Without sound corporate governance, the future of the Shanghai market will not be guaranteed
In November 2011, the IMF published their first Financial System Stability Assessment report on the Chinese financial system. Although the report was primarily concerned in reporting on China’s banking system it made recommendations on the legal and governance system in the securities sector. The IMF noted that the Chinese Securities Regulatory Commission (CSRC) has taken “an active and strategic approach to regulate securities markets, the legal and regulatory system needs improvement.” The IMF specifically recommended that the CSRC should increase their efforts “to detect and deter unfair trading practices”, notably insider trading and market manipulation. These recommendations resonated with the findings of a group of CEIBS MBA students who formed a Corporate Governance Think Tank in February 2011 to discuss the particular challenges faced by Chinese investors. They were particularly keen to advance the case for better protection for small investors against the power of dominant shareholders.
Accounting estimation, especially fair value accounting, requires active markets for reference, such as an active OTC market for non-listed companies. In China, other than the stock market, few other active markets exist that can provide a reliable reference for fair value accounting. Furthermore, many current corporate accountants have not yet adapted their accounting methods to a principle-based accounting regulation regime which could result in the accounting information being subject to a high risk of misstatement. Until 2010, foreign investors had appeared to be oblivious of the accounting standards risks in what the Financial Times has referred to as the “gold rush mentality” associated with the rapid rise of Chinese securities listed on international bourses over the past decade. The most common form of gaining foreign listing (usually on US exchanges such as Nasdaq) has involved about 370 Chinese companies to date acquiring shell companies that were already publicly traded. These deals became known as “reverse mergers” and avoided the scrutiny of the IPO process.
[Reprinted with permission from The China Europe International Business School.]