Archives For China

Emmanouil Schizas-3770

By Manos Schizas, senior economic analyst, ACCA

ACCA’s Beijing office recently teamed up with the China International Center for Economic and Technical Exchanges (CICETE) and the China Association of Microfinance (CAM) to hold an excellent event on the future of small business financing in the world’s second largest economy. It was a privilege for me to address this event and to learn first-hand from some of the pioneers of small business lending in China. It was also a great opportunity to meet a 50-strong delegation from ICBC, one of ACCA’s biggest employers in the region.

One question that came up as we were planning the event was this: What does the future hold for SME financing? More specifically, does Big Data have the potential to transform the industry and extend access to the large numbers of under-served small and micro-enterprises? It’s a reasonable question. After all, here at ACCA we stress that information is one of the four key inputs into business finance – alongside control, collateral, and risk appetite. It is, in fact, the most important one, as financial systems over-reliant on the other three can become unfair, unbalanced or unsustainable.

Unfortunately, I am no expert in Big Data. I was, however, able to fall back on the work of my colleague Faye Chua, our Head of Futures Research, as well as ACCA’s Accountancy Futures Academy, who are looking into this topic regularly and published an excellent review only a few months ago. Their report on the promise and perils of Big Data for the accountancy profession can be found here. What follows is a summary of what I told our audience in Beijing based on this reading, and although I must credit my colleagues for the insights, all errors and misunderstandings are entirely my own.

It’s good to start by defining what we mean by Big Data, because the term is often misused. My colleagues adhere to Gartner’s ‘Three Vs’ condition for Big Data, which says that ‘Bigness’ comes from the high Volume, Velocity and Variety of data. Gartner’s definition adds that Big Data “demand cost-effective, innovative forms of information processing for enhanced insight and decision making.”

Thus defined, what kind of Big Data are we seeing, and what could we soon see, in SME financing? The possibilities are significant – both for ‘soft’ and ‘hard’ data.

The easiest input imaginable is real-time transaction and payment data integrated from online payment systems, card terminals, accounting software, and credit databases. Finance providers such as Kabbage are already integrating this information to inform short-term lending decisions (more on this here).

More difficult to imagine, but still within the realm of ‘hard data’, would be trade credit data along supply chains – information about which businesses owe each potential borrower money, and how many sources of finance an SME is tapping at once. Mapping the web of trade credit flows makes it easier to spot vulnerabilities that wouldn’t show up in the financials of an individual business. Credit rating agencies are already able to provide some of this information, although mapping the web of business-to-business claims in real time could be many years away. You’ll know that day has arrived when governments start pre-emptively recapitalising corporate supply chains in the same way that they do banks today.

Finance providers could source almost real-time information about business’ capacity utilisation from utilities providers (electricity, water or telecoms) – giving them great insights into the business’ performance and potential finance needs. I recall that, in China, economists already used this method back in 2010 to estimate the effect of lending constraints on SMEs – they found at the time that electricity consumption by very small industrial users was down 40% year-on-year. Similarly, tracking data from logistics companies and GPS information could also provide a clue to the efficiency and capacity utilisation of a logistics-heavy business, helping direct finance to the right ones and making it much easier for providers to provide vehicle leasing or fleet insurance services.

In the realm of soft data, the possibilities are also substantial.

Integration with social media, family records, or the archives of large employers and educational institutions, could provide finance providers with a map of any entrepreneur’s social capital – who they know and who they can call on, as well who might be able to help them when in difficulty. Online crowdfunding would benefit strongly from this type of information, but credit providers could also use it as a measure of social capital when evaluating young businesses with no track record. Social media could also provide a tangible measure of a business’ ‘word of mouth’ – its stock of loyal customers, its reputation, and the uniqueness of its brand. Not all business models depend on this, but those that do can turn it into a tangible cash equivalent.

Entrepreneurs’ own personalities could become a target for data analysts, as it they are highly relevant to financing decisions. Not that long ago, ACCA’s own research demonstrated how executives’ personalities interact with business infrastructure to produce innovation. Forbes’ post on our findings is still ACCA’s most popular article ever, reaching about 800,000 people to date. The behaviour of entrepreneurs’ personal current accounts, for instance, can be correlated with anything from the way they speak on social media and the leisure activities they take part in, in order to populate a profile. Even language analysis could help. It’s already known, for instance, that CEOs’ and CFOs’ use of particular language on investor calls correlates with deceptive behaviour and through this to negative stock returns; or that the laughter of Federal Reserve interest-rate setters correlates with asset bubbles.

Realistically, the area most likely to see significant interest would be compliance, as Big Data is leveraged to allow easier identification of finance applicants and simplify due diligence. This can help control some of the most significant cost drivers in small business lending, especially in emerging markets. And given the small amounts involved, shaving off even a small percentage of the cost of due diligence can make a huge difference to financial inclusion.

