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Breakthrough in US and China auditing dispute

A 20-year dispute between US and Chinese regulators regarding the auditing of Chinese-domiciled but US-listed securities could soon be resolved. 

There was a high risk prior to this breakthrough that over 200 Chinese securities with a market cap of $1.6 trillion would be delisted from US exchanges in early 2024 under the Holding Foreign Companies Accountable Act (HFCAA).

The Public Company Accounting Oversight Board (PCAOB) has recently signed a Statement of Protocol with the China Securities Regulatory Commission (CSRC) and the Ministry of Finance of the People’s Republic of China governing inspections and investigations of audit firms based in China and Hong Kong. This agreement establishes a specific, accountable framework to make possible complete inspections and investigations by the PCAOB of audit firms based in China and Hong Kong, as required under US law. This allows the PCAOB to see all audit documentation without redaction even if Chinese authorities deem it sensitive.

While this new agreement is an important step forward, it should be noted that the agreement itself does not satisfy the HFCAA. Compliance with the agreement is ultimately what matters and US regulators will be monitoring compliance. The news of an agreement has provided some relief to investors and is an important step forward in resolving this dispute after significant uncertainly. 

The paper covers:

  • The background of the dispute
  • The Holding Foreign Companies Accountable Act (HFCAA)
  • Agreement between regulators
  • Hong Kong listings
  • Index impilcations
  • Liquidity
  • What's next?
  • What does it mean for investors?

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