The Trump administration plans to soon scrap a 2013 agreement between U.S. and Chinese auditing authorities, a senior State Department official said, a move that could foreshadow a broader crackdown on U.S.-listed Chinese firms under fire for sidestepping American disclosure rules, Reuters reported.
The deal, which set up a process for a U.S. auditing watchdog to seek documents in enforcement cases against Chinese auditors, was initially welcomed as a breakthrough in U.S. efforts to gain access to closely guarded Chinese financial information and bestowed a mark of legitimacy on Chinese regulators.
But the watchdog, known as the Public Company Accounting Oversight Board (PCAOB), has long complained of China’s failure to grant requests, meaning scant insight into audits of Chinese firms that trade on U.S. exchanges.
The lack of transparency has prompted administration officials to lay the groundwork to exit the deal soon, according to Keith Krach, undersecretary for economic growth, energy and the environment, in a sign the PCAOB will give up on efforts to secure information from the Chinese.
“The action is imminent,” Krach said on Monday in an emailed response to questions. “This is a National Security issue because we cannot continue to afford to put American shareholders at risk, to put American companies at a disadvantage and allow our preeminence of being the gold standard for financial markets to erode.”
One other administration official and three former White House officials said terminating the memorandum of understanding was under consideration, adding that the White House was involved with the discussions.
The White House declined to comment, while the Chinese Embassy in Washington and the PCAOB did not immediately respond to requests for comment.
It is not clear when or how the administration would revoke the agreement, which requires 30-day notice by either party, and its termination would not directly threaten the listed status of Chinese companies that trade on U.S. exchanges. Among some of the bigger Chinese companies trading in the United States are Alibaba Group Holding and Baidu.
But discussions about revoking it are a sign of growing frustration by U.S. authorities over a lack of disclosure by Chinese companies widely held by U.S. investors that could lead to a more direct crackdown. It also comes amid rising U.S.-China tensions over Beijing’s handling of the coronavirus and its move to curb freedoms in Hong Kong.
In May, the administration successfully pressured an independent board that oversees a $40 billion international pension fund for federal employees to halt plans to track an index that includes Chinese companies, citing “risks to investors resulting from inadequate investor disclosures and protections under Chinese law.”
In early June, President Donald Trump assigned a group of officials including Jay Clayton, chairman of the Securities and Exchange Commission, which oversees the PCAOB, to recommend measures within 60 days to protect U.S investors “from the failure of the Chinese government to allow PCAOB-registered audit firms to comply with United States securities laws.”
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