China surpasses US as world's top corporate borrower; Will the IMF headquarters move to Beijing?

China surpasses US as world's top corporate borrower

Corporate debtChinese corporate borrowers owed $14.2 trillion at the end of 2013 versus $13.1 trillion owed by U.S. corporations with the switch in ranking

The Chinese mainland has surpassed the US as the world's top corporate borrower, and higher debt risk in the world's second-largest economy may mean greater risk for the world, a report said on Monday.

However, Chinese economists noted that the debt risk in China's corporate sector is still well under control.

Nonfinancial corporate debt in the Chinese market was estimated at around $14.2 trillion by the end of 2013, overtaking the $13.1 trillion debt owed by the US corporations, a progress happening sooner than expected, said a report from the Standard & Poor's Ratings Services on Monday.

The report expects that by the end of 2018 debt needs of mainland companies will reach $23.9 trillion - around one-third of the almost $60 trillion of global refinancing and new debt needs.

"It [the mainland surpassing the US as the largest corporate borrower] is not surprising at all, as the [size of] mainland non-service sector has already surpassed that of the US," Tian Yun, an economist with the China Society of Macroeconomics under the National Development and Reform Commission, told the Global Times on Monday.

Cash flow and leverage at mainland corporations has worsened after 2009, and debt risks in the property and steel sectors remain a particular concern, the report said.

Private companies are facing more challenging financing conditions - highlighted by China's first corporate bond default case of Shanghai Chaori Solar Energy Science and Technology Co in March and another case of default of leading private steel maker Shanxi Haixin Iron and Steel Group.

"The capital market has been sluggish during the past few years, leading to the fast growth in corporate debts," Xu Hongcai, director of the Department of Information under the China Center for International Economic Exchanges, told the Global Times Monday.

Experts noted that the rapid growth in debt reflected some problems of the  Chinese economy, but the size of the debt is still in a safe range and will not cause major risks as the economy remains stable.

"The problems of the Chinese economy are institutional and structural," Tian said, "By addressing these issues, debt risks can be managed."

Tian further noted that most corporate debts in China are internal debts, thus debt problems in the country will have limited impact on the rest of the world.

The report also said a possible contraction in "shadowing banking" will be detrimental to businesses as general.

But Xu noted that China's tighter supervision of the "shadow banking" sector will make it more transparent and better-regulated, which will reduce the potential risks in the sector.


Local governments face massive debt repayment pressure

China's local governments are facing huge debt repayment pressure this year with 2.4 trillion yuan ($390 billion) of debts due in 2014, China Business News reported Monday.

From 2009 to 2013, China issued 94 local government bonds raising 850 billion yuan, the report said.

With another 400 billion yuan worth of bonds to be issued this year, the total financing since 2009 will reach 1.25 trillion yuan, according to the report.

However, the total local government debt is much higher than the amount raised through the bonds, the report said, noting that major debt came from bank loans.

Although the central government has stated several times that the overall debt risk is under control, the statistics from China's National Audit Office show that some local governments have a debt-asset ratio of more that 100 percent and are facing huge repayment pressure, the report said.

Market analysts hold the view that local governments may borrow new debts to pay for the old ones.

The central government allowed local authorities to raise funds since 2009 in the wake of the global financial crisis, while the central government also issued bonds and repaid debts on behalf of the local governments, a practice criticized by some as not conforming to market economy principles.

As the bond issuing backed by the central government is limited and could not fully meet the local needs, the local governments also turned to opaque financing channels including shadow banking activities, the report said.

Despite the big debt pileup, no local government default has so far taken place.

- By Liang Fei Source:Global Times Published: 2014-6-16 23:43:09 

Will the IMF headquarters move to Beijing?

The International Monetary Fund's headquarters may one day move from Washington to Beijing, aligning with China's growing influence in the world economy, the fund's managing director Christine Lagarde said early this month.

Attaching importance to China

Christine Lagarde made the statement at the London School of Economics and Political Science (LSE), saying that the IMF rules require that the institution should be headquartered in the country that is the biggest shareholder. This has always been the U.S. since the fund was formed.

"But the way things are going, I wouldn't be surprised if one of these days, the IMF was headquartered in Beijing," she said.

Lagarde remarked that the IMF had a good relationship with China, the world's second largest economy, and she praised the Chinese government's commitment to fighting corruption.

Lagarde added that she did not think the IMF should be controlled by Europeans in its first place. Since its establishment in 1945, the IMF headquarters has been headed by Europeans and located in Washington, while the World Bank has been headed by the Americans.

Not satisfied with the U.S.

Lagarde also pointed out that the U.S. government is an "outlier" among the G20 in refusing to approve IMF reform, and the IMF was trying to give emerging economies like China and Brazil a bigger voice through reform.

According to Lagarde, on the part of countries like China, Brazil, and India, there is frustration with the lack of progress in reforming the IMF by refusing to adopt the quota reform that would give emerging economies a bigger voice, a bigger vote, and a bigger share in the institution. “I share that frustration immensely,” she said.

She also claimed that the credibility and the importance of the IMF are closely related to proper representation among the membership. "We cannot have proper representation of the membership if China has a tiny share of quota and the voice, when it has grown to where it has grown," she said.

