IIEffective Insolvency and Creditor Rights Systems
There is insufficient publicly available information as to China's compliance with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank. However, there is some largely descriptive information suggesting that China is making progress in the area of insolvency reform. Chief among China's efforts is the passage of China's new Enterprise Bankruptcy Law in 2006, which establishes a new insolvency regime that, according to KPMG and PricewaterhouseCoopers' (PWC) reports, is believed to be more orderly and structured, and to provide greater creditor protection. Nonetheless, China's key concern of maintaining social stability has led to the inclusion of a provision in the new law that prioritizes the payment of claims by laid-off employees if such claims were accrued prior to the passage of the law (claims accrued after the laws passage do not enjoy this priority). The PWC report adds that the new legislation brings China more closely into alignment with international practice on reorganization and other procedures, and includes provisions that respect foreign bankruptcy judgments. The legislation extends bankruptcy provisions to cover all enterprises. This is contrary to the previous regime, in which private enterprises were ineligible for bankruptcy protections and only state-owned enterprises had access to the system. However, a lack of consistency in the application of the law and the paucity of trained insolvency professionals has led to an uncertainty about outcomes.
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IDInternational Financial Reporting Standards
According to the Deloitte IAS Plus website (November 2005 update), the MoF supports international accounting harmonization and is working towards achieving convergence of Chinese accounting practices with the requirements of International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB). Multiple sources confirm this finding and emphasize the fact that Chinese accounting practices are largely converged with the international norms and standards, however, certain differences still persist. More recently, in a 2009 assessment of the Chinese accounting and auditing practices, the World Bank commends China on making “impressive progress” in establishing an institutional framework for accounting, auditing and corporate financial reporting. The report reiterates China’s commitment to convergence of Chinese Accounting Standards (CASs, also known as Accounting Standards for Business Enterprises or ASBEs) with IFRSs and points out that full convergence is expected to be achieved by 2012. In September 2009, the MoF issued an exposure draft on the “Roadmap for Continuing and Full Convergence” of Chinese standards with IFRSs. Also, a PWC 2009 report on IFRS adoption notes that in addition to Chinese standards, financial institutions must also prepare IFRS-compliant (as issued by the IASB) financial statements. The MoF has issued a separate standard for small-sized enterprises with simplified reporting requirements. Overall, despite the strong positives, the World Bank expresses concerns regarding the quality of accounting and auditing practices outside major cities in China. It also emphasizes the lack of adequate expertise among corporate accountants in preparation of financial statements and recommends capacity improvements in all sectors – the MoF, professional accounting bodies, and the various regulators.
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IDPrinciples of Corporate Governance
In China, a system of corporate governance has emerged as a result of enterprise, legal, institutional, and regulatory reforms. In January 2001, the China Securities Regulatory Commission (CSRC) issued the Code of Corporate Governance for Listed Companies in China. Based on the "comply or explain" principle, the Code has “strictly followed” the Organization for Economic Cooperation and Development Principles of Corporate Governance, according to a 2003 article by Violet Xing. Revisions to the Company Law and Securities Law in 2006 have also strengthened minority shareholder rights and disclosure requirements for listed firms. The publication of Basic Standard for Enterprise Internal Control in 2008, to be implemented over time, signals another important step towards enhancing corporate governance. However, highly concentrated ownership structure, the dominance of state-owned enterprises, and the resulting weak minority shareholder protection remain as major obstacles to develop a corporate governance culture in China. Lu et al. also note that the gap between good and poor corporate governance among listed companies is significant. Various recommendations are being put forth to improve corporate governance in China, including speeding up share reform, shareholding diversification, reducing government intervention in state owned enterprises, improving minority shareholder rights, and enhancing board structure and responsibility.
