China achieves low overall compliance with international standards and codes, with a score of 23.3 out of 100 in our Standards Compliance Index. The highest level of compliance reached under any category is "enacted," but there are serious gaps in implementation. Moreover, a full third of the standards are rated at "insufficient information," indicating a serious lack of transparency and making an accurate assessment of the current situation difficult. However, intent has been declared to follow international guidelines for accounting, monetary and fiscal transparency, and money laundering. Nonetheless, there are concerns regarding the long-term commitment of authorities to pursue open and transparent policies. China's corporate governance regime has been reformed with the adoption of a Code for all listed companies. Progress in at least creating an appropriate legal framework for banking supervision is also notable.

Macroeconomic Policy and Data Transparency

China is not a subscriber to the International Monetary Fund's (IMF) Special Data Dissemination Standard (SDDS). China, however, participates in the IMF's less stringent General Data Dissemination System (GDDS). While China's economic statistics are adequate for surveillance purposes, weakness remain in the quality of the data, including coverage, frequency and timeliness. Nevertheless, China has made significant strides in bringing its economic and financial statistics into line with international good practice. In a 2004 Article IV Consultation report by the IMF, the Chinese authorities indicated that they would continue to make improvements in statistics in the context of their participation in GDDS, and expressed interest in subscribing to the SDDS in the future. More »

Oxford Analytica (OA), in its 2005 report on Monetary Policy Transparency in China, rates China's compliance with the IMF's 'Code of Good Practices on Transparency in Monetary Policy' as 'Intent Declared'. In April 2002, China joined the IMF's General Data Dissemination System (GDDS), marking a major step towards increased transparency in the reporting of economic data. According to OA, there have been no major advances in monetary transparency in 2005, although there have been important incremental improvements. Ongoing efforts indicate the desire for greater transparency, modernization and progress. There is still much room for improvement, including increased transparency of monetary policy decisions, and the communication of such decisions and their rationale. Other areas for improvement include: providing publicly available information regarding the Peoples' Bank of China's (PBC) profit and loss statements and expenses; providing a more detailed and clear balance sheet; and further improving timeliness of reporting. China moved to a managed-float exchange rate system in July 2005 based on a basket of currencies. However, IMF staff, in the 2006 Article IV consultations, argued that exchange rate flexibility, not just appreciation, is what is needed for China's economy going forward. Allowing the exchange rate to move more flexibly and be increasingly determined by market conditions would enhance monetary policy independence, helping the central bank to meet its policy objectives and reducing interference in the operations of the commercial banks. The lack of sufficient discretion given to the PBC to set interest rates is also an impediment to timely policy action. More »

In its 2005 report on Fiscal Transparency in China, Oxford Analytica rated China's compliance with the International Monetary Fund's (IMF) Code of Good Practices on Fiscal Transparency as "Intent Declared." According to the report, fiscal transparency in China over the past year has continued to improve, though at a slow pace. Classification of budget expenditure and coverage is currently weak, but the Ministry of Finance plans to classify financing and debt according to the 2001 IMF's Government Finance Statistics manual. A full rollout of the new classification system was scheduled for mid-2005, but this has not yet happened. China is currently running pilot schemes in six provinces and several cities with the new budget classification system. A new budget law is currently being considered, but the details of the law have not yet been made public, and the timetable for the passage of the law is not clear. China lacks a system to measure fiscal risk management, and the government does not have complete information on its contingent liabilities. Fiscal policy objectives are not clearly explained in the available documentation. China continues to work towards building a multi-year budget framework and an efficient performance evaluation system for spending programs The data released by the National Bureau of Statistics of China is increasingly comprehensive, though the accuracy of statistics is still questionable. The relationship and distribution of responsibilities between the government, the public sector and the rest of the economy in the People's Republic of China are subject to significant shortcomings and an overall lack of transparency. Government spending is being centralized and the quality of data is undergoing a fundamental transformation. More »

Institutional and market infrastructure

According to a bulletin released by KPMG in October 2006, the Standing Committee of the National People's Congress adopted a new Enterprise Bankruptcy Law of the People's Republic of China (PRC) on August 27, 2006, which will take effect on June 1, 2007. It will supersede the existing bankruptcy law, which was adopted in 1986 and ran on a trial basis for more than two decades. The new law provides for a more orderly and structured approach to deal with failing companies and seeks to provide better protection for creditors. The method of reorganization to be applied conforms to most modern global restructuring and insolvency regimes and can offer creditors a better recovery than in a liquidation scenario. The new law applies to all legal persons, including state-owned enterprises (SOEs), private companies, foreign-invested companies and joint-stock companies. By contrast, the old bankruptcy law (enacted December 2, 1986, and effective November 1, 1988) merely applied to the SOEs. Inclusion of provisions for cross-border insolvency is another step taken to align China with the growing international practice of respecting foreign bankruptcy judgments. However, there is insufficient publicly available information regarding China's compliance with the World Bank's Principles and Guidelines for Effective Insolvency and Creditor Rights Systems. More »

