Chapter Two: Literature Review on China’S Accounting Change Have Been Incorporated in the Following Book Chapter

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2012 Fair value accounting as an instrument of neoliberalism in China Ying Zhang University of Wollongong

Recommended Citation Zhang, Ying, Fair value accounting as an instrument of neoliberalism in China, Doctor of Philosophy thesis, School of Accounting and Finance, University of Wollongong, 2012. http://ro.uow.edu.au/theses/3499

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Fair Value Accounting as an Instrument of Neoliberalism in China

A thesis submitted in fulfilment of the requirements for the award of the degree

DOCTOR OF PHILOSOPHY

From

THE UNIVERSITY OF WOLLONGONG

YING ZHANG

School of Accounting and Finance

February 2012

CERTIFICATION

I, Ying Zhang, declare that this thesis, submitted in fulfilment of the requirements for the award of Doctor of Philosophy, in the School of Accounting and Finance, University of Wollongong, is wholly my own work unless otherwise referenced or acknowledged below. The document has not been submitted for qualifications at any other academic institution.

1. Section 2.1, 2.2, and 2.3 of Chapter Two: Literature Review on China’s Accounting Change have been incorporated in the following book chapter:

Zhang, Y., Andrew, J. and Collier, H. 2009, „The Convergence of International Financial Reporting Standards in China: A view on the influence of political ideology on Chinese accounting profession‟, in Basu, P. and Bandara, Y. (ed.), WTO Accession and Socio-Economic Development in China, Chandos (Oxford) Publishing, Oxford, pp. 135- 149. (The percentage of authorship: Ying Zhang 60%, Dr Jane Andrew 25% and the late Mr Henry Collier 15%).

2. Part of section 7.5 of Chapter Seven: Contextualising Fair Value Accounting in China has been incorporated in the following conference paper:

Zhang, Y., Andrew, J. and Rudkin, K. 2009, „Fair Value Accounting and Chinese Capital Markets‟, in Proceedings of the 21st Annual Conference of the Association for Chinese Economic Studies, RMIT University, Melbourne, Australia. (The percentage of authorship: Ying Zhang 60%, Dr Jane Andrew 25% and Dr Kathy Rudkin 15%).

3. Part of section 2.4 of Chapter Two: Literature Review on China’s Accounting Change has been incorporated in the following journal article:

Zhang, Y. and Andrew, J. 2010, „Land in China: Re-considering comparability in financial reporting‟, Australasian Accounting Business and Finance Journal, vol. 4, no. 1, pp. 53-75. (The percentage of authorship: Ying Zhang 60% and Dr Jane Andrew 40%).

4. Part of Section 3.2 of Chapter Three: Theorising China’s Change and Section 7.5 of Chapter Seven: Contextualising Fair Value Accounting in China have been incorporated in the following conference paper:

Zhang, Y., Andrew, J. and Rudkin, K. 2010, „Fair Value Accounting in China: neoliberalisation and accounting change‟, in Proceedings of the Sixth Asia Pacific Interdisciplinary Research in Accounting (APIRA), The University of Sydney, Sydney, Australia, pp. 1-24. (The percentage of authorship: Ying Zhang 60%, Dr Jane Andrew 25% and Dr Kathy Rudkin 15%).

Ying Zhang 14 February 2012

ACKNOWLEDGEMENTS

The completion of this thesis marks a defining point in my life. During the journey, I have transitioned from an international student with a non-English speaking background to an academic lecturing in accounting at the University of Wollongong. This is a personal achievement that would not have been possible without the help and support of my academic supervisors, my peers, and my family and friends.

In the first instance, Dr Jane Andrew and the late Mr Henry Collier recognised my potential and encouraged me to undertake a research degree. Their trust and unconditional support helped me to survive whilst I was struggling to develop confidence in myself. After converting to a PhD, I received continued guidance and theoretical insight from Dr Jane Andrew, which has been instrumental in the exploration of the many ideas within this thesis. My principal supervisor, Dr Kathy Rudkin, has been a strong influence in substantially strengthening the arguments of this thesis and for providing continued support during my PhD. It has been an honour and a privilege to have Dr Rudkin‟s intellectual inputs and supervising experience as part of this work.

I express my gratitude to Associate Professor Gaorui Cai from Fuzhou University for his generous assistance, which enabled me to collect data from Chinese academic databases during my visits to China in 2008 and 2009.

To my peers at the University of Wollongong School of Accounting and Finance, thank you for your encouragement and friendship. You have made my time as a PhD student a thoroughly enjoyable and warm experience. I would also like to acknowledge the assistance of editor Laura E. Goodin and the staff of the University of Wollongong Faculty of Commerce.