That’s the potential.

However, as my colleagues pointed out in their review of Big Data, it’s easy to get caught up in the futurist dream and forget the reality. Big Data insights are expensive and the people that can help build them are few in number and increasingly well paid. The raw data that finance providers would need are not Open Data (indeed it helps to remember that most Big Data inputs are not); they are owned by providers with substantial bargaining power. Not to mention, their use will increasingly become heavily regulated as governments catch up with the industry.

Even then, my colleagues note that insights this tailored are bound to be short-lived. Big Data might be able to answer the question of ‘how likely is this person to need a business loan?’ very well, but only as long as the context has not materially changed. Meanwhile, competitors will each be building their own insights platforms, which other lenders will only be able to beat with even more investment. It will be undoubtedly progress, but not profitable progress.

Overall, it’s worth remembering the teachings of the Resource-Based View of the Firm. If you can’t own the raw data for your insights, or appropriate the gains from them, or if your competitors can replicate them, you have nothing of value in the long run. With no choice but to follow the leaders, many SME lenders will focus their energies on creating, buying in or replicating proprietary data.

Is this future imminent? Not as far as I’m concerned – SME lending will take a long time to catch up. The real reason for this, I think, is not cost; it is the fact that banks have such better uses for their money. I’m particularly thinking of a recent review of SME financing by uber-consultants McKinsey & Co. McKinsey found that the typical SME lender is already making really good risk-adjusted returns on equity, and they can double those by taking relatively simple analytical steps (see slide 13 on their deck), most of which don’t come close to using Big Data. If Small Data can double your returns, Big Data will almost certainly have to wait.

China makes the case

aksaroya —  24 April 2013 — Leave a comment

China’s experience of IFRS convergence makes a convincing case for other economies, says ACCA president Barry Cooper

Barry Cooper-0513

Given China’s increasing influence in the world, not only as producer but as major consumer, there’s growing interest in how to do business there. I’ve worked in China on and off for over 25 years and have been fascinated to see how it has developed into an economic world power.

With that growth has come some challenges, not least in the US where the Securities and Exchange Commission recently raised questions about the ways in which Chinese companies report their performance. So I was particularly interested to see some research commissioned by ACCA, which has looked at the impact of China’s convergence with International Financial Reporting Standards (IFRS), and what it has meant for corporate reporting.

The ACCA report, produced independently by Dr Edward Lee and Professor Martin Walker of Manchester University, together with Dr Colin Zeng of the University of Bristol, shows that IFRS convergence has benefitted the Chinese economy, by making accounting earnings more informative and therefore more useful to domestic and international investors.

After examining all Chinese companies listed on the Shanghai and Shenzhen stock exchanges between 2003 and 2009 the study found that the value relevance of earnings (the degree to which changes in reported earnings affect share prices) had increased following IFRS convergence in 2007, almost certainly as a result of convergence itself. The research also revealed that IFRS convergence resulted in better quality corporate disclosures only where there were other strong incentives for companies to do so, such as a high level of dependence on the equity markets for funding.

The findings underline the importance of IFRS as the international standard for financial reporting, particularly where companies have legal, governance and commercial incentives to provide high-quality disclosures. Convergence has undoubtedly worked for China. Other emerging economies – along with some significant developed ones yet to converge with IFRS – must now take notice. To consolidate and build on the benefits of convergence, the legal and regulatory accounting framework will need to be enhanced on a continuous basis, which will provide challenges and opportunities for all finance professionals.

Professor Barry J Cooper is head of the School of Accounting, Economics and Finance at Deakin University, Australia

This post first appeared in Accounting and Business, International edition, April 2013

A shifting focus for CFOs

aksaroya —  15 April 2013 — 1 Comment

By Cesar Bacani, editor-in-chief of CFO Innovation Asia

One of the more interesting conversations I recently had was with John Henderson, Asia Pacific CFO of Regus, the US £1.9bn a year global provider of business centre office space. For me, it illuminated the emerging issues that finance functions in Asia are beginning to face as domestic consumption, not just exports, become a key driver of economic growth from China to India to South East Asia.

This development means that the business activities of Asia’s emerging multinationals – and those of global multinational corporations like Regus – will increasingly focus on selling into the region’s markets, instead of using them mainly as export bases. And that has implications for the way CFOs manage finance and the kind of finance professionals they need for their team.

Henderson is already in the throes of the transition. Like many companies, finance management at Regus had been centralised in regional headquarters – in this case Hong Kong. ‘What we understand by looking at our strategy, by looking at our opportunity in the markets, is that we need to move from a very much centrally managed business to a country focus,’ he says.

This year, Henderson will be hiring five or six senior finance executives who will be working closely with newly appointed country managers in smaller markets where it sees growth opportunities (the company operates in 16 Asian countries).

