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Hong Kong. Hong Kong’s pending acceptance of Chinese accounting standards marks an important advance in Beijing’s drive to globalize its financial sector, but could challenge international investors with reports prepared by an industry prone to scandal.

A rule change that was intended to take effect from Jan.1, 2010 would have seen Hong Kong’s stock exchange let locally-listed Chinese companies report using their home accounting standards, a move designed to lower costs and keep Hong Kong competitive with Shanghai.

But concerns about supervision of Chinese auditors have led to delays, which made it impossible for the exchange to meet that Jan. 1 target date to implement the change.

The change will lead to variant results for certain industries, such as insurance, although those differences are expected to fade over time as standards converge.

“There is a confidence issue,” said Judy Wong, president of the Association of Chartered Certified Accountants (ACCA) Hong Kong, a group whose members stand to lose substantial business to lower-cost Chinese accounting companies under the delayed rule change.

The Chinese Finance Ministry “should let the public know how they vet applications from mainland accounting and audit companies and what are the criteria,” she said, adding ACCA agreed with the proposal’s direction, but issues needed to be resolved.

The unification of standards will see Chinese companies, whose shares trade in Hong Kong, known in the territory as H-shares, allowed to post one set of results for each reporting period identical to the report they put out for their China-listed shares.

Most Hong Kong-listed Chinese companies are expected to use their home standards for their Hong Kong reports once the move becomes official, both as a money-saving measure and to reduce confusion that often occurs due to differences in the reports released in China and Hong Kong.

Insurance companies such as China Life and Ping An Insurance now see some of the greatest variation due to different treatment of investment gains and losses. Others such as banks, airlines and resource companies would see little or no change.

Investors do not expect any big impact on stock prices from the accounting change.

Patrick Yiu, a fund manager at CASH Asset Management in Hong Kong, said he would not change his investment strategy after the new accounting standards were adopted, and that the move should be welcomed by the broader market. “Though there is some concern over discipline among auditors in the mainland, I don’t think it will be a major issue, and many major Chinese enterprises will do their best to disclose the most useful information to their investors,” he said.

Hong Kong’s move testifies to the growing importance of China for international investors, who are increasingly eyeing a steady stream of Chinese IPOs that are only open to most outsiders via off-shore listings in places like Hong Kong. Hong Kong is likely to top global IPO fund raising in 2009 thanks to a strong influx of new China listings. It could raise another $48 billion in 2010, even as Shanghai takes over top spot with $56 billion in new offerings, according to Ernst & Young.

Mainland accounting companies that prepare reports under Chinese standards charge about one-third of their Hong Kong counterparts, making them more attractive in terms of price.

But any cost gains could easily be offset by an industry where book-cooking scandals were so common less than a decade ago it led former Premier Zhu Rongji to call fraudulent accounting a “malignant tumor” that threatened the country’s economy.

To help minimize that risk, Hong Kong, under the proposal it is now considering, will only allow in Chinese auditors that have passed muster with China’s Finance Ministry as well as its securities watchdog, the China Securities Regulatory Commission. Other checks and balances are being discussed.

“We expect it will come up with a list of not more than five companies,” said Jack Chow, a Hong Kong-based partner at global accounting company KPMG.

Hong Kong’s move is seen as an acknowledgement of the fact that Chinese accounting standards are rapidly converging with international standards.

One major difference between China and international standards is accounting for asset impairment, which is responsible for some of the big differences in results for investment-oriented companies like insurers.

China standards do not allow for the reversal of asset impairment if initial provisions later turn out to be overstated. But international accounting does.

The Chinese are now working with their international counterparts to resolve that difference, said Chris Joy, executive director of Hong Kong Institute of Certified Public Accountants.

“If convergence doesn’t continue and if standards start to diverge, effectively the stock exchange’s proposal will fall aside,” he said.



Reuters