The Risks and Rewards of the Chinese Gold Rush

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China is growing by bounds more than leaps. Different groups have different investment philosophies but China is still the largest emerging market in the world. Large tactical investments such as these are risky in a country where management is not sophisticated by U.S. standards and the accounting is lax.

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The Royal Bank of Scotland and its partners recently purchased a 10 percent in the Bank of China for $3.1 billion. Buying their stake in an existing business is one strategy in this gold rush although buying businesses outright might settle shareholders more satisfactorily though. Control can be asserted more directly instead of squandered using staff without distribution and marketing expertise in a new products such as credit cards, insurance, and investment vehicles allowed by regulators. Chinese banks are reputed to change slowly without clear oversight. At the same time, The Bank of China must have shown its new investors that they mean to deliver returns although it may be difficult to evaluate the true value of their joint venture investment in the near future.

Bank of America has also been investing their dollars in stakes in larger banks to take advantage of their branch distribution networks. Other banks such as Citicorp and HSBC have been buying minor Chinese banks that may come under their direct control in the future. Accounting is the basis by which all of these investments will be measured. The International Trade Administration of the U.S. Department of Commerce spells out the extent and operating perimeters for accounting firms in China.

Joint service ventures providing management consulting and taxation services are the only enterprise option allowed currently by the Chinese government. Wholly foreign-owned subsidiaries will be allowed after December 11, 2007. WTO-based accounting firms will also be allowed to start wholly foreign-owned subsidiaries, affiliate with Chinese and other WTO-based companies.

Only those Certified Public Accountants (CPAs) licensed by Chinese authorities will provide accounting services in China. The Chinese national CPA examination can only be taken by foreigners submitting a completed and approved application. They will be notified within 30 days of this submittal of their approval or not to take the test. CPAs licensed in other countries and working in existing joint ventures may provide accountancy services though.

There is no restriction on service providers of accounting, auditing, bookkeeping, taxation, and management consulting services. They may also practice throughout China. Accounting firms may also provide taxation and management consulting services without establishment requirements.

Executives, managers, and service specialists assigned to a particular branch, office, or subsidiary can stay in China for an initial stay of three years. Stays may also be dictated by the length of contracts but the shorter term of the two will determine such a long-term stay. Temporary staffs, such as service salespersons meeting certain conditions, are limited to a 90-day stay.

Market access restrictions will not be placed on accounting, management consulting, and taxation services. These services can also be executed throughout the country without restriction.

All restrictions on rights of ownership, operation, and scope of activities for an existing foreign service provider that were set out by contract, shareholder's agreement, or operating or service license will be limited to those terms established on December 11, 2001.

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