Hong Kong: outsourcing integrity

This is a blow to the city’s pretensions as a serious international financial centre. The differences between standards may be minor: Chinese ASBEs (Accounting Standards for Business Enterprises), which became mandatory for mainland-listed companies from January 2007, were basically modelled on International Financial Reporting Standards; HK standards, in turn, have broadly converged with IFRS.

But investors are entitled to feel aggrieved. The loss of direct comparability between issuers in the same sector will be bad enough. Worse, HKEx will allow mainland audit firms to be vetted, nominated and endorsed by mainland authorities. When Chinese issuers list shares on other big international exchanges – New York, London, Tokyo, Sydney – their auditors are subject to local oversight by the respective authorities. Hong Kong’s decision to rely on Chinese supervisors implies a loss of integrity, as well as a loss of legal redress should things go wrong.

The enthusiasm of the Hong Kong exchange for all things Chinese is understandable. 56 of this year’s crop of 78 new listings descended from over the border; November’s HK$2,154bn of trades on the main board was the highest since January 2008, when the last IPO party was still in full swing. But in the same week that leaked US embassy cables suggested that China’s published gross domestic product figures should be seen as a reference point, rather than a true and fair reflection of the state of the nation, the decision to outsource is unfortunate. For investors thumbing through accounts signed off by an unfamiliar auditor, the suspicion will linger: not so much made in China, as made up in China.