Opening Up of Capital Market Will Require Companies to Strictly Abide by Chinese Law

BEIJING, January 9, 2018

Recently, the China Securities Regulatory Commission has followed through on directives from the 19th NCCPC on further opening up to the outside world and actively promoting the two-way opening up of the capital market to boost reform and development. According to the Chinese government’s top-level layout to open up finance, China will optimize the development planning, policies and measures for the opening up of the capital market, as well as accelerating the establishment for the opening mechanism which is conducive to protecting investors’ rights and interests, enhancing orderly competition, and safeguarding risks. China will also implement detailed policies for the loosening up of foreign capital’s entry into the security industry and promote the filing policy reform for overseas listing. In addition, it will support stock exchanges and institutions in the industry to develop finance innovation around the construction of “Belt and Road Initiative”, providing specialized service and support in the area of cross-border trade, investment and mergers and acquisitions.

Although China is increasingly becoming more open, all foreign investment banks, overseas accounting firms and other intermediary agencies should strictly abide by Chinese laws and regulations when undertaking business in China.

On May 26, 2015 the Ministry of Finance issued interim provisions for accounting firms’ audit business for China’s mainland enterprises’ listing overseas. According to the provisions, “if a mainland enterprise entrusts a foreign accounting firm to do the audit, the entrusted accounting firm should cooperate with a mainland accounting firm. The two accounting firms should sign a written agreement on business cooperation, independently negotiate the division of business and respective rights and obligations of the both sides. The audit work manuscript finished in China shall be kept in China by the Chinese mainland accounting firm.” “Overseas accounting firms engaged in the audit of overseas listing businesses of Chinese mainland enterprises should be reported to the provincial finance department of mainland enterprises at least 7 days prior to the entry and implementation of the audit business and copied to the Ministry of Finance. At the same time, they should also provide copies of the audit business agreement signed with the entrusting enterprises and copies of the written agreement on business cooperation signed with the mainland accounting firms. Foreign accounting firms that do not file on time, file incorrectly or provide incomplete information (including the engagement letter and business cooperation agreement), shall be issued a warning notice by the finance department at or above the provincial level, be ordered to make corrections and transferred to the relevant regulatory agencies of their country (region); if serious, it will be publicly announced and they will not be permitted to engage in the audit business of Chinese mainland enterprises’ listing overseas for 5 years after the announcement date.”

As is known, currently many overseas accounting firms have not reported correctly before undertaking audits of Chinese businesses, nor have they signed cooperation agreements with domestic accounting firms.

The Ministry of Finance, State Administration for Industry and Commerce, Ministry of Commerce, Foreign Exchange Bureau, and China Securities Regulatory Commission issued a notice on May 10, 2012 on “Sino-foreign cooperative accounting firms’ localization scheme”: as of December 31, 2017, for special general partnership accounting firms, the proportion of foreign partners both in total number of partners and in partner management committee shall not exceed 20%.

The time for the restructuring of the ‘big four’ (Ernst & Young, KPMG, DDT, PWC Zhong CN) has come. Accounting firms must now complete the restructuring in accordance with the provisions to undertake business legally in China.

However, the prerequisite for many major international investment banks to undertake the consulting and consignment of Chinese enterprises’ to list overseas is that the Chinese enterprises accept the audit services of the overseas ‘big four’ rather than the restructured mainland ‘big four’. They claim that this helps to establish credibility for Chinese enterprises in overseas markets with the help of the so-called “reputation” of “big four”.

All foreign investment banks, accounting firms, other Chinese intermediaries and overseas listed Chinese companies must strictly abide by China’s laws and regulations. China will protect the legitimate rights and interests of institutions and investment banks, but for illegal activities, it will be punished in accordance with the legal system.

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