The Peoples Republic Of China

Published Date: 02 Nov 2017

After 1911, China entered a period known as the Warlord Era when the country was divided among several military factions. (Cultural China, 2013) The Northern Warlords faction enacted the first recorded professional accounting legislation in China. (Chinese Accountants and the Spirit of Professionalism, 2013)

Public accounting was suspended when the Peoples’ Republic of China was established and the Communist party came to power on October 1, 1949. Accountants became subject to government control and principles were based on model used in the Soviet Union. This model continued in use until 1980.

During the 1950’s, as part of Mao Zedong’s sweeping reforms, all private companies and farm land were seized by the government. A system of collective possession of these assets with central control by the government was set in force. The overtaken companies were and are still referred to as State Owned Enterprises, (SOS). Chairman Mao’s plan was to modernize and industrialize the country, though he was unsuccessful in the long run during his reign, his actions set China on the path to modernization in a relatively short period of time.

The People’s Republic of China assumed China’s seat at the United Nations, replacing Taiwan in 1971 and is now a permanent member of the United Security Council. (U.S. Relations with China, 2013). China enacted Sino foreign joint ventures, in 1970. This new regulation allowed direct foreign investment between a Chinese company and a foreign company. Some of the limitations the government put forth required that the entity be a limited liability company, foreign investment must be at least twenty-five percent, and the profits, losses, risks and rewards are all shared in proportion with capital investment. Auditing must be done on financial statements and tax returns by registered Chinese CPAs. It was during this period of time that public accountants began to practice again.

China’s modern day economic and regulatory controls surrounding business and accounting were established throughout the eighties. During this time accounting and auditing firms were separate and regulated by different governmental parties. Accountants were regulated by the Ministry of Finance and auditing firms by the State Council.

The municipal government approved the first securities regulation in 1984. The State Council put out CPA regulations for the scope of practice, ethics and working rules. The establishment of these new regulations led to the development of an accounting professional body, the CICPA, Chinese Institute of Certified Public Accountants in 1988. Unlike the U.S.’s AICPA or FASB, the CICPA is directly controlled by the Ministry of Finance. The government’s control does not allow for independence as they are essential a branch of the government, where their leadership is appointment by the government.

The Shanghai Stock Exchange (SHSE) was reopened in December 1990, after the being closed by the Communist Party in 1949. A second stock exchange, Shenzhen Stock Exchange (SZSE), was opening April 1991. The Chinese Security Regulatory Commission (CSRC), which is similar to the U.S. SEC, began with fifty companies in 1992. January 2013 statistics show that the Chinese stock exchanges had a combined 2,454 companies listed. (Monthly Reports Latest Statistics World Federation of Exchanges, 2013)

Though we think that stock exchanges mean free trade, the capital markets in China are still controlled by the government.

The Ministry of Finance began regulating both accounting and auditing firms as well as still controlling the CICPA. In 1993, the government takes the steps to begin to replace the previous Soviet model with an Anglo-American model. The CICPA joins the Confederation of Asian and Pacific Accountants (CAPA), in 1996. In, 1997 China becomes members of the International Federation of Accountants (IFAC) and the International Accounting Standards Committee (IASC). Acquiring membership with the IASC does not convince the government to adopt international financial accountant standards; the Ministry of Finance declares they will develop their own standards, they will be similar to IFRS but the country will not adopt IFRS.

China’s joining of the World Trading Organization in 2002 is subject to many stipulations. The WTO requires that China adopts IFRS. Currently the China Accounting Standards Committee (CASC) sets the accounting standards in China. The Ministry of Finance in February of 2006, issued a new set of accounting standards consisting of one basic standard and 39 specific standards. A statement was made by the Ministry of Finance in February 2006 that China’s new accounting standards would bring substantial convergence between Chinese standards and IFRS. China’s national standards were substantively converged by the end of 2011. (China affirms commitment to converge with IFRSs, 2006)

One of the most vital parts of doing business in China is the cultural concepts of guanxi [gwan-shee], renqing [rén qíng], mianzi [miàn ze], and keqi [kei-qi]. Guanxi involves networking and interpersonal relationships; it refers to the benefits gained from social connections that can last a lifetime. Bloomberg BusinessWeek posted an article in 2007 that stated, "It's the first word any businessperson learns upon arriving in China. It is the key to everything: securing a business license, landing a distribution deal, even finding that coveted colonial villa in Shanghai". Fortunes have been made and lost based on whether the seeker has good or bad guanxi, and in most cases a positive outcome has meant knowing the right government official, a relationship nurtured over epic banquets and gallons of XO brandy." (Balfour, 2007)

