Wednesday, December 12, 2018

US accounting regulators join trade war - Paul Gillis

Two financial regulators in the US, the SEC and the PCAOB, have joined the trade war of their country against China's accounting practices, writes Beida accounting professor Paul Gillis at his weblog. While the complaints are not new or surprising, he wonders about the timing, Gillis adds.

Paul Gillis:
For those have not been following the issue, the PCAOB is mandated by Sarbanes-Oxley to inspect accounting firms that audit U.S. listed companies, including foreign accounting firms. When the PCAOB attempted to come to China to inspect firms (mainly local affiliates of the Big Four) auditing U.S. listed companies China blocked them on the basis of national sovereignty. Attempts to find alternatives also foundered on arguments that the working papers might contain state secrets.  The PCAOB was also blocked from inspecting Hong Kong firms to the extent the work related to the mainland.   
After the wave of frauds by U.S. listed Chinese companies in the past ten years, the SEC finally got fed up with the intransigence of the Big Four firms about producing their working papers and brought charges against the firms. The firms argued to a SEC administrative trial judge that they were caught between a rock and hard place, having to decide whether to break Chinese or American law, and the judge appropriately observed that if that were the case, it was only because the firms put themselves in that position when they decided to do U.S. audits for Chinese companies. The judge threw the book at the Big Four, and BDO. 
The firms appealed and settled with the SEC paying a $500,000 penalty each and promising not to sin again. 
The PCAOB has succeeded in agreeing on enforcement cooperation with Chinese regulators, but has been unable to reach agreement on inspections, arguably a more important issue for investors than enforcement. Inspection are used to make certain that audits of U.S. listed companies comply with U.S. auditing standards, which is especially important in a market like China, where accounting practices are often “flexible”. 
The primary champion of getting PCAOB inspections in China was former PCAOB chairman James Doty, who together with the rest of the PCAOB board and much of its management was forced out in a purge after the Trump election. This is the first comment on the issue that I am aware of by Doty’s replacement, Republican loyalist William Duhke III. 
The remedy to China’s refusal to allow inspections has been what is referred to as the nuclear option. The PCAOB could deregister accounting firms that it cannot inspect. The consequence of that would be that most U.S. listed Chinese companies (and some multinational firms) would be unable to file audited financial statements with the SEC and without being granted an exception would be delisted from U.S. exchanges. This has been viewed as a step too far for the PCAOB, since it would likely hurt investors in the Chinese companies. Most of these investors are Americans, since it is difficult for Chinese to buy shares of companies listed in the U.S. because of currency restrictions.  The result of a mass delisting would likely be a surge of IPOs on the Hong Kong exchange. 
I suspect the SEC and PCAOB are raising this issue at this time because of the trade war. Allowing inspections would not seem to be a huge concession for China to make in a settlement of the trade war. Threatening to cut off access to U.S. capital markets for Chinese companies is yet another way for the U.S. to escalate the trade war.
More at the ChinaAccountingBlog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

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Tuesday, December 11, 2018

How China can hit Canada - Shaun Rein

Shaun Rein
China threatened Canada with severe consequences after it arrested Huawei's CFO Meng Wanzhou on the request of the USA. Business analyst Shaun Rein, author of The War for China's Wallet: Profiting from the New World Order, spells out what those consequences could be for AFP.

AFP:
China’s state-run Global Times, a nationalist tabloid, cited experts as saying the consequences may include trade sanctions, a degradation in bilateral ties and fewer visits to Canada by Chinese tourists and businesspeople. 
Canada exported goods worth US$18.2 billion to China last year, and it would be “very easy” for Beijing to shut down key energy and agricultural products with bans or boycotts, said Shaun Rein, the founder of Shanghai-based China Market Research Group. 
The spat could also endanger exploratory talks on a free trade agreement between Ottawa and Beijing that have been ongoing for two years. 
“I think the free trade agreement is definitely in a precarious situation, because Canada needs it with China more than China needs it with Canada, economically,” Rein said. 
China could also hit back by detaining an executive from a large Canadian company, Rein added.
More at AFP.

