China makes key rule change in U.S. stock audit standoff

China's stock regulator removed its long-standing requirement that Chinese companies seeking to list on foreign exchanges primarily use Chinese auditors.

Why it matters: The rule change could make it possible for the U.S. and China to reach an agreement permitting Chinese companies to continue to list on U.S. stock exchanges.

Background: The U.S. requires all public companies to make their audits available for inspection to the U.S. Public Company Accounting Oversight Board (PCAOB), but Chinese companies have long refused to grant this access, saying Chinese national security law prohibits them from doing so.

• A 2013 agreement between the PCAOB and China's securities regulator was supposed to facilitate audit requests, but the PCAOB says Chinese companies have violated the agreement.
• In 2020, the U.S. passed a law requiring foreign companies that don't follow U.S. audit requirements to be booted from U.S. exchanges. The U.S. Securities and Exchange Commission finalized implementation guidelines for the law in December 2021.
• In March, the SEC began naming specific Chinese companies that were at risk of being delisted due to lack of compliance, including search engine Baidu and social media platform Weibo.

The big picture: “It’s the Chinese regulators who are preventing the U.S. regulators from inspecting the audits,” Brendan Ahern, chief investment officer of KraneShares, told CNBC.

• “What you have is Chinese law clashing with U.S. law."
• China's new rule change may reduce this tension, potentially giving some Chinese companies the option of greater cooperation with U.S. regulators.

Yes, but: Chinese companies with close ties to the government or military could choose to continue withholding access to their audit information due to the requirements of Chinese national security law.

What to watch: "The ball now heads back to Washington’s court—where its reception remains highly uncertain," the Wall Street Journal's Jacky Wong writes.