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Casino Capital: A Case Study of China Angel PinaHardin ACCU 625 September 3, 2013 Brandman University

A Case Study of China Casino Capital: A Case Study of China Introduction Over the past few decades, China has gone from a purely communist economy to a capitalist economy except when it comes to their stock exchange. According to Choi & Meek (2011) the investors approach to the stock market in China is trading, not ownership (Pg. 116). China is working hard to change this perspective. However, it will not be easy when Chinese companies continue to view financial reports as a joke (Choi & Meek, 2011). Additionally, according to Choi & Meek (2011) the Chinese governments official auditing body admitted that more than two thirds of the 1,300 biggest state-owned enterprises cook their

books (Pg. 116). China needs to continue moving their exchange market from a solely supply side market and start including the demand side where investors are not driven to trade on rumor but on accurate accounting information from company reports (Choi & Meek, 2011). This paper will discuss the conditions needed to develop a stock exchange in an emerging economy, how these conditions compare to the current conditions in China, the possibilities that China will develop a stock market with fair trading and the reforms necessary to achieve a fair trading market. Conditions of emerging economies The idea of launching an international board separate on the Shanghai stock exchange may seem what the country needs to start to build a strong solid reputation and in 2011, this idea was approached by the Shanghai stock exchange. In addition to the development of accounting regulation and reform mentioned by Choi and Meek (2011), other conditions necessary to develop a stock exchange in an emerging economy include, development of internationally

A Case Study of China acceptable accounting and auditing standards, resolution to policy risk, and the promotion of healthy financial instutions. As the chinese government moves from a micro mananged economy to a more macro

managed economy, the chinese accounting standards are going to need to be developed to reflect this transition. The Accounting Law defines the role of government in accounting procedures in China while the State Council issues the Financial Accounting and Reporting Rules for Enterprises. Additionally, the Ministry of Finance is responsible for auditing and formulating accounting standards in China. Over the years, all three governing bodies have implemented various rules and regulations to strengthen the accounting standards in China yet more still needs to be done (Choi & Meek, 2011). China needs to move away from a strictly government issueing body to private sector investors and accounting professional adding to international accounting standards. The use of international accounting standards like the International Finance Reporting Standards and having an independent standards setting body to implement accounting standards such as International Accounting Standards Board will give creditability to accounting standards used in China. Resolution of policy risk is needed in an emerging economy as well. Policies involving investor protections need to be implemented and enforced though not solely by the government but also by independent accounting professionals and investors. Finally, having a stable financial body that does not over extend itself in good economic times and then violently retract itself in down economic time is also needed in emerging economies. Compared to China Recently, Chinas stock exchange has seen tough times. Outside investors are uneasy about the thought of investing and companies worry about market quality free from abuse and misconduct. According to Howard Gold (2011), companies and investors still face huge

A Case Study of China barriers to doing business in China becaue China is a country more concerned with social order above all else. Additionally, the legal system in chani is wrought with non-responsiveness and frenquently clouded in mystery (Gold, 2011). Additionaly, state-owned banks have been saddled with nonperforming loans, which effectively blocked their global aspirations; however, this level of bad loans has dropped cosiderabley since 2001 and in 2007, was down to just seven percent. Also, international investors like Bank of America, HSBC, and the Royal Bank of Scotland have helped state-owned banks to improve their operations (Ngal & Wang, 2008). Finally, China does not have solid accounting and audit standards that are being overseen or enforced. According to Choi & Meek (2011), the top regulator from the China Securities Regulatory Commission, found that one in ten listed companies had doctored its books, and the Finance Ministry reported that 152 of the firms it had surveied, all had misstated their profits by a combined 2.9 billion Yuan (pg. 117). To Develop a Fair Trade Market I believe that with changes and over time, China can develop a fair trading market. Even though the stock market has been dominated by state-owned enterprises that were listed for political rather than economic reasons changes in recent years have helped to stop powerful syndicates from dominating and ramping up the prices of shares (Choi & Meek, 2011). Individual proponants of free trade are increasingly becoming skepital of Chinas trading with

other nations so much so that they are now arguing to impose trade sanctions. However, China is slowly trying to put their foot down and enforce regulations and accounting standards. The President of the American Chamber of Commerce in the Peoples Republic of China (AmCham China), Christian Murck, has said there has been big, healthy changes in China recently (Gold, 2011). One change is the ability for shareholders to file individual or class action lawsuits

A Case Study of China against companies that lie about thir accounts (Choi & Meek, 2011). However, AmCham Chinas members are having a harder time obtaining business licenses, navigating murky laws and regulations and dealing with corruption (Gold, 2011). To suceed as a fair trade market, China needs to stop using the stock market for political purposes and national industrial policy and start using it to allow private companies to raise capital (Choi & Meek, 2011). Reform Plans

To this extent, reform is still needed. One reform for stock market development would be to allow foreign companies to list on the Shanghai Exchange. Since 2009, China has been planning to launch an international board a separate board will allow overseas companies to float shares and will soon make its debut according to the Deputy Director of the Economic System Reform Department of the National Development & Reform Commission Lian Qihua. Additionally, China recently removed controls on bank lending allowing commercial bank to compete for borrowers. Wang Jun, senior economist at China Centre for International Economic Exchanges, says this is a major step in financial reform (Yao & Subler, 2013). Also, in opening the bondmarket to foreign investors, China needs to make pricing mechanisms more constitant by having equal trading on both Chinas bond markets. As well, China needs to dervisify products increase yields. To do this, government domination of the credit sector must discontinue by establishing an effective domestic ratings industry. Finally, China will need to make available long-term maturity rates because that is what most investors are comfortable with when investing in foreign bonds (Mills, 2011). China has a bad reputation to foreign investors. The chinese government has done everything in its power to manipulate chainas stock exchange for political and national purposess. Reforms are being made but those reforms are few and far in between what is actually

A Case Study of China needed for the chinese stock exchange to become a fair trade exchange. As China continues to grow as a world ecnomic power, private sector companies and investors will have to step up to the plate and do more to ensure reforms are implemented and enforced so that the exchange can become competative with other world markets. Finally, once reform is made in China, more companies and individual investors will be more willing to invest in China and on its stock exchange. Without these reforms, China could become an Eron type scandal only on a more massive scale.

A Case Study of China References: Choi, F. D., & Meek, G. K. (2011). International accounting (7th ed.). Upper Saddle River: Pearson Education Inc. Gold, H. (2011, June 3). Dealing with China is still a tricky business. Retrieved from Market

Watch: http://www.marketwatch.com/story/dealing-with-China-is-still-a-tricky-business2011-06-03?siteid=rss&rss=1 Mills, I. (2011, April 15). China's reform plan highlights bond market challenges. Retrieved from Investments & Pensions Asia: http://www.ipe.com/asia/Chinas-reform-plan-highlightsbond-market-challenges_40212.php#.Uem4W3fn_IU Ngal, J., & Wang, Y. (2008, June). Global investment strategies for China's financial instutations. Retrieved from the McKinsley Quarterly: http://www.mckinsey.it/storage/first/uploadfile/attach/140171/file/chfi08.pdf Yao, K., & Subler, J. (2013, July 19). China frees up lending rates in major reform. Retrieved from Reuters: http://www.reuters.com/article/2013/07/19/us-China-economy-ratesidUSBRE96I0GA20130719