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My take on the Chengdu arrest of 100 protestants and their pastor - Ian Johnson

Ian Johnson
Journalist Ian Johnson, author of The Souls of China: The Return of Religion After Mao, looks at the arrest of 100 participants of the Early Rain Covenant Church and their pastor, Wang Yi, this weekend. Johnson did spend over a year with the underground church and wrote this fast overview for the New York Times.

Ian Johnson
In September, the authorities informed the church that it was in violation of the government’s religious policy, according to a copy of the notice posted by church activists on social media. According to Chinese law, only churches, mosques and temples registered with the government and under government control are considered legal. Others are illegal, even though since the early 1980s, official government policy has been largely to tolerate these sorts of places of worship as long as they are apolitical. More than half of the estimated 60 million Protestants in China worship at churches like Early Rain that are not registered with the government. They are some of the most dynamic congregations in China, and widely seen as the fastest-growing religious group in the country. 
Early Rain is especially prominent because of the role of Pastor Wang. A trained lawyer, Mr. Wang was a well-known blogger and film critic, and in the early 2000s was rated by Chinese media as one of the country’s most prominent public intellectuals. In 2005, he converted to Christianity, part of a wave of interest in the religion by politically active Chinese. He started Early Rain and it quickly grew in size, and now has more than 500 members. 
In 2006, Mr. Wang met President George W. Bush at the White House along with two other prominent Christian activists. 
Over the past few years, however, the government has made a nationwide effort to more strictly regulate spiritual life in China, reflecting President Xi Jinping’s drive to exert a tighter control over society. In 2016, it enacted new regulations emphasizing that all places of worship must be controlled by the government and banning foreign ties.
Earlier this year it took other steps, such as banning online sales of the Bible, and seeking a deal with the Vatican to normalize relations. The government has also destroyed churches or removed their steeples and crosses
Steps against Islam, however, have been even more draconian. Hundreds of thousands of minority Muslims have been sent to internment camps in China’s far western region of Xinjiang while others have been banned from fasting during Ramadan.
More at the New York Times.

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Monday, December 10, 2018

What makes Chinese accounting different from Western standards? - Paul Gillis

Paul Gillis
Accountants have to figure out what is happening in a company, and the difference between Western and Chinese practices makes that often hard, says Paul Gillis, accounting professor at Peking University, and author of the leading website ChinaAccountingBlog to Young China Watchers.

Young China Watchers:
YCW: You have a wealth of experience as a certified public accountant (CPA) across many countries. At a high level, is there anything specific that analysts and observers should take into account when trying to understand financial statements and general business practices in China? 
PG: One of the biggest challenges has been adapting Western accounting and auditing practices to Chinese business practices, where personal relationships can overshadow contracts and laws. In the West, internal controls often rely on the separation of duties on the premise that it is hard to get two employees to agree to commit a fraud. What we found in China is that the existence of 关系(guanxi) relationships between actors often overrode controls. There was a big problem with bank confirmations. A standard audit practice is for the auditor to ask the bank to confirm the bank account balances of clients. In China, it proved not very difficult for many companies to lean on the bank branch manager to confirm a false balance. Auditors needed to find other ways to audit to overcome these problems, but there were many frauds in the meantime.    
YCW: A lot has been said about Beijing’s intention to open up China’s financial sector. How do you see this impacting the audit industry? Have you observed any broad trends recently as a result of the latest round of market reforms? 
PG: Accounting is not directly affected by the opening up of the financial sector. Foreign accounting firms in China are structured like the firms elsewhere in the world: Local partners own the local firm. There has always been a lot of talk about allowing foreigners to own interests in local accounting firms—they already can, but the biggest obstacle is passing China’s CPA exam, which is the toughest in the world! It actually makes sense for local partners to own and operate the firms in China. They have local expertise and since most of them are now local Chinese, they better understand the cultural aspects of doing business.    
YCW: A lack of transparency has always concerned investors and lenders in China, perhaps unjustifiably so. While the perception is changing, can you identify any obvious steps to be taken at the state and firm levels to speed up this process, or has all the low-hanging fruit been picked? 
PG: Disclosures of public companies in China, particularly those listed abroad are pretty extensive. The greatest difficulty often lies in opaque ownership structures where it is hard to figure out who is ultimately in control. One thing I have observed is that Chinese companies often do not do things in the most straightforward manner. For example, it is not uncommon to put the ownership of companies in the names of friends or relatives. I guess that gives people plausible deniability if problems come up, but it often scares investors and business partners who think they are trying to hide something. I think a lot of this is a legacy of earlier times when being a “capitalist roader” (走资派, zou zi pai) was a bad thing.
More at the Young China Watchers.