According to Deloitte & Touche, the Ministry of Finance of the People's Republic of China (MoF) clearly supports international accounting harmonization and is working to achieve convergence of Chinese Accounting Standards (CASs) with International Financial Reporting Standards (IFRSs). The MoF generally looks to IFRSs in its decision on the accounting principles that are included in the CASs, but sometimes modifications are required due to national laws and the practical issues associated with effective implementation by Chinese enterprises. On February 15, 2006, the MoF formally announced the issuance of the long awaited Accounting Standards for Business Enterprises (ASBEs) which become mandatory for listed Chinese enterprises from January 1, 2007. Other Chinese enterprises are also encouraged to apply ASBEs. ASBEs replace the existing CASs and an earlier version of ASBEs which differs from IFRSs. The applicability of the CASs and the older version of ASBEs is not changed except for those entities required or electing to adopt new ASBEs. Although ASBEs are substantially in line with IFRSs, differences between the frameworks still exist. Some of the key differences are in the areas of accounting for property, plant and equipment, jointly controlled entities, impairment borrowing costs, related parties, biological assets, business combinations, and other. More »

Back in September 1999, the 4th Plenum of the Communist Party's Central Committee declared that corporate governance lies at the core of the modern company system. The China Securities Regulatory Commission (CSRC) and the State Economic and Trade Commission (SETC) collaborated to develop the Code of Corporate Governance, released in 2002 and currently applicable to all listed companies in China on a "comply or explain basis." The Institute of International Finance (IIF) in a 2006 follow up report to a 2003 report, observed that positive changes in the corporate governance framework have been made through revisions to the Company Law and Securities Law. These changes, which came into effect on January 1, 2006, strengthen minority shareholder rights. However, more needs to be done by way of implementation and enforcement of revised rules and regulations. While the recent steps might lead to a de jure compliance with applicable international principles, ultimately, according to the IIF, the government's recent steps to improve corporate governance, important as they are, do not provide a long-term solution for the major corporate governance problems in China. To bring about real effective change, it is necessary that the government reduce its role and influence in Chinese companies. More »

On December 22, 2005, after a joint meeting the Chinese Auditing Standards Board (CASB) and the International Auditing and Assurance Standards Board (IAASB) released a joint statement in which the CASB stated that the fundamental principle of drafting Chinese auditing standards is to improve the Chinese auditing standards system and to accelerate its convergence with the IAASB's International Standards on Auditing (ISAs). The Ministry of Finance of the People's Republic of China (MoF) and the CASB intend to eliminate over time, as the environment in China changes, those differences between the Chinese auditing standards and ISAs that still exist. In particular, there are differences in the approach to dealing with guidance which is an integral part of ISAs but which cannot be incorporated in the legal instruments containing the requirements of Chinese auditing standards. The CASB plans to include explanatory materials in interpretative guidance which will be required to be read and applied in conjunction with the standard, to ensure the completeness and effectiveness of the standard. On February 15, 2006, the MoF announced that it has adopted 48 new Chinese Auditing Standards that are similar to ISA. The new auditing standards will become effective for listed enterprises from January 1, 2007. Other enterprises are encouraged to adopt them. More »

The Financial Action Task Force (FATF), in February 2005, welcomed China as an observer. The FATF's invitation to China follows the commitment made by the Chinese authorities to implement the FATF 40 + 9 Recommendations, to undergo a mutual evaluation and to play an active role in the fight against money laundering and the financing of terrorism both regionally and worldwide. According to a 2007 U.S. Department of State report, on October 31, 2006, the National People's Congress passed a new Anti-Money Laundering Law, which came into effect on January 1, 2007. This new law broadens the scope of existing anti-money laundering regulations to include any institution involved in money laundering. It mandates that financial and some non-financial institutions maintain records on accounts and transactions, and that they report large and suspicious transactions. The law more firmly establishes the Central Bank's (the People's Bank of China) authority over national anti-money laundering efforts, and also increases the number of predicate offenses for money laundering to include terrorism, fraud, bribery, and embezzlement. Additional regulations were also announced in 2006 aimed at further strengthening China's anti-money laundering efforts. China will be eligible for FATF membership after the completion of a successful mutual evaluation of its anti-money laundering and counter-terrorist financing system. More »

