China's
securities experiment: the challenge of the globalization
Back
to Contents
Note: Footnotes Omitted
Part
IV. The Inevitable Reform Driven by WTO
Since 1986,
China has been pursing its GAAT/WTO membership for 13 years. On Nov. 15, 1999, Chinese and U.S. negotiators
signed a breakthrough agreement that removes trade barriers
and clears the biggest hurdle to China¡¯s entry into the
World Trade Organization. It can be reasonably concluded that China
will joint WTO in the first half of year 2000.
The General Agreement on Trade in Services (GATS), which was negotiated
in the Uruguay Round and completed in 1994, marks the first
time that services have been covered by a global trade agreement. As an agreement liberalizing international
financial services sectors, GATS will have significant influence
on China¡¯s stock markets if China joins WTO as expected.
A. GATS Overview:
The Premises of GATS on Financial Services
The GATS deals with trade in three types of services: (1) services
supplied in one WTO member state for consumers in another,
(2) services provided by a services providing entity of
one member in the territory of another member, and (3) services
provided by nationals of one member in the territory of
another member. The GATS
differs from the former GATT regime because regulation of
trade in service often involves regulation of the services
provider. Regulation of trade in good, on the other hand, involves the
product itself.
With respect to financial services, the
GATS addresses, basically, the following two principles:
1.
National Treatment
and Market Access
A host country might take many measures discriminating against foreign
financial firms, such as refusing to grant license to their
branches or subsidiaries, imposing limitation on their aggregate
market share, or prohibiting them from engaging in certain
activities that are permissible for their domestic counterparts.
This is so called ¡°discriminatory barrier to entry
and operation¡±.
The GATS uses the widely accepted principles of ¡°national
treatment¡± and ¡°market access¡± to reduce or eliminate
such barriers. The national treatment obligation requires a host country to
treat foreign services or services providers no less favorable
than ¡°like¡± domestic services or services providers. National treatment under GATS does not
apply unconditionally, but only apply to those sectors a
State has places on its schedule.
As for market access, in theory, it means the right to enter
a host-country market in whatever form a service providers
chooses.
A foreign service supplier could decide to invest locally
and provide services across borders to host country customers,
it could also choose to establish a branch or a subsidiary.
2.
Removing Non-quantitative
and Non-discriminatory Structural Barriers
Such barriers arise from aspects of national regulatory systems that,
even though do not discriminate between domestic citizens
and foreigners, afford less favorable treatment to services
or services suppliers than those in other major countries.
The GATS addresses certain types of nonquantative and nondiscriminatory
structural barriers.
For example, it impose a general ¡°transparency¡±
obligation on WTO members to public all measures of general
application ¨C including statutes, regulations, and administrative
decisions ¨C that are relevant to trade in service. It also require countries to apply domestic
regulations in a ¡°reasonable, objective and impartial manner¡±
to avoid undermining commitments to national treatment and
market access. Moreover, countries are also required
to establish appropriate procedures to review administrative
decisions affecting trade in service, and to refrain from
adopting rules or standards that are so burdensome or restrictive
of trade.
B. GATS Impacts
upon China¡¯s Securities Markets and Regulatory Systems
As a would-be member of WTO, China¡¯s securities regulatory systems
and markets will be inescapably influenced by the GATS in
the following manners:
1.
Growing Entry of
Foreign Securities Intermediaries into China¡¯s Securities
Markets
Currently China is implementing a discriminatory policy against foreign
securities firms or other intermediaries, which are only
allowed to deal with B shares.
Under GATS regime, China must eliminate those discriminatory
barriers and treat foreign securities firms and their domestic
counterparts equally.
As a matter of fact, a great reform in this
regard has been foreseen by people since the conclusion
of the Sino-U.S. WTO accord.
According to the accord, China
will permit "minority" foreign-owned joint ventures
to engage in fund management on the same terms as Chinese
firms. Foreign
companies will be able to hold a 33 percent stake in such
ventures immediately on China's entry into the WTO and up
to 49 percent in three years. In essence, the accord appeared to give
fund managers what they have long been seeking -- access
to the big domestic A share market.
2.
Internationalization
of Accounting System
The core of a sound securities regime is the disclosure system, which
needs the strong support of a suitable accounting standard. GATS contains several articles that deal
with the issues of mutual recognition of accounting licenses,
international standards, and qualification requirements.
Article VII allows for recognition by a member state of
multilaterally agreed criteria pertaining to the licensing
of service providers, with the Member states itself ensuring
the competence of applicants.
Article VII (5) provides that international standards,
such as those of the professional practice, should be broadly
followed to ensure service trade liberalization.
Article VI provides that domestic measures pertaining
to qualifications should not, in and of themselves, constitute
a trade barrier.
Since
1993, China has adopted the accounting standards that comply
with the IASC accounting standards for business enterprises.
However, significant differences still exist between Chinese
accounting standards and IASC:
Chinese accounting standards require that fixed assets
be stated at cost, unlike the IASC historical cost or revalued
amount, and a general provision against stock is forbidden.
Similarly, under Chinese accounting standards, inventories
are stated at cost, whereas the IASC standard is the lower
of cost or net realizable value.
Depreciation is similar under the IASC and Chinese
practice, except that residual value under the Chinese system
must be within 3% to 5% of original cost. Pre-operating expenses under the IASC
are charged to the income statement whereas in Chinese practice,
they are amortized in equal installments over five years. Under the IASC, intangible assets are amortized over the estimated
beneficial period, whereas in China they are amortized over
either the beneficial period or a time period specified
by state regulation. Shareholder equity is valued using the
prevailing exchange rate on the date of contribution under
the IASC, but is valued at the official rate in Chinese
practice. Provisions for bad debts under the IASC are required
when they have been justified; in China they are required
when allowed under state regulations, but are limited to
0.3% to 0.5% of total receivables per year.
However, Chinese accounting standards in theory differ
from practice, which presents a continuing problem as to
the accuracy of Chinese financial reports.
Needless to say, to attract international investors, China
must submit its ¡°Chinese characteristics¡± in accounting
system to the international practice.
3. Transparency of Law
and Regulations
As noted above, the GATS require transparency in national regulations.
In brief, transparency means, among others things,
extensive publication of all statutes, regulations, rules,
norms affecting relevant business; publication before implementation;
enforcement only of those laws and regulations that are
published; and creation of a single inquiry point with a
time limit for response. Although China has attempted vigorously
to make transparent its legislative drafting and publication,
it still enjoys notorious reputation of, besides the rules
published, enforcing another body of rules ¨C so called
internal norms (Nei Bu Gui Ding) ¨C that is not available
to general public.
The internal norms were extensively used by administrative
bodies, especially at local level.
Today, since most rules or regulations concerning
business have been published, the use of internal norms
is not so common as it used to be. However, since Chinese government never
declared publicly that it will give up the use of such norms,
and never declared as well that it will enforce merely those
rules published, the internal norms still remain an uncertain
aspect in Chinese legal system.