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The rise of China as a superpower - Ian Johnson

Ian Johnson
Pulitzer prize winner Ian Johnson, author of The Souls of China: The Return of Religion After Mao, addresses the change China went through over the past twenty years, beyond the poor cliches we often look at. How the country became more important military, as a consumer heaving, but also developing cultural values that were believed to be missing.

Organizers: Petit Academy, Tatra Banka Foundation, Comenius University in Bratislava, Slovakia.

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Thursday, December 06, 2018

How Trump is missing the point on China - Harry Broadman

Harry Broadman
The world, including China, is still trying to make sense out of the Trump/Xi trade talks. The Trump trade team is fighting the wrong battle, argues former U.S. Assistant Trade Representative Harry Broadman for Gulf News. "The Trump trade team continues to fight the wrong battle with China."

Harry Broadman:
For the US — as well as for the rest of the world — the strategic challenge with China is that fundamentally it is not a bona fide market economy. More importantly, it has not lived up to its legal commitments under its 2001 WTO accession agreement to reform into one.
Yet the White House — whether in Buenos Aires or Beijing or Washington — does not squarely focus on this issue. 
Instead, the Trump trade team continues to fight the wrong battle with China, uses the wrong weapons, and is in the trench alone while China’s harm to the US is little different than what it inflicts on the world’s other major trading partners. What do I mean? 
Trump’s preoccupation — actually it borders on being a fetish — with reducing the US bilateral merchandise trade deficit with China is a wholly misplaced battle. Bilateral trade deficits in and of themselves are not economically meaningful — especially in a world where supply chains are multinational. 
If anything, they reflect symptoms rather than a disease. 
At the same time, tariffs, which, after all, are really taxes on imports, are very crude instruments to try to induce economic change “upstream” in a supply chain. Perhaps if China were truly a market-driven economy, where prices are set freely by supply and demand, tariffs might bring about some changes “behind-the-border”. 
But in non-market economies, prices do not hold the import in conveying value as they do elsewhere. 
More to the point, in the case of China, the core trade problems are inherently part of the underlying fabric of the country’s domestic economy. 
The backbone of China’s economic engine remains dominated by large state-owned enterprises (SOEs), propped up by large state-owned banks (SOBs). The rub is that the SOEs and SOBs are at the core of the Communist Party’s raison d’etre and the “socialist market economy” philosophy that has underpinned China’s political economy structure since 1978. 
To say it’s going to take a lot more than tariffs to unwind these would be an understatement. 
It’s no surprise Trump prefers to negotiate bilaterally. But structuring one-off real estate transactions in New York are no match for today’s complexities of crafting global trade deals. In fact, when an opposing party engages in trade practices that many of your closest allies also judge to be unfair, it makes no sense to not bring them into the fold to strengthen your negotiating leverage. 
Yet that is exactly the formula Trump has been following — and not just with respect to China but all other trading partners. 
Finally, the accord Trump struck with Xi at the dinner has only deepened the openly contradictory US trade policy the White House has been pursuing with China. Here’s the contradiction in a nutshell: the US asserts it is appalled over China behaving as a non-market economy but then goes ahead and asks the Chinese government, itself, to purchase more US exports. 
Is it any wonder why Xi thought the dinner was a great success and his top economic advisers continue to shake their heads trying to make sense of US trade negotiation strategy?
More at Gulf News.

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Wednesday, December 05, 2018

Downturn in luxury purchases, certainly in the US - Ben Cavender

Ben Cavender
Consumers from China are spending less, and certainly luxury brands in the US will feel the downturn at least in the short run, says luxury consumer expert Ben Cavender to AP. Tighter visa restrictions under President Donald Trump also make it harder for Chinese shoppers to get to the United States.

