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Between the Lines in China

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Unread 05.14.12, 06:34 PM
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Between the Lines in China

On 05.14.12 11:00 AM posted by Derek Scissors, Ph.D.

There is a lot going on in China today, this week, this month, this year. There’s internal Chinese politics. There’s U.S.ĖChina politics. There’s concern about the Chinese economy. There are hints of possible economic reform.

Amid all the shouting, something is happening low on the radar that could turn out to be vitally important: The PRC is nationalizing business auditing. This is potentially a critical step backward, away from a China that can truly be a global economic leader.

There’s so much speculation concerning China, it’s almost painful to add more. But if the PRC does require foreign companies to give up control of auditing firms to local partners this year, that’s about far more than grabbing profits in the sector. It’s about more than the lack of Chinese cooperation with American inquiries into securities fraud.

Most people have a vague impression that China is normalizing in economics and businessóthat its commercial practices are moving toward global standards, its currency is internationalizing, itís becoming more open. At the most basic level, however, itís not clear thatís true.

Transparency is the foundation of modern economics. No system is entirely transparent, but some systems require participants to come clean, while others intimidate information providers into silence.

Obviously this is not 40 years ago, when the PRC was an entirely closed society. But itís worse than it was 10 years ago. On the whole, China doesnít appear to have made much progress, for example on the quality of published economic statistics.

Now it is retreating from transparency on the business side. If the PRC were just looking to train more local accountants, that would be one thing. But foreign firms are required to give up control this year and train local accountants gradually. Beijing wants control of what can be reported about its firms, and it wants it now.

Perhaps this is because conditions are deteriorating. Perhaps a reform push is planned, and the Party wants to be able to spin the results more fully at the corporate level.

It’s difficult to know exactly why this is happening, the way itís often difficult to interpret events in China. But the Chinese government is saying it wants more control over what the world gets to know. That’s easy to interpret.

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