pension fund for federal employees to halt plans to track an index that includes Chinese companies, citing “risks to investors resulting from inadequate investor disclosures and protections under Chinese law.” This happened in May 2020.
Pressure is also coming from the U.S. Congress, where the Republican-led Senate has already passing a bill that, if approved by the Democratic-led House of Representatives and signed into law, would bar securities of any foreign company from being listed on any U.S. securities exchange if it fails to comply with the PCAOB’s audits for three years in a row.
“In addition to terminating this MOU, which allows Chinese companies to openly defy U.S. laws and regulations for financial transparency and accountability, we must address the Chinese Communist Party’s exploitation of U.S. capital markets, which is a clear and ongoing risk to U.S. economic and national security,” said Republican Senator Marco Rubio.
The lack of transparency by Chinese companies appears to be by design.
In March 2020, Beijing amended a securities law which bans any Chinese person from sharing any securities-related document with overseas regulators without approval from the securities regulatory authority under the state council.
Highlighting the disproportionate benefits on the MOU, Kyle Bass, a hedge fund manager said, “The MOU represents a gaping hole in U.S. investor protections, while providing the framework for systemic Chinese fraud. It’s unconscionable that the United States continues to allow Chinese companies raising trillions of dollars from U.S. investors to avoid complying with basic U.S. securities and audit standards.”