Global standards essential for financial control

So how is China now progressing in addressing these issues and implementing global standards? And, where must it increase its focus in terms of doing so?

China now leads the way in implementing financial controls across the financial sector. If the China Banking Regulatory Commission continues to pressure financial institutions to fully implement the requirements, China will be at the leading edge of financial regulation and able to continue to open its markets to more sophisticated trading instruments.

The central bank is now introducing global standards across all financial firms to control the placement and integration of the proceeds from crime into the financial system. The new rules will be fully active in 2016 and should lead to much greater control and opacity. Financial firms will be responsible for implementing processes and controls to ensure compliance. These controls do not prevent fraud from occurring, but will make it more difficult for individuals and companies to abuse markets by illicitly moving funds. The Ministry of Finance and the CBRC are moving toward the application of IFRS. However, this should be enforced with all companies, not just financial firms. While the application of the standards does not prevent fraud, it does provide markets with a consistent way to value businesses from China that wish to list on international markets, including Chinese exchanges, as they open to international investors.

Variable interest entity structures are often used as a work-around for China's restrictions over ownership of businesses operating in sensitive industries. However, VIEs have left foreign investors with heavy losses because of the non-ownership of the underlying assets that they are investing in. Therefore, investors do not benefit by continuing to use VIE structures, and Chinese lawmakers need to review the foreign ownership restrictions in some business areas, such as Internet companies and training/educational businesses.

For the most part, China is making tremendous strides toward managing fraud and money laundering. However, there remains some uncertainty in determining how best to implement adequate controls and international business laws into its internal structures. With China's growth exceeding almost all other countries, it must catch up rapidly in areas of law and supervision to enhance and maintain the trust of the global investment community.

The author is regional director North Asia at Wolters Kluwer Financial Services.