A 2002 report by the Executive's Meeting of East Asia Pacific Central Banks and Monetary Authority (EMEAP) noted that the People's Bank of China (PBC) has been ameliorating different payment methods, perfecting relevant payment regulations and standardizing non-cash payment instruments. The PBC has also been actively promoting the development of electronic payments and standardizing local clearing houses, to support the developments of China's securities market and foreign exchange market. According to the PBC's 2005 Financial Stability Report, to ensure the security and stability of the payment system, the design of China's National Advanced Payment System (CNAPS) has taken into account the Bank for International Settlements' (BIS) Core Principles for Systemically Important Payments Systems (CPSIPS). In addition, CNAPS has introduced advanced payment and settlement methods and technologies that are universally recognized. The PBC claims that CNAPS has basically met the requirements for safety and efficiency of the CPSIPS, but notes that there is still room for improvement in some areas. Nevertheless, there is no information publicly available as to China's compliance with the CPSIPS. More »

Financial Regulation and Supervision

An assessment conducted on banking supervision in China in 2004 and reported in the Journal for Chinese Law, indicated that the Chinese regulatory framework shows a high degree of compliance with the Basel Core Principles (BCPs). Hence, on a de jure basis China is getting closer to international prudential requirements. However, a deficiency identified in the report is that the 2003 Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) allows for discretion and political interference of the central government raising suspicion that the Core Principles serve as an external stick for structural changes in order to tighten control over local agents. In this case de facto compliance presumably will be restricted to the central leadership's power politics. A 2006 working paper by the IMF, reports that the China Banking Regulatory Commission (CBRC) has made progress in improving bank supervision, but more effort is required. Substantial improvements in banking regulation have been made in recent years, including in the critical areas of asset classification and provisioning and capital adequacy. Furthermore, based on the findings of another report in 2006 by the Bank for International Settlements (BIS), over the past decade, there has been significant progress with the establishment of a supervisory legal framework and the deepening of banking reform. Since 2002, in convergence with the international trend, China's banking supervision has shifted from emphasizing regulatory compliance only to emphasizing both regulatory compliance and risk supervision. More »

The China Securities Regulatory Commission (CSRC), as a centralized supervisory agency of securities markets, is responsible for promulgating regulations/rules concerning regulation of the securities market and monitoring companies' compliance with relevant regulations. In the People's Bank of China (PBC) 2005 Financial Stability Report, the authorities acknowledge that, according to the categories formulated by the International Organization of Securities Commissions (IOSCO), market risk, credit risk, liquidity risk, operational risk, legal risk and systemic risk deserve great attention and tight control. However, there is insufficient publicly available information regarding China's level of compliance with IOSCO's Objectives and Principles of Securities Regulation. More »

China's commitment to comply with the World Trade Organization (WTO) requirements has prompted reforms in the insurance industry having taken place since its accession. In 2000, the Asian Development Bank (ADB) was invited by the Chinese government to assist China Insurance Regulatory Commission (CIRC) in strengthening its regulatory capacity. In 2001, the ADB completed a report "Capacity Building for the Insurance Sector Regulatory and Supervising System." The report contained a series of recommendations that, according to the ADB, if implemented, were expected to transform the supervisory system of the CIRC into a sound prudential regulatory arrangement, fully compatible with best practices for developing markets, including standards of the International Association of Insurance Supervisors (IAIS) issued in 2000. In 2002, China adopted the recommendations of the report and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs). More »

Legend:

Credit Ratings

Moody's A1/Stable

Fitch A+/Stable

Standard & Poor's A/Positive

Macroeconomic Data

2007 GDP (Current Prices): 3,250.8 billion USD (IMF)

2007 GDP (Per Capita): 2,461 USD (IMF)

2008 GDP (Growth Forecast): 9.3% (IMF)

2008 Inflation (CPI): 5.9% (IMF)

2007 Unemployment: 4% (CIA)

2006 Foreign Direct Investment

FDI (Inward): 69.5 billion USD (UNCTAD)

FDI (Outward): 16.1 billion USD (UNCTAD)

2006 Official Development Assistance

ODA (Received): 1245 million USD (OECD)

ODA (Disbursed): N/A million USD (OECD)