AS China's securities regulator strives to implement stricter rules on initial public offerings and the delisting of companies that break the rules, its conflicts with the US Securities and Exchange Commission over inspection of Chinese companies listed in the US may soon break ice.

The China Securities Regulatory Commission and the SEC have been working on an agreement to fill a regulatory grey area. Last month, a US federal court granted a six-month stay in the dispute between the SEC and the China branch of Deloitte Touche Tohmatsu CPA Ltd over submission of audit documents related to Chinese firms.

The US securities regulator said it applied for the stay so that it could continue to negotiate with its Chinese counterpart over access to the audits of companies suspected of cooking their books.

Longtop Financial Technologies Ltd, a China-based, US-listed company that was a client of Deloitte's, was charged by the SEC last November with producing inaccurate financial reports.

Deloitte was sued by the SEC after the auditor refused to turn over its paper work on Longtop, citing Chinese law that forbids auditors from submitting audits on Chinese firms to foreign regulators without Chinese government approval.

The recent court stay came as a relief to Deloitte, which said in a statement that it was pleased about the efforts of Chinese and US regulators to reach an agreement.

Concern voiced

Concerns have previously been voiced that if Deloitte China lost the court case, the auditing firm would be banned from practice before the SEC.

The remaining three of the world's Big Four auditors - PricewaterhouseCoopers, Ernst & Young, and KPMG - are in the same soup. Their Chinese branches have received similar document requests from the SEC. "We are now caught in the middle of conflicting regulations," said Lai Cheekong, a partner at Ernst & Young, "But we expect that the two sides will reach an agreement within this year."

Instead of allowing the SEC direct access documents in China, he said, the US and China are likely to agree on a system whereby the China Securities Regulatory Commission could inspect audits of Chinese firms on behalf of the SEC.

"No country is willing to open up too much to a foreign regulator," Lai said.

The SEC has said recently that some of its top officials have visited counterparts at the CSRC, seeking to obtain relevant documents directly from Chinese auditors.

Conflicts existing

Jia Wenqin, chief auditor of the CSRC, said in June that conflicts exist because US regulators insist on conducting on-site inspections in China.

"Despite the differences, we have reached some preliminary consensus with the US," said Jia. "We may send observers to each other's countries during a transitional period to ensure one another's creditability."

Whatever approach the two sides take to solve the dispute, something needs to be done to increase the transparency of Chinese firms listed in the US. Lack of creditability is probably the most serious challenge facing these companies.

Last year, 39 US-listed Chinese firms were charged with fraud. A total 44 companies were delisted in the past two years for reasons including cheating.

On June 13, the SEC charged New Oriental Education Co, China's largest private education services provider, with manipulating its company structure and hurting the interests of shareholders.

In May, China Natural Gas and its Chairman and former CEO Ji Qinan were charged with concealing loans to benefit Ji's family and business partners.

Since the latter half of 2011 the zeal of Chinese companies seeking US listings shriveled into a frozen state.

In the first half, only one Chinese company has successfully gone public in the US. In the same period, 19 companies were delisted, according to a report by the Ernst & Young.

"The crisis of confidence has severely impacted Chinese companies in the US," said Lai. "Delisting is happening at a quicker pace because these companies face tougher regulation and short-selling pressure."

Zero tolerance

The CSRC's Jia said his agency "would never tolerate" fraud and cheating, and has always focused on protecting the interests of domestic and foreign investors.

As Ravi Menon, managing director of the Monetary Authority of Singapore, pointed at the Lujiazui Forum in Shanghai in June, the core problem of cross-border regulation is not the making of rules but the sharing of information.

For many domestic investors, the more important issue is the sharing of information within China markets.

Analysts and ordinary stock investors have long called for better information transparency about what companies are doing and how regulations are being enforced.

"Better regulation over domestically listed companies and Chinese cooperation with foreign regulators will be essential for China to establish an International Board," Lai said, referring to the pending start of a new domestic bourse where foreign firms can list shares in yuan.



Calling for cross-border regulation

2012 July 18 The SEC applied for the court to suspend its disputes with Deloitte China to allow more time for diplomatic negotiation.

2012 June 1 The CSRC chief auditor Jia Wenqin said Chinese and US securities regulators have reached a preliminary agreement over cross-border regulatory issues.

2012 May 9 The SEC charges Deloitte with violating US securities laws by refusing to produce required documents.

2012 March 23 Vipshop Holdings Ltd became the only Chinese company going public in the US this year. As of the end of June, 19 Chinese companies had been delisted in the US.

2011 December 31 Throughout 2011, a total 67 Chinese companies listed in the US were publicly questioned by short sellers on auditing frauds and other cheating behaviors. Fourteen Chinese firms got listed in the US while 41 were de-listed that year.

2011 November 10 Longtop Financial Technologies was charged by the SEC for failing to file current and accurate financial reports.

2011 September 8 The SEC filed an enforcement action against Deloitte for failing to produce documents of the Shanghai-based public accounting firm's client Longtop.

2011 July 11 Official talks between the China and the US on cross-border regulation were launched in Beijing.