HONG KONG, Aug 26 — Beijing and Washington took a major step today towards ending a dispute that threatened to boot Chinese companies, including Alibaba, from US stock exchanges, signing a pact to allow US regulators vet accounting firms in China and Hong Kong.

US regulators long demanded access to audit papers of Chinese companies listed in the United States, but Beijing has been reluctant to let overseas regulators inspect accounting firms, citing security concerns.

The pact marks a major thaw in US-China relations and come as a huge relief for hundreds of Chinese companies and investors who have invested billions of dollars in the firms that have a chance to retain access to the world's deepest capital markets.

Even as the deal's details were laid out by both sides, US officials struck a cautious note, warning their view on China's compliance would be determined by whether they get full access to Chinese companies' audited documents.

Still, the Public Company Accounting Oversight Board (PCAOB), which oversees audits of US-listed companies, said it was the most detailed and prescriptive agreement the regulator has ever reached with China. Read full story

The China Securities Regulatory Commission (CSRC) said the agreement was an important step towards addressing the auditing issue. If unresolved, it could hit some 200 Chinese companies with trading bans, US Securities and Exchange Commission Chair Gary Gensler said.

US regulators have previously identified Alibaba Group, JD.Com Inc JD.O, and NIO INC NIO among those affected.

In a statement, the PCAOB said the agreement would give it "sole discretion to select the firms, audit engagements and potential violations it inspects and investigates – without consultation with, nor input from, Chinese authorities."

The US regulator added its inspectors would be able to "view complete audit work papers with all information included and for the PCAOB to retain information as needed."

"The PCAOB has direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates," it said.

Regulatory needs

The deal comes against the backdrop of inflamed tensions between Washington and Beijing following House Speaker Nancy Pelosi's visit to Taiwan, which China claims as its own territory. Read full story

The Chinese securities regulator said keeping Chinese companies listed in the United States benefited investors, companies and both countries.

Friday's agreement signals that both sides have "made a crucial step to solve the audit regulatory issue of US listed Chinese companies through enhanced cooperation", according to the CSRC statement.

"It is in line with the hope and expectation of the markets ... if cooperation afterwards satisfies each side's regulatory needs, there is hope that the audit issue will be resolved, and passive delisting will be avoided."

Current US rules stipulate that Chinese companies that are not in compliance with audit working papers requests will be suspended from US trading in early 2024, but that deadline could get brought forward.

Gensler said Chinese companies still faced delisting if their accounts could not be accessed by US authorities.

"Make no mistake, though: The proof will be in the pudding," he said.

"This agreement will be meaningful only if the PCAOB actually can inspect and investigate completely audit firms in China."

Major Chinese companies listed in the United States rose in premarket trading, with Alibaba up 2.6%, Pinduoduo PDD.O gaining nearly 6% and Baidu Inc BIDU.O up 3.3%.

"This is seen as a positive first step. However, things are not fully cast in stone yet, as seen from the various sudden reversals in the past," said Samuel Siew, market specialist at CGS-CIMB.

Challenges ahead

PCAOB said in its statement that Hong Kong has been chosen as the location to carry the on-site inspections due to COVID-related restrictions in China, but US regulators have the option to inspect on Chinese mainland in future.

Reuters reported earlier that Beijing has told some US listed Chinese firms and their auditors to prepare transferring audit documents and staff to Hong Kong for the upcoming audit inspection by US regulators.

Kai Zhan, senior counsel at Chinese law firm Yuanda, said that the agreement shows "both sides have strong wills to solve" the dispute.

"Cooperation has not completely broken down despite the Sino-US rivalry," said Zhan, who specialises in areas including capital markets and US sanction compliance, adding there were still challenges ahead.

"In implementation, both sides could easily clash on some technical details, so uncertainty remains." — Reuters