The theme of the China Business Summit is: "China’s Next Phase of Modernization: Creating Scientific and Sustainable Solutions". Financial sector reform is a central pillar of this strategy. How would you assess the government’s progress thus far?
Robert Alspaugh: If you go back 20 years, there wasn’t a banking or financial sector. At that point it wasn’t much more than a way for the government to fund social policies. What they’ve done since then is remarkable, but you are right to talk of financial reform as a central pillar because financial reform is and absolutely must be one of China's top priorities.
You need a strong financial sector to help companies grow. China made a commitment in joining the World Trade Organization to open their financial sector by the end of 2006 and to do that they have to address governance and risk issues. I think they have done some good things, for example, re-capitalizing the Bank of China and China Construction Bank. And also they have put regulatory systems in place around the banking and insurance business. All of that helps top banks to improve transparency and corporate governance which will ultimately make them more competitive internationally and it will also help open up these markets for international investment.
As you start to drill down, there are still a few issues that have clearly got to be dealt with. One is the many non-performing loans that are on the books of banks and the challenge is to get those loans off the books without putting too much of a strain on government resources as those funds could be used on social expenditures.
You’ve also got to change the mindset of the bankers who are making some of these loans so that loans are made on the basis of market conditions and with full expectation of repayment. This also brings us to the fact that China does need better risk management systems and transparency around its policies. But again they have done some good things by starting with some of the bigger banks - the regulations, the capital adequacy rules - both of these things will help to drive this. I don’t think anyone should suggest that everything can go on auto pilot. They have got to be very forceful in dealing with root issues within the financial market.
How much progress – from an accounting perspective – has been made in improving the governance of state owned enterprises in China?
Robert Alspaugh: The ministry of finance and the China Securities Regulatory Commission are responsible for the accounting rulemaking. Up to this point, they’ve been focused on public entities and trying to move them towards international accounting standards. But non-public state-owned enterprises have not really been a priority for them.
Should this issue be top of the list? Probably not, but in my view it is an issue that needs to be addressed when you talk about privatising these entities and raising the capital for them. You have got to have consistency of accounting. The Ministry of Finance has established training centres for accounting. These training centres advise the management teams of state-owned entities and explain some of the rules and where the international reporting standards are going. So there is action being taken, it hasn’t been a top priority, but it should be more of a priority.
Have foreign accounting firms operating in China justified the confidence placed in them and how would you characterize relations with their domestic counterparts?
Robert Alspaugh: Candidly, there is always tension because the Big Four firms have the capacity, the global infrastructure and the financial wherewithal to bring the best people and provide the training necessary to assist with these mega-IPOs [of state-owned enterprises]. These assignments require a very deep pool of talented people.
From a strategic standpoint, KPMG believes that the best way for us to grow in China is to do that organically. We are experiencing enormous growth in China and one of the things you have to look at is the risk perspective. How fast is too fast? There is a point, whatever business you are in, where fast is too fast and what we are experiencing is very substantial growth. In order to best manage the risk associated with growth, we believe to grow organically is best for us.
We want the accounting profession to thrive in China and we believe we support the profession best by developing the KPMG brand and the people within our organization through strong training.
How much has KPMG grown in the past five years in China and has it met expectations?
Robert Alspaugh: It has absolutely exceeded our expectations. We are looking at annual growth rates of more than 25per cent and we now have more then 4,000 people. We probably could grow faster but as I said earlier, rapid growth also brings more risk. Particularly in an environment where some clients don't have a lot of sophistication, you need to spend more time with each client and therefore manage the number of clients that you can help.
How do you think certain vulnerabilities in the economy (for example the lack of a social safety net, regional imbalances, weaknesses in the banking system) could undermine the continued rapid expansion of the economy?
Robert Alspaugh: You have to say that the Chinese government really has done an excellent job of managing growth up until this point. When you consider the scale of it, it’s amazing what they have been able to do. There is risk of an asset bubble where prices get out of control and then there’s an inevitable significant downturn.
There is clearly a risk of social instability if certain expectations are not met. There is also the issue of managing the privatization of state-owned entities. We talk about privatization but in some cases, it’s dismantling them and that could lead to job losses and managing that is a real challenge. When you take a look at the income gap between the rural and urban societies in China, the risks are not inconsequential.
But when you look at how they have done so far, you have to give them an A.
What are the biggest challenges for Chinese companies going global?
Robert Alspaugh: First of all Chinese companies have to go global. When China joined the WTO, many companies were no longer protected in terms of their local sales base.
I believe that going global starts with having the right kind of management teams. Do they have the right kind of experience and knowledge of global marketing and service delivery to different cultures and value systems? You can have a lot of well-trained people, but in the end it takes experience (and often the experience of not succeeding) to drive success.
There are big tasks involved for a Chinese company to move into the global marketplace. You’re talking about distribution networks, how to develop the brand that you want, perceptions in the marketplace of the quality and reliability of Chinese products.
You've got to invest in R&D, got to come up with superior products and be able to enhance them. Those are challenges that the management team has to deal with when deciding how much to invest for the future. The good news is that China is churning out engineers, which is a breeding ground for new technologies. But it still requires decisions around how much to invest.
In my opinion, it comes down to experience and how to get that experience without making a major mistake like overpaying for an acquisition, inadequate investment in R&D or not understanding the subtle cultural differences in trying to develop a global brand.