Guanxi relationships can simple, with one person or a complex web of many connections. It is a contact one can call upon when they need something. Guanxi relationships can develop from childhood though school, clubs and organizations. Establishing a new guanxi relationship is a delicate process, especially for Western countries trading with China, who do not understand this concept. A gift is a very popular way to establish this relationship. Special care is needed in choosing the gift. If you give too inexpensive of a gift to someone you don’t know well they may not feel respected enough. Conversely, if you give a gift that is too expensive the receiver may be suspicious that you may ask for a return favor they cannot deliver. Different regions of China and different occasions may affect the choice of gift as well. The Chinese believe people will not give a gift without reason. Though giving a gift to a stranger will not be received unless a proper introduction has gone before the exchange. (What is Guanxi?, 2013) Once established, the guanxi relationship becomes a moral obligation, much like the Chinese obligation of renqing, which follows the Confucian notion of reciprocity. A Chinese citizen who has done a favor for you automatically feels they are owed one in return. Guanxi comes down to who you know and what they perceive to be their obligation to you. Mianzi is the concept of face. In Chinese culture the concept of losing face, saving face and even giving face is as important as guanxi. Maintained composure, not publically losing your temper or confronting someone, even a subordinate, saves face. It is the calmness or harmonious way you present yourself on the surface and is considered of a higher value than your personal thoughts or emotions. The Chinese often use intermediaries to deliver bad news. Finally, keqi, or humility and modesty are highly regarded within China. It is impolite to be arrogant and boast about your accomplishments. Being polite, well-mannered within their guidelines, and considerate is of the highest honor. (Harmony in Chinese Culture, 2008) These four cultural guidelines are of such importance that there have been research studies done, books and papers written in regards to these culture norms that shape and mold how business is accomplished in China. It is important for foreign companies and business people to consider these concepts and educate themselves to avoid a negative economic consequence due to lack of cultural consciousness.

China is still run by a communist government and recently they have moved to a more market orientated economy from their centrally planned, government run socialist system. Economic reforms that included more independence in business, a diversified banking system, reopening and development of their stock markets, opening to foreign trade and investment led them to be the world’s largest exporter in 2010. Despite the fact that in 2012, they were the world’s second largest economy and provided the second highest value of service behind the U.S. their per capita income is below the world average. They estimated GDP per capita in 2012 was $9,100 per person. China’s economy is based primary on exports; $2.05 trillion estimated in 2012. This puts China at risk when other countries face economic issues. Europe’s economic situation has greatly affected China. Attempting to counteract these effects the Chinese government enacted the "12th Five-Year Plan" in March 2011. The plan emphasizes continued economic reforms, the need of increased domestic consumption to lessen their reliance on exports. Their labor force is the largest in the world at approximately 795.4 million and is divided with 35.7% in services, 29.5% in industry and 34.8% in agriculture.

The U.S. imports 17.2%, Hong Kong imports 15.8% and Japan imports 7.4% of China’s exports. China’s main exports are data processing equipment, apparel, telephone, textiles and integrated circuits. The industries in China encompass a much larger market producing iron, steel and aluminum, coal, petroleum and cement, chemicals and fertilizers as well as transportation equipment; automobiles, rail cars, locomotive, ships and aircraft. They also have a large industry in commercial space launch vehicles and satellites. (East and Southeast Asia:China, 2013)

Many U.S. companies have invested in China since they have opened their country for direct foreign investment. Companies like Apple, who not only uses Chinese factories to make parts for their popular iPhone and iPad products but they also have a very large following among up and coming Chinese citizens. Ford Motor Company, Nike and even Starbucks have flourished in this fast growing economy. American Casino conglomerates Wynn Resorts and Las Vegas Sands have opened casinos in China and while you are at the casino you can treat yourself to a Chinese brewed Molson beer. (Epstein & Meredith, 2010)

China’s exchange rate is determined by fiat, it is controlled by the government of China. It is not determined by market forces and therefore their GDP measures may not be an accurate measure of their output.