Balancing business risks and risk management in China

Tuesday, September 28, 2010 | Posted by: Fiona Cullinan
Categories: China | Tags: business, tax, investment, governance, China, risk, annual report, management, risks, regulation, audit, labour, export, Chris Tam, import

Grant Thornton’s new risk report came out last week. Chris Tam, Director, Grant Thornton China, outlines the lie of the land for both UK investors looking to mainland China and also Chinese companies, who face unfamiliar risks when doing business in the UK.

What have you seen in China, with regard to risk management process and policies over the last 18 months?

In mainland China, the government has recently introduced new regulations which require public companies to establish internal control and risk management systems, annually evaluate the effectiveness of internal control and disclose any material deficiencies in their annual report.

External auditors will be required to express an audit opinion on the effectiveness of internal control that their strategy is aligned with their desired risk profile.

In light of the credit crunch has there been a change in attitude?

While the credit crunch in US and Europe did not significantly impact on domestic consumption in China, there was a large impact on exports. As such, the Chinese government promoted increases in domestic consumption with many export-oriented businesses repositioning their strategies to domestic markets.

The recent downturn has also created opportunities for Chinese companies to move outside of the country. In 2008-2010, we have seen increasing amounts of outbound investments by Chinese companies acquiring international brands and technologies, natural resources and distribution channels in the US and Europe.

However, many Chinese companies are not familiar with managing overseas businesses and do not have experience in managing unfamiliar risks such as labour relations, international regulations and political issues. This will pose a challenge to many of those companies and require a step change in their risk management processes.

What are the key challenges/risks to firms wanting to do business in China?

We advise UK investors to conduct a thorough risk assessment by consulting your business advisers with local knowledge. However, we would like to highlight the following risks.

Taxes – despite relatively low operational costs in China, there are many hidden costs. For example, tax rules are governed by state and local governments, and these vary from province-to-province or city-to-city. Also, following tax reforms in 2008, there are very few preferential tax benefits for foreign investors compared to domestic companies.

Labour – skilled labour costs in major cities have been increasing by 15-20% per annum for the last 2-3 years. We expect to see this momentum continuing in the mid term due to shortages of skilled labour. In addition, compulsory social insurance and benefits top up approximately 34% to base salaries.

Image: © Brent Moore. This article appears in Grant Thornton’s 2010 research report A new risk equation? Safeguarding the business model, which is available for download.

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