The IMF agreed to reform its management structure in 2010 so that emerging economies could play a bigger role, and made China the third largest member. The U.S. is the only member with control weight in the voting; meaning that any major reform must be approved by the United States.

Hello headquarters

Lagarde has no specific schedule for the headquarters' shift. However, this once again reminds China that there are few international organizations headquartered in its country, which is disproportionate to China's status as the world's second largest economy.

This article is edited and translated from 《IMF总部要搬北京？》，source:Beijing Youth Daily, author: Bu Xiaoming. (People's Daily Online)

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Chinese corporate borrowers owed $14.2 trillion at the end of 2013 versus ...

Will Malaysian audit have its day in court?

Silver Bird may well be the first local listed company to sue its internal and external auditors.

IF ever there were Malaysian parents who had hoped that their kids would go into audit, there's probably quite a bit of serious rethinking going on right now. It looks like the audit profession is in for some harsh scrutiny and painful soul-searching.

On Aug 1, Silver Bird Group Bhd and two wholly-owned subsidiaries filed an action in the Kuala Lumpur High Court in relation to financial irregularities at the three companies. One of the 10 defendants named in the suit was Crowe Horwath, Silver Bird's longtime external auditors.

According to Silver Bird's announcement through Bursa Malaysia, the suit against the accounting firm is premised on alleged negligence and breach of duty of care and/or its duties and responsibilities to the plaintiffs as external auditors.

The bread and confectionery maker links this to Crowe Horwath's “failure to discover and/or detect the financial irregularities”.

It is believed to be the first such legal action by a listed company in Malaysia against its external auditors.

In recent years, it's increasingly common to hear of auditors in the United States, Britain and elsewhere (Japan, India and Hong Kong, for example) being sued for professional negligence because they had failed to spot fraud and warning signs of business collapses.

It's perhaps an indication of the current thinking that when companies go under, certain parties should be held accountable for the huge losses and suffering, and these include the auditors, whose opinion on the companies' financial statements are widely relied upon.

The day after Silver Bird initiated the civil suit, Crowe Horwath issued a press release to deny the allegations in the suit, as laid out in the Silver Bird announcement. The auditors pointed out that they had, in fact, discovered the irregularities and immediately reported these to Silver Bird's audit committee and board of directors.

“We believe that the suit by Silver Bird is frivolous in nature and without basis. We strongly believe that we have fully discharged our duties professionally and will vigorously defend our position in court,” added the firm.

Indeed, as that last line in the press release indicates, right or wrong will be decided before the judge, unless the case doesn't go to trial.

However, there were no such statements from Audex Governance Sdn Bhd and Focus Internal Audit Solutions (FIAS), who are also among the defendants. Both are on the list because they have done internal audit work for Silver Bird, which had outsourced its internal audit function to Audex Governance before switching to FIAS.

Suits against internal auditors appear to be rare overseas and it's almost certain that Silver Bird's civil action against Audex Governance and FIAS is a first for Malaysia.

The Silver Bird case has thrown the spotlight on the roles and responsibilities of internal auditors.

Internal audit became a more visible component of corporate governance in Malaysia when it was made mandatory beginning Jan 31, 2009, for a listed company to have an internal audit function.

Bursa Malaysia's listing rules require that the internal audit function be independent of the activities it audits and that it reports directly to the audit committee.

In addition, the listed company's annual report have to include a statement relating to the internal audit function, informing whether the function is performed in-house or is outsourced, and the costs incurred for the function in respect of the financial year.

Despite these rules, most people tend to underestimate the importance of internal auditors, probably because few people really appreciate what internal auditors do.

In a brochure, The International Institute of Internal Auditors (IIA) reports this lament: “There is a universal lack of understanding of the internal audit profession, how it makes a difference in regard to organisational governance, risk, and internal control; and its value to stakeholders.”

In addition, there's more emphasis on the audit opinion of the external auditors as it's a tangible product of their work.

Also, the external auditors are seen as independent of the management, whereas an in-house internal audit function is undertaken by those on the company's payroll.

The IIA defines internal audit activity as a “department, division, team of consultants, or other practitioner(s) that provides independent, objective assurance and consulting services designed to add value and improve an organisation's operations”.

It adds: “The internal audit activity helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of governance, risk management and control processes.”

On the other hand, as Crowe Horwath puts it in Silver Bird's financial statements for the year ended October 2011, the external auditors are called in primarily to express an opinion on the financial statements “based on our audit in accordance with approved standards on auditing in Malaysia”.

Silver Bird's move to sue the internal auditors tells us that it's time to take a closer look at the internal audit function, whether in-house or outsourced. The regulators and the internal audit profession should be asking some tough questions.

Would it be possible for companies to sue internal auditors for professional negligence if they are employees? Who watches over the outsourcing of the internal audit function and the firms that take on such jobs? What more can be done to ensure the independence and quality of the internal audit function?

When financial irregularities are not picked up by the internal and external auditors, is it possible for one of the auditors to be exonerated while the other is found to be at fault?

The Silver Bird case may or may not lead to answers to these questions, but if the audit profession is truly proactive and dynamic, it wouldn't wait for the case to be resolved before responding to the reality that in Malaysia, resistance to the idea of suing auditors is waning.

> Executive editor Errol Oh hopes he will have the stamina and patience to follow closely the developments in the Silver Bird lawsuit.