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Peeling the Onion provides an in-depth analysis of the major issues facing multinationals doing business in China in today's environment. It features a regular update of regulations, taxation, business environment and accounting legislation affecting foreign invested enterprises in China. |
Table of Contents |
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New
ASBE Issuance On 15 February 2006, the Ministry of Finance of the People's Republic of China (the 'MoF') formally announced the issuance of the long awaited Accounting Standard for Business Enterprises ('ASBE'). The ASBE consists of the Basic ASBE and 38 Specific ASBEs. These standards, which will be applied effectively from 1 January 2007, will become mandatory for all listed Chinese enterprises. Other Chinese enterprises are also encouraged to apply these standards. The ASBE replaces the existing Chinese Accounting Standards (CASs) and an earlier version of the ASBE. The applicability of the CASs and the older version of the ASBE are not changed except for those entities required or electing to adopt the new ASBEs. The new ASBEs mark China’s determination and effort to converge to IAS. They are substantially in line with IFRSs, except for certain modifications that reflect China's unique circumstances and environment. Actually, the new ASBEs result from China’s long-term struggle and progress to market economy. Since the stock market began, China has planned to replace the accounting model adopted under the planned economy by a set of standards that is more suitable for an evolving market economy. In 1992, China issued an Accounting System for Business Enterprises (ASBE), which is symbol beginning of accounting reform. Since then, China has issued 20 exposures and 16 specific accounting standards. In 2005, China issued 17 exposure drafts including Insurance Contract etc. Convergence to IAS In the process of formulating its own accounting standards, China has always referred to IAS, so in many aspects CAS is consistent with IAS. Chinese Ministry of Finance has much contact with IASB to find the ways to diminish some essential differences with IFRS, such as the opinion of reliability of fair value etc. On November 8, 2005 Mr. Wang, secretary of Chinese Accounting Standards Committee, signed a joint declaration with Sir David Tweedie, Chairman of the IASB, which marked the Chinese effort to converge to IAS. The number of adjustments required to convert the financial report prepared under CAS to an IAS report has reduced over the years. As a result of the accounting reform over the recent years, China has almost now harmonized with IAS. On the other hand, globalized markets require a common language and convergence to IAS. To promote the convergence to IAS, IASB has encouraging their countries to enlarge the range of IFRS or harmonize their national GAAP with IAS, rather than simply replace them. However there are no voices from developing countries in IASB, partly because capital markets in developing countries are limited and the quality of information is lower. This provides a good opportunity for China to cooperate with IASB and to persuade IASB to consider the characteristics associated with developing countries. Such a role could assist IASB in their understanding and their applicability and effectiveness of accounting regulations IAS. It is also probable that China might seek to take a seat on the IASB. Difference between CAS and IAS Although
the new ABSE shows more convergence to IAS, there are still some
differences between CAS and IAS. First
of all, the accounting policies of certain economic activities prescribed
under CAS are designed to focus on truthfulness and prudence, since the
environment of market economy is not mature enough in China. For example,
to prevent listed companies from polishing their financial statements
through non-monetary transactions, China has issued Accounting Standard
for Non-monetary Transactions, which prescribes the respective accounting
treatment of non-monetary transactions involving exchange of similar and
dissimilar assets. There is not a similar standard in IAS. Secondly,
China prefers historical cost to fair value as a measurement. But IAS 39
and IAS 40 include financial assets and investment property in the realm
of fair value, which are the main part of assets in listed companies. It
is rather difficult to acquire the information of fair value in China,
because the capital market is relatively small and other commodity markets
also need further improvement. Thirdly,
sometimes the same activities may have different effects on current
profit. For example, the profit of annual financial report of Bank of
Communications in 2004 based on CAS was 0.9 billion Yuan, which was only
57% of that reported in their prospectus based on IAS. The most prominent
difference between them was the transfer of a non-performance loan to
China Cinda Asset Management Corporation, which increased profit by 1.2
billion Yuan according to IAS. Finally,
most stakeholders of Chinese listed firms do not care much about public
accounting information, due to questions on accuracy and transparency.
