AdrianHouse

A blind spot in a new Chinese accounting system has the potential to foster trouble for stock market investors once it is activated on January 1, outside experts warn.

Some 1,200 companies listed on the Shanghai and Shenzhen stock exchanges will from next week be required to follow the accounting rules, which are modelled closely on the international financial reporting standards (IFRS) in force in Europe.

The changeover is part of government efforts to improve corporate reporting and its credibility in the supercharged economy.

But China's requirements differ from IFRS in one area of concern to market watchers: the disclosure of transactions between businesses under common ownership or management control, known as related parties.

China's finance ministry has decreed that state- controlled entities will not be regarded as related parties, so transactions between them will not have to be reported. Yet information about related-party transactions can be crucial to understand a company's performance – and to identify corporate wrongdoing.

中国特色。中国的会计要求与国际财务报告准则有一不同之处，那就是共同所有权或共同管理控制下的企业之间的交易信息披露，即所谓的关联方交易。

中国财政部已规定，国家控股的企业将不被视为关联方，因此它们之间的交易将无须披露。然而，对于了解一家公司的业绩，以及确认公司不当行为来说，关联方交易的信息颇为关键。

想想，很快又要做Intercompany disclosure了。看来国有企业管理层又准备编故事了。

In the past year academics, including Wang Jiwei of Singapore Management University and Ming Jian of Nanyang Technological University, have reported evidence of related-party transactions being used in China to prop up earnings and “tunnel” resources from subsidiaries to parents.

Worries over the role of related party transactions reflect the continued weakness of corporate governance at many Chinese companies. “I think it's steadily getting better, but it's still a long way behind,” said Hugh Young of Aberdeen Asset Management.

Neil Juggins, head of research at Evolution Securities China in Shanghai, said that price transparency was crucial. “It's important to understanding the real underlying profitability of the company,” he said.

“Without it you don't know if you're going to have a good year one year and the profits are going to disappear the next.”

But, he said, there was little danger that the related-party blind spot would dim foreign investors' enthusiasm for China.