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HONG KONG — Investors have cheered a breakthrough deal that promises U.S. regulators access to Chinese companies’ accounting paperwork but say markets will need to see successful inspections and economic recovery before much more money can be expected to move to China.

At least in principle, the agreement, announced on Friday, satisfies a long-held U.S. demand for unfettered access to Chinese audit papers – dramatically cutting the risk of Chinese firms being removed from U.S. bourses due to non-compliance.

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Yet U.S. officials warned the deal was only a first step – and financial markets are similarly cautious. Investors are waiting to see actual cooperation and worry that, while the deal is positive, it is not enough to pierce economic gloom or resolve broad Sino-U.S. tensions.

Share price gains made on rumors ahead of the audit agreement were capped by a new round of risk aversion on Monday, triggered by rising global interest rate expectations.

The U.S.-listed shares of one-time darling Chinese internet businesses, such as Alibaba and Baidu, are trading at less than half of 2021 highs and not far above recent troughs.

“There is optimism based on the fact China and the U.S. can see eye to eye and seek common ground,” said Sam Lecornu, co-founder and chief investment officer at fund manager Stonehorn Global Partners in Hong Kong.

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“But the audit issue is not the biggest driver of negative sentiment towards China,” he said. The two countries still had “bigger deals to be done that would help lift that sentiment.”

Investors are chiefly worried about a sharp slowdown in the Chinese economy that has caused confidence and spending to slump and unemployment to spike – partly reflected in this month’s 2.5% slide for the Chinese yuan.

Then there are sharply rising U.S. interest rates – an incentive for U.S. investors to stay home – new strains in U.S.-China relations over Taiwan and persistent nerves about regulatory tightening in China, especially for internet firms.

“This announcement was a good outcome,” said George Boubouras, head of research at K2 Asset Management in Melbourne.

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“But (U.S.-China) divergence will continue to occur …. There are too many differences between the West and how China wants to dictate their narrative. The tension will remain.”

While the deal’s announcement on Friday has brought major relief for investors in U.S.-listed Chinese companies, legal experts and China-watchers warned that the two sides could still clash over the details.

SIDELINES

Most global and even Asia-focused funds are underweight on China, according to HSBC, and foreign institutional investor flows into the country this year have been skittish and only slightly positive.

In the near-term, focus will shift to the first actual audit checks under the deal and to an anticipated update for Chinese rules on how mainland companies can access global capital.

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The U.S. Public Company Accounting Oversight Board (PCAOB) said inspections would first be conducted in Hong Kong, due to COVID restrictions in mainland China. Officials said selected companies had already been notified.

“Much will depend on the outcome of the full and extensive audits and the prevailing geopolitics,” said Daniel Tu, founder of Active Creation Capital in Hong Kong.

“U.S. investors, especially institutional investors, are staying on the sidelines for now.”

Markets are also awaiting the final rules from the China Securities Regulatory Commission (CSRC) governing how mainland Chinese companies can list overseas.

Draft guidelines have flagged that any floats will need to be vetted by CSRC officials and that overseas banks acting as sponsors or lead underwriters must also file annual paperwork, something bankers warned will further impede transactions.

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Beyond that, analysts say investors need to feel comfortable that the deal signals a positive shift in the Chinese government’s attitude towards business and supporting the economy before they will come back to a market that has underperformed for years.

“This is a potential sign that the Chinese leadership is returning to being pragmatic when looking at economic issues,” said Andy Rothman, investment strategist at Matthews International Capital Management

“If this shows that we could (also) see a pragmatic approach to COVID mitigation and dealing with the Chinese property sector, then that could have a big impact on the Chinese economy, investment environment and sentiment towards Chinese stocks.” (Reporting by Scott Murdoch in Hong Kong; Writing and additional reporting by Tom Westbrook in Singapore; Editing by Bradley Perrett)