China has proposed allowing US regulators to audit state-owned companies in efforts to resolve longstanding accounting concerns, but would reserve the right to redact materials over national security concerns.
The concessions are meant to show China is “sincere” in wanting to find a resolution, China Securities Regulatory Commission vice-chairman Fang Xinghai told Bloomberg News.
Washington officials have been pressing China to gain access to audit working papers for Chinese companies traded on US markets and have threatened to delist them by January 2022 if the firms do not comply and pass inspections.
The accounting issue has percolated for years, especially as relations deteriorated after 2017 trial investigations performed jointly by regulators from both sides failed to end in an agreement. China’s latest proposal would allow the US to pick any state-owned enterprise for another trial inspection.
Both private and state-owned Chinese firms listed in the US have been embroiled in massive accounting scandals for years, exposing the gap in US audit oversight.
Earlier this year Luckin, a Chinese coffee rival to Starbucks, was found to have fabricated more than $300m (£227m) in sales just 11 months after its New York float. In July, Nasdaq delisted the company.
US Secretary of State Mike Pompeo has also accused Chinese companies of defrauding American investors while exploiting US markets.
Moving forward as suggested by Beijing could represent a big step as Chinese state-owned enterprises are backed by the government, and operate in key sectors such as banking, oil and gas, and telecoms.
However, it remains to be seen how much transparency would be allowed in practice to US regulators. China has a history of backing out of international and bilateral agreements.
The proposal represents a concession from what was previously put forward by Beijing to allow joint investigations of private sector firms as they were less likely to have national security concerns.
Beijing would have still required information to be withheld if private companies with government contracts were being audited.
A wide range of Chinese firms are listed in the US, including state-owned energy and telecoms giants, private tech and e-commerce firms, and even Sinovac, a biotech company with a coronavirus vaccine frontrunner in last-stage trials in Brazil and Indonesia.
As of July, there were about 230 Chinese companies worth a total of about $1.8 trillion listed in New York, according to the Peterson Institute of International Finance, a US think tank.