Gateway to the east

Any business with international pretensions has to be interested in China these days. Everyone from Disney to the BBC is knocking on the door of a market that is already beginning to cast a shadow over the rest of the world.

The Big Four are there, as you would expect. And many of the major UK accountancy institutes are eyeing training opportunities that are beginning to emerge.

Though the word China is seldom found in a sentence without the word ‘opportunity’ nestling nearby, the market is a tough one to crack. Cultural differences, the pace of change and its sheer size see to that. But many organisations – of varying sizes – are using a familiar gateway to access the territory: Hong Kong.

Next Friday marks the eighth anniversary of the handover of Hong Kong to China. And it is perhaps only now that the ‘one country, two systems’ approach adopted by Chinese leaders after the handover has borne fruit.

During the past eight years, the territory has had to prove remarkably resilient. It survived the Asian financial crisis, an event that in no small part helped put the international into international financial reporting standards.

It recovered from the connected property crash, which damaged sentiment enormously. And it has bounced back after SARS, the disease that caused nothing less than a global panic and thoroughly isolated Hong Kong.

The turnaround has been remarkable with the number of companies going public these days highlighting the recovery.

Driven by listings of mainland companies, last year Hong Kong jumped into second place globally in terms of IPOs behind New York. And it is mainland listings that are driving those IPOs. And just as a lack of accountants in mainland China has the potential to curb growth, an accountancy skills shortage in Hong Kong is having a similar effect.

‘One of the constraints on new IPOs listing here – there is huge queue of quality firms that want to list – is that they just can’t get the accountants,’ says Simon Galpin, associate director general of Invest Hong Kong.

Victor Ng, president of ACCA Hong Kong, says the problem is having a wider impact than on just IPOs. ‘In Hong Kong we are running short of staff,’ he admits.

Staff retention for the firms is an issue – the lure of business is perhaps even more powerful than in the UK – with the effect that salaries are rocketing. In professional firms they leaped by 5-15% last year, though for recently-qualifieds, promotion means increases are in the region of 40-50%. ‘The situation in Hong Kong is a little bit tense in terms of staffing,’ says Ng. ‘In China it’s even worse.’

For once, IFRS is having little impact. Hong Kong has adopted 2005 as its go-live date too, and the transition has been relatively smooth. Only IFRS40 – investment property – has been contentious, though given Hong Kong’s obsession with property prices (here the property market dictates consumer sentiment and consumer sentiment governs business reality), that should come as little surprise.

Sarbanes-Oxley has driven more activity. ‘With most of the Sox work, we knew it was coming,’ says KPMG partner Nick Debnam. ‘But part of the problem is the industry sucking up accountants to do internal Sox certification.’

After a recession that felt like it was never going to end, this year’s recovery has offered some respite. There is more business around and for the first time in a long time, firms have been able to put up fees. For a long time, admits Edward Chow, president of the Hong Kong Institute of Certified Public Accountants, ‘fee rises have been close to impossible’.

But Debnam says the fact that rising staff costs have been so well-known – Hong Kong is much more open about salary levels than the UK– means firms have been able to tackle the fee issue. ‘Fees have been pretty flat here for the last few years, but this year most companies will be facing a request for an increase from their auditors,’ he says.

Ten percent has been a typical rise and KPMG at least sounds like it has been fairly forthright in its negotiations. ‘We’re not really interested in clients who only want a low fee,’ Debnam says.

Its Closer Economic Partnership Arrangement with China convinces Hong Kong that it is the obvious gateway to the mainland. And the way the firms structure themselves suggests they buy that argument too. Most of the big firms now run a China practice – not separate ones for Hong Kong and the mainland as was previously the case.

All they need are the bodies that can deliver on the promise. As Fung Waai Ying, president of the Association of International Accountant’s Hong Kong branch, says: ‘Experienced accountants are really in demand right now.’ UK qualifieds with wanderlust take note.

CHINA'S RISING STOCK

Even the London Stock Exchange is looking at expansion opportunities in the Far East. Last November it opened an Asia-Pacific regional office in Hong Kong. The Exchange said it underlined its commitment to the region. What it meant was that it had seen the opportunity China offers.

According to market research firm Deallogic, IPOs by mainland Chinese companies accounted for 6.75% of the global market outside China last year, prompting LSE chairman Chris Gibson-Smith to say: ‘We believe London is the natural home for dynamic, growing Chinese and Asian companies looking to attract international capital.’

What Gibson-Smith didn’t say was that Chinese companies are increasingly wary about the Sarbox-driven compliance cost of listing in the US, and that he hoped to persuade more Chinese companies to list on London instead.

Air China has already obtained probably the highest-profile London listing, though the number of mainland Chinese companies on the main market and AIM is now in double figures. The LSE is hoping these are just the first of many.