Accounting and the negative list | China Accounting Blog | Paul Gillis

Accounting and the negative list   

China has long restricted foreign investment in sensitive sectors of its economy.  These restrictions appear to have had two primary motivations – protecting state security and social stability, and protecting state owned enterprises from foreign competition. The former has led to keeping foreigners out of media, internet, and defense sensitive sectors. Restrictions protecting SOEs from foreign competition were largely negotiated away during China’s accession to WTO.

Investments were categorized as to encouraged, restricted and prohibited. In 2015 China began a move towards a negative list – investment is allowed unless a sector is on the negative list.  China has just released a new negative list for its 11 free trade zones that goes into effect on July 10, 2017.

Accounting was initially off limits to foreign investment. The international accounting firms entered in the early 1980s through representative offices that were not allowed to practice. In the early 1990s they were permitted to enter joint ventures with state-controlled CPA firms. In the late 1990s the state-controlled CPA firms were separated from the state. In the early 2010s the Big Four restructured into special general partnerships (SGP) that allowed up to 20% ownership by unlicensed foreign partners (started at 40% and phased down). 

Allowing any ownership by unlicensed foreign partners was a concession to the Big Four that is unique to China. I believe China is the only country that allows any unlicensed partners in CPA firms. The Big Four were built in China using foreign partners (mainly Hong Kong) although local partners are now in the majority.

Included in the deal to allow foreign partners was a restriction that said the senior partner of the SGP must be a local Chinese. This restriction likely violated China’s WTO commitments to not have nationality based restrictions, but the Big Four figured out a workaround. They would nominate a local partner to be senior partner of the SGP, but all power was vested in the senior partner of the firm, who typically was a Hong Kong citizen based in Hong Kong. I do not believe any of the Big Four currently have a local Chinese senior partner, but I expect the next generation of senior partners will all be local Chinese. 

China has removed the nationality restriction on the senior partner of the SGP in the latest iteration of the negative list. I think this will have little effect since the Big Four effectively ignored the rule, although there may be a few Big Four partners with foreign passports whose career prospects have improved.

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