From the perspectives of performance evaluation and supervision, laws and
regulations in China have paid too much attention to net income, so it is
not easy to replace it with comprehensive income as per IAS. Conclusion Confirming
with the global capital market, China should provide high quality,
transparent and comparable information in capital markets. Chinese
standard setting bodies should provide specific problems and suggest
solutions directly to IASB to converge with IAS actively. |
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In China,
companies are required to pay Value Added Tax (“VAT”) on goods
purchased locally in China. If
those goods are subsequently exported, the exporter could apply for a
refund of the VAT paid. The export VAT refund rates are varied depending on the types
of goods exported, in which VAT could be refunded fully, partially or even
with no refund at all. On 14 September
2006, the Ministry of Finance,
the National Development and Reform Commission, the Ministry of Commerce,
the General Administration of Customs and State Administration of Taxation
jointly announced that China
has further reduced the export VAT refund rates for certain items, which
would lead to further increases in the absolute costs for exporters in
China. These newly announced
revision of VAT export refund rates have come into effect on 15 September
2006. The
revision The
revision in the export VAT export refund rates could be categorized into
the following three categories (by product groups): (a) products where
export VAT refunds have been abolished; (b) products where export VAT
refund rates have been reduced; and (c) products where export VAT refund
rates have been revised upwards. Abolishment of VAT export refund 1. All non-metallic products (except salt and cement) listed in Article 25 of import and export Tariff Regulation, coal, natural gas, olefin, bitumen, silicon, arsenic, stone materials, non-ferrous metals as well as certain scrap materials. 2. Metallic ceramic, 25 types of pesticide and their intermediary products, certain finished products of leather, lead-acid battery and mercuric oxide battery. 3.Thin fleece of goat, charcoal, crosstie, cork products, certain processed primary wood products. Decrease in VAT export refund rates 1. Refund rate for steel products under 142-tariff heading has been reduced from 11% to 8% 2. Refund rate for ceramic products, certain
finished products of leather and glass products has been reduced from 13%
to 3.
Refund rate for certain non-ferrous metallic materials has been
reduced from 13% to either 5%, 8% or 11%. 4. Refund rate for textile, furnishings,
plastic, lighter, and specific wood products has been reduced form 13% to
11%. 5. Refund rate for non-mechanically propelled vehicles and certain component parts has been reduced form 17% to 13%. Increase of VAT export refund rates 1. The refund rate for significant technical equipments, certain IT products, and bio-medical products as well as certain “encouraged” high-tech products has been increased from 13% to 17%. 2.
The refund rate for selected processed products made from
agricultural products has been increased from 5% or 11% to
Rationale Apart from attempting to address the issues of high consumption and high pollution in China, Chinese high favorable balance of trade also contributed to the revision of VAT export refund rate. The General Administration of Customs has announced that based on the trading data of August 2006, another record high trade surplus of US$18.8 billion was recorded in August 2006. This is the 28th consecutive month where favorable balance of trade was recorded. Facing with the continuing high favorable balance of trade that attracted critics from various parties, Mr. Bo Xilai, the Minister of the Ministry of Commerce, has indicated that China has been considering various ways to reduce the high favorable balance of trade. The recently announced revision of VAT export refund rates may be considered as one of China’s efforts in addressing this issue. Conclusion In conclusion,
this revision represents another structural change to the VAT export
refund policy of China. The
Chinese government will be using it to direct and monitor economic
activities. |
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Analysis on newly issued foreign banks regulation “PRC Foreign Bank Regulation” Since the first foreign bank representative office was established in Beijing in 1979, China has begun her involvement in world economy in a more extensive way. In fulfilling one of her commitments when joining World Trade Organization (WTO) in 2001, China has issued a landmark ruling allowing foreign banks to offer a full range of services to local customers on 11 November 2006. Background:
A review of foreign banks developments in China 1.
Branches and Representative Office (RO) of Foreign Banks During the past decade, the number of RO of foreign banks in mainland Chinareached its peak in 1997, which was about 550. Subsequently, the number of RO has decreased and it was kept at around 220 in recent years. The number of branches of foreign banks in mainland China is relatively stable, around 150 over the past 10 years. 2.
