Editorial | New China approach on audits opens way to US compromise

The latest two-hour phone call between presidents Xi Jinping and Joe Biden has been portrayed as another wasted opportunity in some media quarters. That is not necessarily so. While the topic of Ukraine apparently dominated, positive movements may be detected over economic issues of mutual concern to both countries. Among these are the reinstatement of hundreds of tariff exemptions in the United States, and the possibility of an accommodation in the long-standing tussle over different accounting standards.

The Biden White House will reinstate tariff exemptions on more than 350 Chinese imports, accounting for about two-thirds of the waivers that had expired at the end of 2020. The import exemptions include bicycles, electric motors, appliances and X-ray machines and underscored how critical Chinese products are to global supply chains. And while the waiver only mitigated a fraction of the tariffs imposed by former president Donald Trump – which have affected two-thirds of all Chinese exports to the US – the announcement does help relieve pressure in tense US-China trade relations.

In their conversation, Xi had stressed the legitimate economic interests of China and those of its companies. A persistent problem has been the inability of both sides to agree to mutually acceptable accounting practices, especially for Chinese companies listed in the US. The dispute goes back at least 10 years, as both sides have different accounting and auditing standards. But it worsened after the massive fraud exposed at Luckin Coffee, once billed as China’s Starbucks, in 2020, on the heels of several other Chinese stock fiascos such as the now defunct Sino-Forest. Amid fraught US-China relations, the Holding Foreign Companies Accountable Act was pushed through the US Congress and passed into law by Trump. It contains rules that take publicly traded companies to task, including Chinese firms. This grants the Public Company Accounting Oversight Board access to raw accounting data from company audits.

Much is at stake for both sides. Of 250 Chinese companies listed in New York, the biggest 120 are valued at US$1.9 trillion. The deadlock seemed hard to break as China passed a law in December 2019 barring Chinese companies from handing over data deemed sensitive to foreign parties. That includes raw accounting and auditing data. However, the China Securities Regulatory Commission is planning a new approach. This will grant the US access to Chinese audit papers after vetting by China’s finance ministry, which will adhere to global audit and data privacy principles.

If the various Chinese regulatory agencies can iron out the kinks and present a viable plan, the US has a clear incentive to reach a compromise between the world’s two largest economies.