AP:
Forecasters including Euromonitor International and Bain &Co. say Chinese customers will be the luxury industry’s main growth engine over the next decade. But this year, shoppers are skittish amid cooling economic growth, trade tension with Washington and weak real estate and stock markets. 
“Consumers are just not as excited about spending that kind of money right now,” said Ben Cavender of China Market Research Group. 
Demand for Tom Ford suits and Jimmy Choo shoes held up better than some other Chinese spending as economic activity slowed following a government clampdown on bank lending to cool a debt boom... 
In the United States, retailers face pressure from China’s weak yuan, which makes prices in dollars more expensive for Chinese shoppers. 
Tighter visa restrictions under President Donald Trump also make it harder for Chinese shoppers to get to the United States, said Cavender. 
Chinese tourist arrivals in the United States fell 20 percent from a year earlier to 880,000 in the three months ending in September, according to an estimate by the China Outbound Tourism Research Institute in Hamburg, Germany. The number going to France rose 20.7 percent to 664,800 and those bound for Italy rose 18.9 percent to 850,000. 
“If people previously were going to the U.S. to buy an American luxury brand, that’s not their first choice anymore,” said Cavender. “They would rather go to Japan, New Zealand or someplace in Europe where the process is easier.”
More at AP.

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Monday, December 03, 2018

How do you define religion, and other questions for Ian Johnson

Ian Johnson
Author Ian Johnson got quite some people thinking after his most recent book The Souls of China: The Return of Religion After Mao hit the bookshelves. Some of them got stuck with questions and for Oclarim Johnson answers some of them. How does he define religion, and why are the Tibetans and Uighurs not included.

Oclarim:
How did the book take form?
I tried to identify representative cases for the spiritual life of ethnic Chinese people. That meant making a tough decision to leave out minority groups, such as Tibetans and Uighurs, because I felt that their stories were very different from ethnic Chinese. Also, ethnic Chinese make up 91 percent of China’s population and so I felt it was enough to try to cover their faiths. The question was how: China is such a big country. So I read a lot, traveled a lot, and after many false starts began to find the five case studies that make up this book.
You talk about religions in China in your book. What is your definition of religion?
Good question! I try not to answer that. Sociologists debate this endlessly. I would say I have a broad definition. It is not just an organized faith like Catholicism or Islam, but can include rituals and beliefs that people practice on their own that give their life a deeper meaning. Today, in many parts of the world, this is how faith is expressed: personally and privately, as opposed to communally as in the past, especially when most of us lived in villages. So I tried to have an open definition.
You mention the destruction of religious buildings in China in the last century. Can you expand on that?
China began to attack religion in the late 19th century as part of a general self-doubt about its traditions and culture. Faith practices began to be defined as illegitimate or legitimate based on the imported western paradigm of “superstition” versus “religion,” terms that originated in the Reformation as a way initially to discredit Catholicism and later used in other parts of the world to attack indigenous faiths. Chinese elites began to define most of their practices as superstitious. A huge wave of auto-cultural genocide ensued. By 1950 half the temples in China had been destroyed. The Cultural Revolution from 1966-1976 was the culmination, when all places of worship were closed.
You have said that there is a religious awakening in China after the Mao era. Don’t you feel that Maoism was a sort of religion?
Maoism was an ersatz religion for a government that had destroyed its cultural heritage and was looking for new ways to satisfy people’s hunger for belief. Of course, it died when he died…..
What, in your opinion, is the most significant story in your book?
My preference is for the Beijing pilgrimage associations, which are working-class people who organize one of the most boisterous, hard-drinking, hard-smoking pilgrimages I’ve ever attended – to Mt. Miaofeng in Beijing’s western suburbs. It’s certainly the most fun story in the book.
You also visited underground churches. What you can say about this experience?
Most underground churches are underground in name only. They are often big with hundreds of members and I guess about 99 percent are well-known to authorities. So essentially they are not underground but are simply not registered with the government because they reject government control over religion. But for various reasons the government tolerates them, largely because most are apolitical.
More questions and answers in Oclarim.

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Xi Jinping cannot change his China model, even when it is needed - Arthur Kroeber

Arthur Kroeber
China's president Xi Jinping has painted himself into a corner, summarizes the famous economist Arthur Kroeber, author of China's Economy: What Everyone Needs to Know®, the economic dilemma China finds itself in, according to NPR. "He cannot back down from his China Model."

