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Chinese accounting Cultural revolution

New accounting rules have replaced the Little Red Book as China's guide to self-improvement. Can the state handle the truth?

Jan 11th 2007 | hong kong | from the print edition

SEPARATING truth from propaganda in China has always been hard, not least when it comes to numbers. Accountants, of all people, were seen as such a threat that during the 1960s they were packed off to re-education camps, dooming the profession for decades afterward. Even in kindlier times, businesses reported information that would interest a centrally planned economy, such as production quotas. The measuring sticks of bourgeois managers—costs, debt, depreciation, and (of course) profit—were ignored.

But since the 1990s China has begun scrubbing up its accounting system. At the beginning of this year it made its biggest move yet when the Ministry of Finance required the 1,200 companies listed on the Shenzhen and Shanghai stockmarkets to adopt, with important exceptions, norms similar to International Financial Reporting Standards (IFRS). These standards may sound like instruments of accounting torture, but countries all over the world are embracing them. China has given all its other firms the option of complying with them “voluntarily”—a word with many shades of meaning. If the changes are more than just cynical window-dressing designed to attract foreign investment, they will mark a profound shift in what China wants people to know not only about its companies, but also about its economy and its government.

A new accounting system would certainly help China. Most companies are good at keeping tabs on their operations, but the book-keeping is complicated by use of a thick manual that makes bewildering distinctions between different kinds of provisions. The result is a mess. “The records are complete, the question is how do you make sense of them,” says T.J. Wong, a professor of accounting at the Chinese University of Hong Kong.

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