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By Xie Yu, Julie Zhu and Selena  Li

HONG KONG (Reuters) –     Beijing has sent a team of regulatory officials to Hong Kong to assist the U.S. audit watchdog with onsite audit inspections involving Chinese co*panies, four people familiar with the matter said, as part of a landmark deal between the two countries.

A China-U.S. agreement last month allows U.S. regulators, for the first time, to inspect China-based accounting firms that audit New York-listed co*panies, a major step towards resolving an audit dispute that threatened to boot more than 200 Chinese co*panies from U.S. exchanges.

About 10 officials from the China Securities Regulatory co*mission (CSRC) and the Ministry of Finance (MOF) have arrived in Hong Kong and joined the audit inspection, which started on Monday, three of the people said.

The officials will assist a team of inspectors from the Public co*pany Accounting Oversight Board (PCAOB), the U.S. audit watchdog, who are in Hong Kong for the onsite inspection, the four people said.

All of the sources declined to be named due to the sensitivity of the matter.

Representatives at CSRC and MOF did not immediately respond to Reuters requests for co*ment. The PCAOB did not respond to Reuters queries sent outside U.S. business hours.

The gathering of U.S. and Chinese officials together in Hong Kong marks a major step forward in what was expected to be a fraught process implementing the audit deal, the most detailed agreement the PCAOB has ever reached with China.

State-owned China Southern Airlines and data centre co*pany GDS Holdings are among the U.S.-listed Chinese co*panies for audit inspection in the Asian financial hub, two separate sources said.

China Southern Airlines and GDS did not respond to requests for co*ment.

Reuters reported last month that U.S. regulators had picked a number of U.S.-listed Chinese co*panies including e-co*merce majors Alibaba Group Holding Ltd and JD.c** Inc for audit inspection.

FULL ACCESS

Officials from the CSRC, which has been leading negotiations with U.S. authorities to resolve the audit dispute, are expected to be present when the PCAOB conducts interviews with and takes testimony from the audit firms’ staff, one of the four people familiar with the audit process said.

The whole inspection process will last about eight to 10 weeks, said two of the four sources, in line with co*ments by U.S. Securities and Exchange co*mission (SEC) Chairman Gary Gensler in a meeting with lawmakers last week.

It was not clear whether the Chinese officials would be present for every step of the inspection process with PCAOB representatives.

A separate source familiar with the matter said that involvement by the Chinese regulators was consistent with the way the PCAOB conducts inspections elsewhere around the world and that the U.S. watchdog was not giving China any special consideration.

U.S. regulators have for more than a decade demanded access to audit papers of U.S.-listed Chinese co*panies, but Beijing has been reluctant to let U.S. regulators inspect its accounting firms, citing national security concerns.

Despite the audit deal, legal experts and China watchers last month warned they could still clash over how it is interpreted and implemented, with the U.S. side seeking full access to Chinese audit papers without any consultation or input from Chinese regulators.

Beijing’s statement on the deal last month, however, emphasised that the U.S. watchdog will have to obtain documents through the Chinese regulators, and must involve the China side during interviews and testimony taking.

The onsite inspections by the PCAOB are being conducted in the Hong Kong offices of the selected Chinese co*panies’ audit firms, said two of the sources.

The PCAOB will spend the first week inspecting the auditors’ co*pliance and internal control systems and move to review the audit working papers of selected co*panies from the second week, they added.

In line with the U.S. regulators’ statements, the PCAOB inspectors can see co*plete audit work papers without any redactions, and they will adopt view-only procedures for personally identifiable information, the two sources said.

(Reporting by Xie Yu, Julie Zhu, Selena Li in Hong Kong and Michelle Price in Washington; Editing by Sumeet Chatterjee and Edmund Klamann)