NPR:
But Xi has dug in his heels, China’s economy continues to outpace much of the world, and China’s leader has continued to promote the state-heavy China model. “Xi has kind of painted himself into a corner,” says Arthur Kroeber, author of China’s Economy: What Everyone Needs to Know. “He’s said ‘We have this China model, it’s doing its own thing, China needs to become this great power.’ He can’t back down from that.” 
Kroeber says Xi’s style of leadership is a departure from former Chinese leader Deng Xiaoping, whose credo for dealing with the outside world was “Hide your strength and bide your time.” 
“The genius of Deng Xiaoping’s ‘hide and bide’ strategy is that it gives you a lot of freedom of movement,” says Kroeber. “You have not committed yourself to anything specific that it would be difficult to back down from.” 
Kroeber says the problem with Xi’s assertive style is that when he’s challenged, as he is now by Trump, he has to stand his ground, and that can become costly.
More at NPR. Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

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China owns Asia since the US left it - Jim Rogers

Jim Rogers
China owns Asia, after the US under Donald Trump decided to leave the continent, argues super-investor Jim Rogers, author of Street Smarts: Adventures on the Road and in the Markets, at AMTV. The US moved out, and now you see the Chinese everywhere, in Russia, in Iran, just because they have no competition anymore. "You should invest in markets others hate," he says.

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China: a hub for money laundering - Sara Hsu

Sara Hsu
China is becoming a center point for money laundering activities from Latin America, writes the military magazine Dialogo. Financial expert Sara Hsu explains how those links could work out.

Dialogo:
In August 2018, a special jury in Colorado pressed charges against 16 narcotraffickers who moved cocaine from Mexico to the United States and laundered money through Chinese banks. The process isn’t new: In 2017, the U.S. Drug Enforcement Administration (DEA) warned about criminal groups in Mexico, Colombia, and Venezuela that used their contacts with Chinese mafias to launder money through banking entities in the Asian nation. 
Sara Hsu, an associate professor of Economics at the State University of New York and specialist in the Chinese financial system, explains that the Asian nation is an attractive destination to launder money coming from Latin American criminal activities. One of the reasons is the strengthened link between groups such as Mexican drug cartels and Chinese mafias. 
“It’s true that Chinese regulations on money laundering were less rigorous in the past,” Hsu told Diálogo. “But the incentive comes from some Chinese gangs’ willingness to cooperate with Latin American criminals to launder money and participate in other illegal activities. As such, they become important facilitators for Latin American [criminal] organizations.” 
Hsu’s description fit what the DEA indicated in its 2017 National Drug Threat Assessment on the role of Chinese criminal organizations—particularly those operating in the United States—as money laundering facilitators for Latin American criminals. According to the report, Asian transnational criminal organizations (TCOs) “play a key role in the laundering of illicit drug proceeds. Asian TCOs involved in money laundering contract their services and in some cases work jointly with other criminal groups, such as Mexican, Colombian, and Dominican TCOs.” 
According to Hsu, some of the most common money laundering techniques are the purchase of Chinese products and fake commercial exchanges through casinos in Macau and Chinese money exchange houses.
More in Dialogo.

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Thursday, November 29, 2018

Didi: still a lot of trouble with the authorities - Ben Cavender

Ben Cavender
Ride-hailing company Didi Chuxing, the main competitor of Uber, is trying to move upscale, into self-driving cars, foreign cooperation and projects out of China, but at home, they still face basic challenges, says Shanghai-based business analyst Ben Cavender. Local authorities focus on illegal drivers, according to Reuters.

Reuters:
The ministry (of Transport) said that there are still a large number of illegal cars and it will urge local authorities to target unqualified drivers, which could exacerbate the shortages. 
“Didi’s service times have been drastically affected over the last few months following removal of drivers from the platform who did not have local registration in the cities that they were driving in,” said Ben Cavender, Shanghai-based principal at China Market Research Group. 
“The majority of consumers that we speak to who use ride sharing platforms used Didi first but are increasingly looking at other options.”
More at Reuters.

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