Geography segmentation These branches and RO are normally located at coastal cities and metropolitans. Shanghai, particularly due to its extraordinary characteristics, such as government policy, industrial basis, financial position and infrastructures, becomes the most attractive city for foreign banks. However, it is now a trend for these foreign banks to extend their business away from coastal cities, especially to central and western regions, which are equipped with preferential policies. 3.
Operating strategies These foreign banks have adopted different strategies in China, which include: a) Target at multi-functional business, including both wholesale banking and personal banking, such as HSBC, Standard Chartered Bank, etc; b) Cooperate with foreign investment enterprises, particularly clients of their headquarter, such as Japanese banks; and
c) Specialized
in a particular industry. Latest
development: The newly issued regulation
1. Foreign banks shall operate RMB business in China,
without any geography or customer restriction. 2. Policies:
a) Registered capital
b) Business scope
c) Supervisory measures
d)
Restrictions
3. Foreign
banks could set up a separate entity, or simply just branches and RO in
China depending on their own business needs.
4.
Consistent treatments between domestic and foreign banks Since foreign banks are now
operating on the same platform with those domestic banks in terms of business scope and
customer base, they therefore
subject to the same regulatory framework. Challenges
1. Foreign
banks a) Since they are new participants in RMB services, how to position themselves in market place and be accepted widely by customers is a key to their success in China market. b) Localization is another challenge to these foreign banks. China is totally different from any other part of the world. Foreign banks still have a long way to go in getting accustomed to China banking regulation system, legal system and economic environment. c) The big four state-owned banks are their main rivals. The big four have large network of branches that have given them greater access to consumers across China. For example, the number of branches established by each of the big four domestic banks is ranging from 11,000 to 55,000. Whereas for foreign banks, they are normally operating no more than 30 branches in China (for each foreign bank). d) Apart from competition
from domestic banks, foreign banks are also facing
stiff competition among themselves. Foreign banks like HSBC,
CITIBANK, and Standard Chartered Bank which have long penetrated into
China market are likely to compete against each other for market share in
this new RMB business. 2.
Domestic banks a) Facing fierce competition from foreign banks could be the toughest challenge to domestic banks for a long time. The primary reasons are due to shortage of capital and high level of non-performing loan (NPL), which reduces the competitiveness of these domestic banks. b) The existing segmentation and rigorous regulations in banking industry have boosted specialization of domestic banks, which could hinder their future development. Taking commercial banks for an instance, generally their target market is state-owned enterprises, some of which could be operating unsatisfactorily. Consequently, NPL in those banks increases and resulting in a vicious circle as more loans may be needed by these SOE. On the contrary, foreign banks usually are multi-functional. Their services spread to not only traditional business, but also cover investment and securities business. This reduces their operating risks by not relying on a single segment of the market and increases their overall competitiveness.
c) Human
resource issue could be another challenge to domestic banks. Generally
foreign banks seem to be able to attract the talents from the
banking industry. Accordingly, how to retain talented and experienced
personnel in those domestic banks are becoming a critical issue that needs
to be resolved. Opportunities
1.
Foreign banks
a) Worldwide
reputation, international background, innovation and brand name are
foreign banks’ greatest assets. More and more individuals are looking
for personalized and customer-friendly services, as well as a broader
range of services, which are the strength of foreign banks.
a)
As foreign banks begin to offer RMB services, this could encourage
domestic banks to explore new market niche. b) To attract and maintain royalty customers, domestic banks have to look for ways to improve their productivity, efficiency and competitiveness. Conclusion Foreign bank headquarters have shown tremendous interests in China market. As mentioned before, huge consumer market and continuing economic growth encourage more and more foreign banks to set up separate entities, branches or RO in China. The
domestic banks seem to take every opportunity to strengthen themselves in
anticipation of a stiff competition ahead, including raising additional
capital through initial public offering (IPO) in China and/or abroad. However,
whatever the effects of this new regulation may have over the domestic and
foreign banks in China, the consumers are most likely to benefit from
additional alternatives and increased competition in the banking industry
for RMB business. |
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We are interested in receiving your feedback on our articles and any suggestions as to future topics are more than welcome at mailto:newsletter@lehmanbrown.com |
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