What Regus has found, Henderson says, is that it is ‘much more efficient and effective if the finance resources sat next to the CEO, the country manager. It builds a stronger unit to drive business.’ But finance must be strong in both technical and commercial skills, and able to do much more than just transactional process.

Indeed, Regus set up a shared services centre in Manila three years ago to free finance to focus on being a business partner. The objective is ‘to focus on real value-add’ says Henderson, ‘through modelling out acquisitions and other opportunities, looking at our pricing, forecasting, strategy and at financial structures that work best in the local market, and at the same time still being the gate-keeper on things like compliance and cost control.’

It’s tough to find these finance professionals though. ‘We find that quite a challenge,’ the CFO admits. ‘You do get professionals who like to have a very rigid structure. They like to have it all very nicely set up for them and their comfort zone.’ But as a chartered accountant himself who moved up from internal control and controllership to CFO, Henderson is confident he will eventually find what Regus is looking for in China, Indonesia, Cambodia and Sir Lanka.

Henderson will be very hands on in coaching, mentoring and training. ‘At the start, you may have them building financial models and asking the questions about what are the financial levers and what are the business levers that would drive that performance and understanding that,’ he says. ‘Slowly they start to pool more information in and get exposed in project teams to working with the other functions’.

That is so long as they are not wedded to operating only in the silo of accounting and compliance. Food for thought for Asia’s finance professionals and the CFOs who need to have them on their team.

This post first appeared in Accounting and Business, China edition, February 2013

 

Barry Cooper-0513

By Barry Cooper, ACCA President

I would like to take this opportunity to send you all the best wishes for the Chinese New Year, which is now celebrated around the world. The Year of the Snake will be an important one not only for China and Asia, but for the whole world given the region’s economic importance and influence.

One of the key areas that Asian organisations will need to look at more closely, in common with their counterparts around the world, is how prepared they are to adopt a more sustainable approach in their operations. It’s important not just for how environmentally friendly businesses are perceived to be now, but for future generations too, which may have to pay a high price for any lack of global action.

ACCA recently published a report, The green economy: pushes and pulls on Corporate China, which asks whether corporate Asia is ready for the green economy. It concludes that the next few years will be critical ones in the shift to a more sustainable economy in Asia. All stakeholders will have to work together if sustainability is to be successfully adopted. Governments will need to promote green growth; investors will need to incorporate environmental, social and governance considerations into their decision-making; and companies will need to develop goods and services that minimise their environmental and social impact.

What was good to see from the report is that the business case for sustainability is gaining momentum in Asia and that leading companies are integrating sustainability into their corporate culture and decision-making processes. They are already seeing the benefits not only in terms of lower dependency on natural resources, but also in increased sales; customers from around the world are looking at sustainability issues before they make decisions about when, where and from whom to buy.

As accountants, you are well placed to help  businesses and the wider economy they operate in to measure, manage and report on their environmental and social impact, and to enable more organisations to adopt green practices. I wish you every success in this critical mission.

This post first appeared in Accounting and business, UK edition, February 2013

By Ada Leung, head of ACCA China

Being a part of the Accounting for the Future global virtual conference, which was held in October, really helped to push our messages about the green economy in China and Hong Kong.

China’s success in evolving a green economy is in everyone’s interest. It is also in the interest of the accountancy profession – not just in Hong Kong or Mainland China, but globally – to play a central role in helping Chinese business adapt to the changing operational and legislative landscape.

During the conference week, ACCA China launched a report, Greening China’s Economy: Pushes and Pulls on Corporate China, which looks at how an increased focus on environmental and social performance, at international and national levels, is affecting the private sector in Mainland China and Hong Kong.

In seven chapters, the report explores the many factors that businesses need to consider – from government policies aimed at reducing carbon emissions or pollution levels, to demands from customers based outside of the country to improve labour conditions in factories, to calls from investors for greater disclosure on environmental, social and governance (ESG) topics. It’s a wide-ranging report tackling wide-ranging issues.

At our event, we had speakers such as guest of honour Christine Loh, under secretary for the environment of the Hong Kong SAR Government; speakers from PwC Hong Kong and Beijing; speakers from the Hong Kong Exchanges and Clearing Limited (HKEx) and the Shanghai Stock Exchange (SSE), and speakers from businesses such as BASF, Sinopec, MTR Corporation Limited and John Swire & Sons (HK) Ltd.

I summed up the conference in Beijing by saying that sustainability performance one day may well be as important as economic performance. Hong Kong and Mainland China have worked closely like never before. China’s drive towards a green economy could be a challenge, but there are always opportunities as a result of change and as a result of challenges. It is a changing world, no doubt, but it is important for any business to be properly aware of the implications of change, and how to deal with them.