Asia Finance Blog

Asia markets follow US lead and tumble

China adopts new accounting standards

China has decided to conform to the ‘International Financial Reporting Standards’ (IFRS) and thereby revamp its corporate accounting and registered auditing practices in line with international norms. Confirming to IFRS, which is used in almost 100 countries, including EU and US marks in important step in China’s attempt to internationalize its economy. The move will also reinforce foreign investor confidence in the quality of financial information.

The decision has come after a decade long review of local accounting practices and is slated to bring about greater transparency in the financial information disclosed and hence immensely boost investor confidence. There are 39 new standards for corporate accounting that will become effective from January 1, 2007 and 48 standards for registered auditing. China will not adopt IFRS in totality but accept its broad framework and rewrite it into Chinese Accounting Standards Systems, so as to suit its peculiar local needs.

As the new rules focus more on a firm’s current operating business rather than unusual gain and loss, domestic listed companies are expected to disclose a USD 2.5 billion profit surplus in their 2006 results. Also foreign investors’ confidence in the A shares is expected to increase as they will now be able to get a unified financial report for each public company. Investors in the A share market currently opt for listed firms who issue H and B shares as the firms’ financial reports are disclosed under the requirement of international standards.

The accounting and auditing industry in China will undergo a tremendous transformation and will have to primarily focus on training personnel and withstanding competition from the four international accounting giants. Translation and transition to IFRS is likely to be wrought with confusion, slip-ups and interpretation problems as experience elsewhere in the world has shown. The adoption of international standards is just a beginning; the real challenge of implementation lies ahead.

Major companies lineup to invest in China, India to see drop in FDI

While China is fast emerging as the most attractive investment destination for some of the world’s top companies, India is projected to see a decline in FDI. Per reports, some of the top 500 global companies have initiated investment in China’s Suzhou Industrial Park. The Park is now a cluster of around 84 projects by 52 companies totaling about USD 5 billion in investment. The projects are mostly in the nature of high-tech manufacturing industries like chemicals, pharmaceuticals, etc. Also, just recently US based Peabody Energy, the world’s largest coal manufacturing company, announced plans to scout for opportunities for investing in Chinese coal industry.

On the other hand, China’ s Asian neighbor India is seeing a slowdown in the investments due to a non-investor friendly investment climate and inadequate infrastructure. In fact, the IMF has urged the Indian government to embark upon further economic reforms at the earliest, if the country wishes to continue on the growth path. For instance, recent reports indicate that India has emerged as a major hub for global clinical trials, and this has potential to generate more revenues than the IT sector by the year 2010. But for this India will need to gear up and strengthen the investment climate.

New iron and steel policy in China

China is the world’s largest iron and steel producer as well as consumer. However, currently the whole sector is plagued by numerous problems like overheated investment, improper industrial structure, poor quality of products and worsening environmental pollution. In the light of this, China issued its first state policy on iron and steel on July 20, 2005. The new policy envisages forced consolidation among many of the steel firms, nurturing a few domestic producers to compete globally while stopping foreigners from controlling stakes in domestic mills.

According to the new policy, foreign steel companies who plan to invest in China must have full intellectual property rights on their iron and steel products. Their output of common steel in the previous year must be at least 10 million tons and that of high-alloy steel must be one million tons. The policy also calls for China’s 10 biggest mills to produce half of the national output by 2010. China wants to create two big steel companies capable of competing with global majors while shutting down or merging all small domestic producers.

Mittal, the world’s biggest steel group, is seeking to acquire a 36.67 per cent stake in Valin Iron and Steel Co Ltd, a Shanghai-listed steel maker while Arcelor, the second largest steel company in the world, has also been seeking a controlling stake in Laiwu Iron and Steel Co Ltd, also a Shanghai-listed steel maker. The new steel policy will now arrest these steel giants’ plans of acquiring stakes in the Chinese steel industry.

China views iron and steel industry as the backbone of its economy and hence is unwilling to allow foreign entry in the sector. The question to be asked now is whether China’s new steel policy is reflective of its double standards especially when it seeks control of US’s energy major Unocal.

Fighting a different battle

Chinese oil firm CNOOC’s USD 18.5 billion bid for Unocal Corporation has hit a limbo with US lawmakers voting to review the offer. CNOOC engages primarily in the exploration, development and production of crude oil and natural gas offshore China. The company is also one of the largest offshore crude producers in Indonesia.

US considers China’s bid for Unocal as a threat to its national security and hence is defensive about the issue. It is also perturbed about China’s growing economic and military prowess and hence is unlikely facilitate the bid for China. US is likely to use this opportunity to make China conform to WTO norms, as China is far behind schedule in implementing the WTO norms and this is adversely affecting US trade.

CNOOC is 70 per cent owned by the Chinese government. So, essentially, you have the Chinese government making a bid for a US company. The resolution pointed out that the takeover by CNOOC would be ‘heavily subsidized’ by China's state-owned banks.

CNOOC has arranged for USD 7 billion for the bid at ‘favorable rates’. Besides this; the company will raise USD 3 billion from Goldman Sachs Group Inc and JP Morgan Chase & Co, and USD 6 billion from the Industrial & Commercial Bank of China.

Although CNOOC’s bid to acquire the US company is purely commercial, US may not shy away from using political considerations to stop the deal in order to arm-twist China on WTO.