Regulatory and Economic Environment: China - Essay Example

Regulatory and Economic environment China is country which has seen great changes in its economic environment since its inception. China is one of the oldest civilizations in the world today. Time to time it has seen booms and declines in its economy. Chinese economy is recognized as the sixth largest economy in the world. China emerged itself into a powerful economic entity from an agricultural society. In addition, according to a report, China is the third largest economy in the world based on purchasing power parity. 'When one examines the pace and progress of economic reform in the People's Republic of China (PRC), one has to agree that reform has pushed China from a largely agricultural society to a powerful economic entity ready for takeoff. Based on the current exchange rate of RMB 8.28 yuan to one U.S. dollar, China is now the sixth largest economy in the world. Based on purchasing-power parity, it is the third largest economy after the United States and Japan. All this has taken place during a relatively short time. In fact, one can argue that true economic reform in China only started in the early 1980s.' - [M.W. LUKE CHAN, WENDY ROTENBERG] The Chinese economic environment had shown rapid progress during 1991-1997, it could be said that China experienced double digit GDP growth. However, from 1997 and so on there were economic crisis, yet, the Chinese GDP continued to grow at a rapid rate of 7.8%. Background of the Chinese Crisis: Transparency and good supremacy have been the foundation issues observed in the post-crisis years, both in the circumstance of the 1997 monetary difficulties and the recent series of commercial scandals. This suits the accounting and audit profession where efforts have largely focused on "harmonizing standards" within APEC and ASEAN as well as for greater transparency and disclosure. The Chinese financial catastrophe showed that insufficient accounting practices and lack of transparency in financial information still prevail in the region. Usual accounting may no longer adequately reflect the necessary information from the position of regulatory and internal corporate control. Strengthening of accounting and auditing function to properly manage risks is one major task to make the private sector and government agencies competitive and free from corruption. In an internationalized economy, up-to-date accounting and auditing knowledge and skills are the basic institutional infrastructure for private enterprises as well as government agencies to promote good corporate governance and sound public management. The need for transparent information has been heightened, particularly in the situation of managing risks involved. Main challenges for the DMCs are to develop transparent and sound accounting practices to properly manage and regulate the private sector including banks. An overview of the economic framework in China: The economic system of China is based on the Interbank Lending Market, the negotiable instruments market and the Treasury bond repurchase market. Interbank Lending: A nationwide unified interbank lending computer network was put into operation on a trial basis on January 3, 1996. The interbank lending market was not integrated preceding this date. The establishment of unified interbank market helped in connecting all interbank markets through out the nation. Negotiable Instruments: A negotiable instruments market consists of commercial papers as their main instrument. Commercial paper activity started in China in 1981. Since 1981, commercial paper market developed gradually. The acceptance, rediscount and discount process of commercial paper has become standardized. Commercial bills are also another instrument used in China. It has increased drastically in the past few years. Also, the discount and rediscount maturities have increased rapidly providing the funding needs of the national industry development policies and credit policies to flow. Repurchase Transactions - Open Market Operations: The central bank got involved into the open market transactions with treasury bills as trading instruments on April 9, 1996. The purpose of the open market operation was to control the liquid reserve of the financial institutions. Such open market operations are conducted over the counter. Public bidding in terms of short-term repurchase helps determining the prices. Corporate Governance in China: Corporate Governance has attained much attention in China. The Chinese Stock Market was born in late 1990. In a short span of time, that is 15 years, it has grown to the 8th largest stock market in the world. However, the stock market of China is underdevelopment and the widely listed firms only report for a small fraction of all firms in China, yet it has attracted numerous stake holders. According to the statistics released by the China Securities Regulatory Commission (CSRC), more than 70 million investment accounts have been opened across China; roughly 200-300 million Chinese people, directly or indirectly, invest in the stock market. A big amount of bank lending has also been shifted into the stock market by interest groups through various channels (most of them are gray or illegal), even though the defined number is difficult to determine. An ineffective, resource-draining stock market is a pull on the Chinese economy and may basket its ability to maintain the 7-8 percent growth required to keep unemployment in check. Corporate governance thus emerges as a prominent issue in such a situation. It is even more urgent now given that a series of corporate scandals have seriously undermined investors' confidence, and the Shanghai and Shenzhen benchmark indexes have both dropped to record lows over the last 8 years of trading. Influences of Other countries on the Economic system of China: Today, China has become the center of attention of the world. It is considered as the base of production for various companies around the world. The reason to this phenomenon is the cheap labor and resources in China. Numerous companies around the globe have established their factories in China in order to increase their production at a lower rate. The import and export of China has also boosted its economy to a large extent. At present, China is the center of attention of foreign trade in the world. However, this increase in Chinese foreign trade made an impact on their economic environment. This impact had its both aspects; Good and bad. The favorable side was that this influence helped China in building up a stronger economical system, yet, the unfavorable aspect was that China neglected its internal requirements i.e. requirements of its people to fulfill the foreign needs. China gave more attention to its foreign trade that is the trade with Russia, USA and UK. 'The major defects in the raising revenue method of China are, firstly, injustice in distribution; secondly, inelasticity of income and thirdly non availability of paying taxations.' - [Mr. Lee Chou-Ying - book: Pacific Affairs] However, the private companies; the foreign investment in China has helped it to move ahead. The rapid increase in the Chinese economy was due to the foreign investments. Huge organizations from around the world invested in China and made it their base. Regulatory Framework and Accounting practices in UK: The regulatory framework of UK is based on the following accounting practices: The use of current cost accounting (CCA) The use of Long Run Average Incremental Cost methodologies The above two are the basic methodologies in the UK's regulatory framework and Accounting practices. From 1974 - 1977, there was a development of a new system of accounting that was able to allow the day to day changes in costs and prices on the measurement of profit and of capital employed in the business. There were various benefits observed of CCA in UK. The main one was that there was transparency in the accounting system. Moreover, the fluctuation was easily controlled because this accounting system was dealing with the day to day changes in costs and prices. However, besides the benefits there are certain disadvantageous facts about CCA as well. The major disadvantage was the exposure of the income sheets of organizations on daily or monthly basis. The outline solutions to this problem were proposed in the 'Exposure Draft' published in 1976 by the Accountancy profession in the United Kingdom. CCA was also helpful in maintaining a record of distributable profit in relation to the needs to maintain capital. It was also helped in evaluating the value of assets and liabilities periodically. In addition, it was proved helpful in the implications of price control methodologies, taxation and price setting methodologies. Comparison of Chinese economic system with UK's Economic system: The main difference between the Chinese economic system and the UK's system is the methodologies used. In the Chinese economic environment, Interbank Lending Market is the base methodology where as in the UK system CCA and Long Run Average Incremental Cost Methodologies is the base. References: Qiao Liu, April 24, 2006. CESifo Economic Studies, Accessed online: EMEAP, Financial Markets in China. Accessed online: M.W. LUKE CHAN , WENDY ROTENBERG, Accounting, Accounting Education, and Economic Reform in the People's Republic of China. Accessed online: ADB, AIM Conduct Course on Upgrading Accounting in Asia. Accessed online: Robert E. Jupe and Brian A. Rutherford. Watchdogs or Straw Dogs A Critical Appraisal of the UK Regulatory Framework with Respect to (Non-)Compliance with Financial Reporting Standard No. 1. International Journal of Auditing Volume 1Page 205 - November 1997 doi:10.1111/1099-1123.00024. Accessed online: Pacific Affairs, Vol. 10, No. 1 (Mar., 1937), pp. 96-98 Read More