China plans to remove hurdle to Sino-US audit cooperation

The draft rules mark Beijing's latest attempt to resolve a long-running audit dispute with Washington. PHOTO: REUTERS

SHANGHAI/BEIJING (REUTERS) - China on Saturday (April 2) proposed revising confidentiality rules involving offshore listings, removing a legal hurdle to Sino-US cooperation on audit oversight while putting the onus on Chinese companies to protect state secrets.

The draft rules, announced by China's securities watchdog, mark Beijing's latest attempt to resolve a long-running audit dispute with Washington that could lead to roughly 270 Chinese companies being forced to delist from US exchanges in 2024.

Saturday's proposal scraps requirements that on-site inspection of overseas-listed Chinese companies be conducted mainly by Chinese regulators.

That could open the door to inspections by US regulators, who demand complete access to such firms' audit working papers, which are stored in China.

The changes will facilitate "cross-border regulatory cooperation, including joint inspections, which will help safeguard interest of global investors", the China Securities Regulatory Commission (CSRC) said in a statement on its website.

China is stepping up efforts to ensure Chinese firms remain listed in New York.

The commission said on Thursday that Chinese and US regulators had held multiple rounds of meetings and both sides had a willingness to solve their audit dispute.

But US securities and audit regulators have pushed back on speculation of an imminent audit deal with China. In March, the US Securities and Exchange Commission (SEC) identified 11 US-traded Chinese companies, including Baidu and Yum China, that face delisting risks.

State secrets

The draft rules make clear that Chinese companies are responsible for information security in overseas listings, reducing the chance that confidential information unnecessarily enters auditors' working papers, CSRC said.

"Procedural requirements" are added to the rules, demanding Chinese companies provide written explanation when they provide "sensitive information" to intermediaries, such as underwriters and auditors, although such situations should be "very rare", based on experience, according to the watchdog.

CSRC said the rules will offer clear guidance on how to protect state secrets, leading to "orderly" securities issuance and listing activities by Chinese companies.

The current confidentiality rules, which were published in 2009 by the CSRC, the state secrets bureau and the archives bureau, are outdated, CSRC added.

Sources told Reuters last month that Chinese regulators had asked some of the country's US-listed firms, including Alibaba, Baidu and, to prepare for more audit disclosures.

In mid-March, Vice Premier Liu He said talks between Chinese and US regulators over offshore listing issues had made progress and both sides were working on specific cooperation plans.

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