China amends state secrecy laws

The PRC has taken measures intended to boost transparency, which should help cross-border deals.

China has brought in new state secrecy laws that restrict government agencies and related entities from classifying documents or information that should be publicaly known, according to a report by law firm O’Melveny & Myers.

The new regulations were effective 1 March 2014.

The move by the Chinese government is expected to improve transparency after an uptick in cross-border transactions that involved foreign requests for documents or information located in China.

The “Big Four” accounting firms fell into a dispute with US regulators due to the refusal of their China-based affiliates to provide local audit documents, citing state secrecy laws.

Earlier this year, a US  judge ruled that the Chinese affiliates of the Big Four should be suspended for a period of six months for refusing to turn over audit documents for certain US-listed Chinese companies under investigation by the US Securities and Exchange Commission.

The Chinese affiliates of Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers were all given a six-month suspension on auditing US-listed Chinese companies as a result.

Private equity firms’ portfolio companies have been known to come under fire, with their auditors facing similar problems, industry sources say.

While the newly implemented laws address such issues, they do not provide specific guidelines as to what types of documents or information should be considered public knowledge, according to the OMM report.

Moreover, the regulations say that the scope of what is a state secret can be amended “according to changes in the situation”, adding further uncertainty under which conditions the scope could be adjusted.

China continues to liberalise its investment environment, but its regulations remain unclear in many instances.

Recent regulatory changes in China include the move by the China Insurance Regulatory Commission (CIRC) to increase the percent of assets insurance companies may invest in private equity, and other asset classes, to 30 percent from 25 percent.

However, the allocations investors can make on- or offshore remains “not crystal clear”, one industry source told PEI earlier.