China-US audit pact signals cautious optimism

The latest agreement reached by the financial regulators in Beijing and Washington to resolve the audit dispute over US-listed Chinese companies has been seen as a breakthrough in the bilateral auditing cooperation between China and the United States and significantly eased market fears over the imminent risk of massive delistings of Chinese companies from the US market.

The deal, viewed by many as a landmark and long-awaited one, is a major step in the right direction. It sets up a cooperative framework that is mutually acceptable and paves the way for future cooperation toward ultimately resolving the yearslong China-US audit dispute.

While uncertainties still remain－regulators on both sides struck a cautious note in their statements, saying the delisting risk has not been fully removed and the success of the deal depends on effective implementation－the initial agreement underscored the willingness of Beijing and Washington to seek alignment rather than confrontation.

More importantly, the deal sent a positive signal of mutual recognition on the necessity and importance of improving China-US financial ties at a time when the global economy and international financial markets have been battered by increasing headwinds and challenges.

Ever since the US Holding Foreign Companies Accountable Act became law in late 2020, more than 200 Chinese companies have been under the threat of forced exit from the US market. Investor confidence and sentiment have been severely dampened by the worsened prospect amid heightened risk of a potential China-US financial decoupling.

Inking the initial agreement is a reflection that both sides acknowledge that facilitating cross-border audit supervision cooperation and avoiding the delisting risk are mutually beneficial as the US market remains a major source of capital for Chinese companies, and the listings of Chinese companies will provide US and global investors access to the growth opportunities of the world's second-largest economy.

A China-US financial decoupling would be in no one's interests as the bilateral economic and financial ties have been increasingly intertwined. As of the end of 2020, US investors held about $1.2 trillion of Chinese equities and debt securities while Chinese investors held as much as $2.1 trillion of US equities and debt securities, according to estimates by US research firm Rhodium Group.

While the deal marks a big step forward for resolving the China-US audit dispute, it would still be too early to completely rule out the delisting risk for Chinese firms.

Some analysts believe that it is still possible that the US regulatory and financing environment could turn hostile as there are many important factors and details about the auditing issue that need to be hammered out and fine-tuned by the Chinese and US regulators in practice.

What the Chinese side cares the most about is whether the implementation of the deal can be carried out on an equal footing and mutually beneficial basis as agreed.

Despite the uncertainties, one thing is certain. China will not isolate itself from the global financial arena. Deepening financial reform and pushing two-way opening will continue to be major themes underpinning China's next phase of development.

Chinese firms will continue to explore overseas markets for financing channels as many have announced plans to float shares in Swiss exchanges under the China-Switzerland Stock Connect program which was officially launched in July.

Meanwhile, the attraction of Chinese assets for foreign investors will continue to be substantial in the long run as evidenced by the decision of some US financial institutions to increase holdings of US-listed Chinese companies despite the regulatory uncertainty.

Closer financial ties between China and the US are beneficial for investors, listed companies and the capital markets of the two countries. Shutting the door of cooperation will only lead to a lose-lose outcome that no one wishes to see.