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IDInternational Standards on Auditing
A joint statement by the chairmen of Chinese Auditing Standards Board (CAuSB) and the International Auditing and Assurance Standards Board (IAASB) issued in December 2005 asserts that the main reason for drafting new auditing standards in China is to improve the Chinese auditing standards system and to accelerate its convergence with the IAASB's International Standards on Auditing (ISAs). A 2009 report by the World Bank notes that China has made significant progress with respect to convergence and that the Chinese Standards on Auditing (CSAs) are “largely comparable” to ISAs issued by the IAASB. An October 2009 International Federation of Accountants update on ISA adoption, reiterates these findings and notes that the process of harmonization of auditing standards is at an advanced stage, with the final new set of Chinese standards (incorporating the clarified ISAs) likely to be approved by the MoF by the end of 2010. Overall, the World Bank recommends that application of CSAs should be limited to public interest entities that include listed companies, banks, insurance companies, investment funds, pension funds, and other large entities, including state-owned enterprises that meet certain size criteria. The World Bank also finds weaknesses in the auditing regime and points out that MoF-issued implementation guidance on CSAs seems inadequate in comparison to the guidance available on ISAs. Also, The assessment finds that auditors lack adequate expertise and the regulators face capacity-constraints with regards to ensuring compliance with applicable standards.
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IDAnti-Money Laundering/Combating Terrorist Financing Standard
In 2006, China underwent a mutual evaluation of its anti-money laundering (AML) and combating the financing of terrorism (CFT) regime against the Financial Action Task Force (FATF) forty recommendations and nine special recommendations. This mutual evaluation was a joint effort by the FATF and the Eurasian Group (EAG). The findings of this evaluation were published in a 2007 FATF report in which the assessors rated China partially compliant or non-compliant with 25 of the recommendations and special recommendations, five of which are stipulated as core by the FATF. Specifically China is only partially compliant with recommendation (R) 1 on the criminalization of money laundering, R 5 on customer due diligence, R 13 on suspicious transactions reporting, special recommendation II on criminalization of terrorist financing, and SR IV on suspicious transactions reporting related to terrorist financing. However, since the mutual evaluation, several reports, including from the FATF, have commended the Chinese authorities for the steps they have taken to address these weaknesses. In 2007 and 2008, the EAG published follow up reports to the mutual evaluation in which the assessors conclude that China has made significant progress in implementing most of the criteria of the FATF's core recommendations. Owing to this the EAG is considering withdrawing China from the enhanced follow-up process and has scheduled the next follow-up report to coincide with the 11th EAG Plenary meeting in 2009. Nevertheless, the follow-up reports do not explicitly address China's actual compliance with the FATF recommendations, instead, they only mention the measures that the Chinese authorities have undertaken since the mutual evaluation. The FATF, in its 2008-2009 Annual Report, named China as one of the jurisdictions that have endorsed the FATF's 40+9 recommendations.
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IDCore Principles for Systemically Important Payment Systems
In its 2007 Financial Stability Report (FSR), the PBC refers to the China National Advanced Payment System (CNAPS) as a core inter-bank payment system. The CNAPS has two sub-systems: (1) a large-value payment system (LVPS), which is a real-time gross settlement (RTGS) system, and (2) a bulk electronic payment system (BEPS), which is a small-value payment system. The 2005 FSR remarks that the design of CNAPS takes into consideration the Committee on Payment and Settlement Systems' (CPSS) Core Principles for Systemically Important Payment Systems (CPSIPS) and that CNAPS has basically met the requirements for safety and efficiency of the CPSIPS. In its 2008 FSR, the PBC observes that, in 2007, China's payment system progressed steadily, witnessing new developments in institution building and improvements in payment and settlement-related laws and regulations. However, both reports note that there is still room for improvement in some areas, including strengthening the PBC's oversight of the payment systems. Based on the results of the World Bank’s 2008 Global Payment Systems Survey, Cirasino and Garcia’s 2008 report evaluates a country's compliance with four distinct sub components which are broadly based on the CPSIPS. In general, the report states that China achieves "medium-high level of development" for its large value payment systems. However, on the assessments components on legal and regulatory framework for payment systems, China achieves only "medium-low level of development." Nevertheless, the information contained in this report, although useful and informative, cannot be used to decipher China’s compliance with the CPSIPS.
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