U.S. and Chinese authorities halted their countries’ financial decoupling last month when they struck a deal that could save more than 200 Chinese companies from being forced off the U.S. stock market from 2024.

By agreeing to allow U.S. regulators to inspect Chinese companies’ audit data, Beijing not only promised to help its struggling private sector dodge disaster, but also scored a winning bid for international cooperation.

Why we wrote this

Despite rising geopolitical tensions, the United States and China have decided to cooperate on a key financial issue – but to build trust, actions must follow words.

Now the question is whether Beijing will follow the implementation of the agreement.

“In the future, will our markets include issuers based in China? It still depends on our counterparts in China,” U.S. Securities and Exchange Commission Chairman Gary Gensler said in a statement on the deal.

The long-term forces that separate the two economies are powerful. Fundamentally, the tension between the countries is rooted in the conflicting priorities of free movement of capital and national security, and is unlikely to dissipate as geopolitical tensions rise, experts say.

But for now, this deal means the arena of financial engagement will remain, though it may shrink if China’s security concerns prevail.

US and Chinese authorities halted their countries’ financial decoupling last month when they reached an agreement that could save many Chinese companies from being forced off the US stock exchange.

By allowing U.S. regulators to inspect Chinese companies’ audit data, Beijing not only helped its struggling private sector dodge disaster, but also won a bid for victory for international cooperation. Still, the long-term forces that separate the two economies remain powerful, experts say.

Since the Trump administration, Washington and Beijing have cited security concerns when ordering major Chinese companies off Wall Street, and some companies may still leave voluntarily to avoid US scrutiny of their data. Yet the agreement emphasizes that even amidst discord, cooperation is possible.

Why we wrote this

Despite rising geopolitical tensions, the United States and China have decided to cooperate on a key financial issue – but to build trust, actions must follow words.

Why was the United States preparing to delist Chinese companies?

US financial regulators must inspect the audits of companies listed on Wall Street to increase confidence in their financial data and protect investors. But for years Beijing has banned such inspections of audit firms in China and Hong Kong, citing national security concerns. All other governments whose companies are listed on US stock exchanges accept inspections, mandated by US law.

In 2020, amid a US-China trade war, souring relations and an accounting scandal involving China’s largest coffee chain that defrauded investors of more than $300 million, Congress Toughened the law by passing the Foreign Corporate Liability Act (HFCAA) with broad bipartisan support. Under the law, companies risked debarment if US regulators could not “fully inspect or investigate” companies that audited them for three consecutive years. This put more than 200 Chinese companies at risk of delisting in 2024, hurting investor confidence and driving down the value of Chinese companies sharply on US stock exchanges.

Faced with the threat of losing access to US capital markets, Beijing announced a deal on Aug. 26 that would allow US regulators to inspect the documents of China-based auditors, mostly large accounting firms.

The agreement marks “an important step forward by regulators in China and the United States toward addressing the problem of audit oversight … and lays the foundation for proactive, professional and pragmatic cooperation for the next stage “, the China Securities Regulatory Commission said in a statement.

Andrew Kelly/Reuters/File

The Alibaba Group logo is displayed on the floor of the New York Stock Exchange in August 2021. The huge Chinese company could still be delisted if it fails to comply with US regulations.

What led to the groundbreaking deal and will it work?

After a decade of negotiations, China has likely made concessions to grant US regulators access to help support its US-listed companies as part of a broader push to bolster the country’s private sector and the economy. economy in decline, experts say.

“US markets are currently the deepest and most liquid pools of capital in the world,” says Jason Elder, corporate finance partner at law firm Mayer Brown LLP in Hong Kong. “So having access to these markets and this investor base … is valuable for global companies, including Chinese companies.”

Still, questions remain over whether China will fully implement the deal, as official statements from both sides suggest they interpret key points differently. US regulators from the Public Company Accounting Oversight Board, a nonprofit corporation created by Congress to oversee audits, arrive in Hong Kong this month to begin their work, starting with books from e-commerce giants Alibaba Group Holding and JD.com Inc., among others.

“Access to U.S. capital markets is a privilege, not a right,” Erica Y. Williams, chair of the nonprofit Public Company Accounting Oversight Board, said in a statement about the deal. “Now we will find out if these promises hold.”

Some analysts suggest China will only partially comply with US rules, leading some companies to drop from the list and others to stay, analysts say. China’s big state-owned companies – with large volumes of data and closer government relations – may be more likely to leave Wall Street for Hong Kong, says Hung Tran, a senior fellow at the Atlantic Council, a group of American thinking. Other smaller companies with less sensitive information might choose to stay.

“I think there will eventually be a split approach,” Tran says. “Big state-owned companies are likely to voluntarily delist,” he says, like five such Chinese companies that left US stock exchanges just before the August deal. “They may have too much sensitive information to risk leaking to US authorities.”

Does this agreement mark a break with the trend of financial and economic decoupling between China and the United States?

As Washington continues to demand that Chinese companies comply with US law, the arena for financial engagement will remain, but could shrink if China’s security concerns prevail, experts say.

“In the future, will our markets include issuers based in China? It still depends on our counterparts in China,” U.S. Securities and Exchange Commission Chairman Gary Gensler said in a statement on the deal.

Fundamentally, the tension between the two countries is rooted in the conflicting priorities of free movement of capital and national security. It is unlikely to dissipate as geopolitical tensions rise, experts say. In fact, it could get worse if the deal falls apart, as a similar pact did in 2013, they say.

On the one hand, China is keen to remain “a global player in international capital markets,” which requires “strong ties between the U.S. and Chinese economies,” Elder said.

Meanwhile, however, Beijing aspires to become an alternative financial powerhouse that sets its own rules, Tran says. “At the end of the day…China is trying to develop its financial system and markets to attract capital inflows and investments, but on their terms and less subject to US law,” he says.