Opinion: Why the audit fight between regulators will hurt China

The SEC says it seeks to censure the firms or ban them from auditing US listed companies. If the PCAOB is unable to quickly negotiate access to inspect the firms, it too may seek to prevent the accounting firms from auditing US listed companies. That could lead to a disaster for the clients of these firms, since an auditor is required for a company to keep its listing. If all the Chinese auditors are banned, all of the US listed Chinese companies may be kicked off the US stock exchanges.

US multinationals (MNCs) are also threatened by this action. In order for an auditor to play a substantial role in the audit of a US MNC, it must be registered with the PCAOB. Should the PCAOB move to deregister all Chinese accounting firms, US MNCs may have difficulty getting their China operations audited. Caterpillar's recent accounting troubles in China have shown that shareholders of MNCs face some of the same risks as investors in Chinese companies.

Both China and the US have reasonable positions. China has the right to control what goes on within its borders, free of interference from other nations. The US is right to demand that companies that seek capital on US markets play by US rules. The SEC and the PCAOB are charged with enforcing US securities laws and can hardly back down.

Some Chinese officials have indicated that overseas listed Chinese companies should come home to list. That is simply not practical. China's own stock markets reopened in 1990 principally to help restructure state-owned enterprises. Only recently have privately owned companies had meaningful access to these markets. ChiNext, the NASDAQ of China, has grown spectacularly since its launch in 2009, but with thousands of companies in the pipeline, it will likely be a decade before it is able to meet the capital needs of China's growing entrepreneurial companies.

Unless Chinese officials blink, delisting of Chinese companies from US exchanges is an increasingly likely outcome. Some companies would likely seek to move their listings to Hong Kong and others may follow the lead of other Chinese companies and go private. Others may just go dark, stopping communications with shareholders and wiping out their investments.

It is up to China to decide. If it is unwilling to compromise, China's entrepreneurial companies may lose access to needed capital, which could significantly damage indigenous innovation with long-term negative effects on China's economy.

Perhaps some of China state-owned enterprises are too sensitive to allow foreign regulators to pour over their records. China should not allow those companies to list abroad. China, however, should not interfere with the ability of its private companies in non-sensitive sectors to raise capital abroad, and should allow these companies to subject themselves to foreign regulation as a private matter.

Paul Gillis, Peking University, Beijing