China - Eastern promise.
All eyes are on China
All eyes are on China
China has every reason to be optimistic about its future. Its accession to the World Trade Organisation will bring it abundant business opportunities and provide Chinese business and industry with greater market share and access to a greater diversity of markets.
As well, Beijing’s successful application to host the Olympic Games in 2008 will ensure billions of pounds of investment is pumped into the country, creating jobs and business opportunities for local and western businesses like never before.
But the icing on the cake came when the World Bank publicly predicted that China will be the largest economy by 2020 – perhaps not that surprising considering the country has 1.3 billion inhabitants.
To secure the Games, Beijing and the Chinese government agreed a substantial budget of more than #10bn. There are few Chinese venues up to Olympic standard, so the centre of the sporting side of the bid is a giant Olympic park to the north of the city, close to some of Beijing’s renowned landmarks such as the Forbidden City and Tiananmen Square. Also planned is an exhibition centre and a trade centre featuring two huge skyscrapers.
Beijing will also need massive investment in transport, but planners are prepared to build more than 200 kilometres of new roads, five new metro lines and, at the airport, a third runway and another terminal are planned.
Beijing’s rate of development is so massive that building for an Olympics represents only 10% of the city’s construction plans spread over seven years. By 2003 market access will be fully phased in for several key sectors, and by 2006 tariff reductions and market access for other sectors will have been phased in – changes that will offer greater efficiencies and lower entry requirements for newcomers.
But the process of opening up its market will not be so smooth. Thousands of laws and regulations have been, and will continue to be, changed. Specialists at PricewaterhouseCoopers and fellow Big Five firms are leading the charge to ensure businesses can take advantage of the changing environment.
Matthew Wong, partner at PwC in Shanghai, says: ‘State reforms are planned to streamline the government hierarchy overseeing business sectors. In the interim, there is confusion as to the future policy direction in specific sectors. Local administrations, including trade free zones, are jockeying for position and survival as investment destinations.’
Hong Kong Society of Accountants executive director Lee Kai-Fat believes the Big Five have a duty to push for greater awareness of IT ‘as a bridge to open up world movement services, as it is what we need to know to survive’.
In Hong Kong opportunities abound, particularly in insolvency work, of which an estimated 90% has traditionally been carried out by overseas firms. Insolvency work peaked with the Far East financial crisis in the late 1990s, but which hit Japan and Korea the hardest.
However, as Kai-Fat says: ‘There is a constant need for insolvency work in Hong Kong, but there is an increasing local presence in this area.’ Corporate governance services have seen a sharp unturn in interest over the last two to three years. Compared with some of its neighbours, the regulatory requirements for disclosure have been much higher in Hong Kong.
Both China and Hong Kong are very aware that, if their markets are to compete with the likes of New York and London, they must be seen to be taking best practices from around the world.
To cope with China’s fast-changing business scene, accountants are being trained by the Big Five, ACCA, CIMA and HKSA – to mention but a few. They are expected to get out and about and to communicate well.
ACCA, for instance, is placing increasing emphasis on giving students early exposure to the real financial and accounting world – a marked change of philosophy. Indeed, the fact that accountancy training is available at all is a mark of the sea change in the business evolution of the republic.
Such training stopped in China for over 20 years and was not reintroduced until the late 1970s.
It remains to be seen how the relationship between mainland China and Hong Kong will pan out. There are those who take the view that China’s ultimate aim is to make Beijing the region’s number one trade centre.
Others believe Beijing, Shanghai and Hong Kong will all operate alongside each other. What is certain is that Hong Kong-based accountants are having a massive influence in the mainland opening up to the West. Opportunities are vast, further co-operation is called for and the lessons China is learning from Hong Kong are invaluable.
ACCA has recognised the opening up of China by announcing Hong Kong-based Ernst & Young partner Sam Wong as its next president – the first non-European to be nominated for the role.
Wong says: ‘WTO has opened doors for accountants in the region, both from the West and also locally. Local accountants have an advantage in some ways, as they have an understanding of the rules, regulations, the language and culture of the area.’
Hong Kong is an important bridge to China, as many more of its accountants have trained in the US, Canada and Europe and so are aware of different standards. Wong says: ‘For years, Hong Kong standards have worked along the same lines as those in the West. This is particularly relevant, as last year the Chinese government said all financial institutions – insurance companies, banks, finance houses – must produce their financial reports in accordance with IAS.’
PwC Hong Kong partner Richard Sun adds: ‘There is plenty of cross-border activity between the two countries. China has moved towards embracing the West and freeing up its market. There are now more free trade and investment opportunities for foreigners and, of course, they all need accountants. Audit firms, in particular, have enjoyed the opening up of the market, and more and more good quality companies in Hong Kong are going for a listing in Hong Kong.
‘There are now over 70 companies that have listed since we opened the door in November 1999. The emerging companies tend to be in the steel industry as well as pharmaceuticals and herbal medicines.’
Hong Kong has for a long time been considered the New York of China, but the talent is steadily shifting into the mainland. This can partly be explained by the fact the Chinese government has calculated a need for 600,000 new accountants in the country. Changes to legislation, such as that to audit rules in the country, will ensure there is plenty of work to go round.
All companies must now have their audit work carried out by a local CPA plus a Big Five firm, or foreign accountancy firms – a decision that will ensure the Big Five continue to have a lot of work in the country. However,the vast size of China presents business problems. Most of the Big Five have only three or four offices, and the competition is extremely fierce: fees are at extremely low as the battle for market share hots up.
Leo Lee of the Hong Kong Securities and Exchange Commission says: ‘The relationship between Hong Kong and China will be very interesting. There are opportunities and threats for us. The Chinese market is so big there are opportunities for Hong Kong investors, but when China is fully open there is the threat companies will choose to list on the mainland and not need Hong Kong anymore – a threat particularly apparent in the financial sector.’
STAYING ON TOP OF HONG KONG REGULATIONS
Q: Do I form a company, branch, or representative office?
A: Examine your business activities and find out where your company might have a taxable presence. Compare the tax implications of your operations using different forms of entity (subsidiary, branch or representative office) and find the most tax-efficient way that you can to structure your operations.
Q: How do I form the entity that I need?
A: Register with the Hong Kong Companies Registrar, Inland Revenue department and other regulatory authorities. Other co-ordination with registered agents for overseas companies is required.
Q: Who can help me with payroll and accounting functions?
A: When you are getting started, you will probably not have the resources to focus on the accounting and payroll issues. Accountancy firms can provide payroll services and look after accounting and other financial functions, such as bookkeeping, bank accounts, import/export documentation.
Q: Who can look after my audit/reporting requirements?
A: Accountancy firms can perform statutory audits and provide assurance on financial performance. They can also advise companies on accounting policies and provide accounting and regulatory services.
Source: PricewaterhouseCoopers Hong Kong office.