The US Securities and Exchange Commission has accused Chinese regulators of blocking its attempts to stamp out a wave of accounting fraud by mainland companies listed on US stock exchanges.
The SEC is moving aggressively to deal with mainland firms that secured listings on the New York Stock Exchange and Nasdaq via so-called reverse mergers, then became embroiled in financial scandals. Since March 1, 24 US-listed mainland firms have announced auditor resignations, accounting problems, or both.
But the China Securities Regulatory Commission is treating the American regulator's attempts to investigate as 'a possible violation of sovereignty and/or national interest', SEC chairman Mary Schapiro wrote in a report to Congress.
A CSRC spokesman declined to comment.
Schapiro's words are likely to unsettle investors who buy shares in mainland companies on offshore exchanges, including Hong Kong's, believing foreign regulators or law enforcers could bring mainland rule-breakers to book.
Foreign watchdogs, including Hong Kong's Securities and Futures Commission (SFC), need CSRC co-operation to conduct raids, seize documents or interview witnesses on the mainland.
'If you are buying shares of a Chinese company listed on an offshore exchange, that offshore exchange's regulator is sometimes unable to investigate potential fraud due to lack of regulatory co-operation,' said William McGovern, a partner at law firm Kobre & Kim in Hong Kong and a former SEC branch chief.
An example is Ocean Grand Holdings, a Hong Kong-listed, Guangdong-based aluminium extruder that collapsed in July 2006 after 800 million yuan disappeared from the business.
The SFC launched an inquiry and informed the Hong Kong police of its findings. But the regulator and the police could not question well-connected Ocean Grand chairman Michael Yip Kim-po, who returned to Guangdong to work in his factories.
The commercial crime bureau of the Hong Kong police eventually arrested Yip in September 2007, when he tried to enter Hong Kong via the Lo Wu border crossing. Last year he was jailed for seven years.
About 150 mainland companies have joined US exchanges via reverse mergers - buying the listed shell of a dormant business, then injecting their assets into it and thereby escaping the more rigorous regulatory scrutiny of a full initial public offering.
Firms under SEC investigation include Guangdong-based advertising agency China Century Dragon Media, whose auditor accused it in March of falsifying bank statements.
Another is Rino International, a supplier of water-pollution control equipment. Rino, based in Dalian , failed to disclose that a law firm and accounting firm it had hired to investigate analysts' allegations of financial fraud had resigned, the SEC said. Rino also did not tell investors the head of its audit committee and all its independent directors had quit.
Schapiro wrote: 'The SEC routinely notifies our regulatory counterparts, including the China Securities Regulatory Commission, that obtaining voluntary and direct access to witnesses and information is important in our enforcement investigations. Some jurisdictions, such as the [People's Republic of China], view such direct efforts as a possible violation of sovereignty and/or national interest, which may be expressed informally (as is done by the CSRC).'
Additional reporting by Wei Ren