Finally, I wish to thank my family and friends in China and Australia for always being on my side and sharing my dreams. For all these years of love and understanding, please accept my infinite gratitude.

iii

ABSTRACT

The introduction of International Financial Reporting Standards (IFRS) has heralded a new „globalised‟ era of accounting practice. Although this has been celebrated by governments, standard setters, practitioners and reporters throughout the world as a great triumph, little is known about the underlying impacts of these standards on the political economies in which they operate. Given the transformative potentialities of IFRS in the context of globalised capitalism, this thesis explores accounting change in China. It focuses on both the context in which this change emerged and the impact it has had on the Chinese economy.

In addition to its empirical focus on China, IFRS and fair value accounting (FVA), this thesis draws on the broader literature on neoliberalism and financialisation to argue that accounting as a globalised practice is an instrument of neoliberalism. From this perspective, I argue that the adoption of IFRS embeds the ideological tenets of neoliberalism within its reporting regime, giving them the appearance of neutrality and making them difficult to identify, let alone challenge.

To reveal this ideological bias, this thesis adopts the Critical Discourse Analysis (CDA) elaborated by Norman Fairclough as its methodological framework. CDA studies the connections between discursive practices and wider social and cultural relations. It seeks to reveal how discourses are ideologically shaped to facilitate particular socio-political agenda. In doing so, this thesis shows how public discussions of the IFRS and FVA in China have been dominated by supportive discourses that rationalise the adoption with a problematic supposition of the „free market‟ and its unquestioned benefits. This discursive practice has created an appearance of „efficiency‟ and „freedom‟ for the transformation of the market that neoliberal theory preaches. The findings disclose, however, that FVA has produced significant volatility in the Chinese capital markets, which has prioritised the interest of Chinese elite and caused the costs to be borne by ordinary investors. The Split Share Structure Reform (SSSR) introduced by the Chinese government to

institutionalise market freedom has contributed little more than creating an image that symbolises a commitment to the ideals of neoliberalism – privatisation of public assets, deregulation of markets and the adoption of IFRS.

The contradictions identified by this thesis reinforce the disconnection between the theory and practice of neoliberalism that many political economists have argued. Instead of ensuring the „trickle-down‟ of benefits to create greater welfare for all people or market efficiencies, promised by proponents of the reform, this neoliberalisation process has worsened social struggles and expanded inequities in wealth distribution in China. Accounting has been part of the technical architecture of neoliberalism, sustaining an image of the „free market‟ that is devoid of the regulatory and socio-political apparatus in China.

TABLE OF CONTENTS

CERTIFICATION ...... i ACKNOWLEDGEMENTS...... iii ABSTRACT ...... iv TABLE OF CONTENTS ...... vi TABLE OF ABBREVIATIONS ...... x 1 Chapter One: Introduction ...... 1 1.1 The Research Topic ...... 1 1.2 Contributions ...... 3 1.2.1 A „Real-World‟ Example of the Application of IFRS ...... 3 1.2.2 A Perspective of Neoliberalism ...... 5 1.2.3 Fair Value Accounting ...... 10 1.3 Methodological Framework ...... 12 1.4 The Structure ...... 15 2 Chapter Two: Literature Review on China‟s Accounting Change ...... 18 2.1 The Mao Zedong Society ...... 19 2.2 The Reform and Opening-up of the Chinese Economy since 1978 ...... 24 2.3 The Emergence of a Capital Market and Financial Accounting in China ...... 33 2.4 Harmonisation with International Accounting Standards ...... 39 2.4.1 Literature on Harmonisation of Accounting Standards ...... 39 2.4.2 China‟s Efforts toward Harmonisation ...... 43 2.5 Summary ...... 47 3 Chapter Three: Theorising China‟s Change ...... 50 3.1 The Context of China‟s Economic Reform ...... 51 3.1.1 The Emergence of Markets: a Two-track System and Freedom in Economic Decision-making ...... 52 3.1.2 Joining the World Economy ...... 55 3.1.3 Privatisation ...... 57 3.2 The Rise of Neoliberalism ...... 62 3.2.1 Classical Economic Liberalism ...... 63 3.2.2 Keynesianism ...... 64 3.2.3 Neoliberalism in Theory ...... 65 3.2.4 Neoliberalism in Practice ...... 67

3.2.5 Critics of Neoliberalism ...... 68 3.3 The Impact of Neoliberalisation in China ...... 83 3.3.1 Income Inequalities ...... 83 3.3.2 Social Welfare Provision ...... 88 3.4 Some Reflections ...... 91 4 Chapter Four: Methodology – Critical Discourse Analysis ...... 95 4.1 The Reasons and Contributions of Using Critical Discourse Analysis ...... 96 4.2 Theorisation of Critical Discourse Analysis ...... 100 4.2.1 Different Themes of Critical Discourse Analysis ...... 101 4.2.2 The Philosophical Assumptions of Critical Discourse Analysis ...... 102 4.2.3 The Theoretical Foundations of Critical Discourse Analysis ...... 105 4.3 Methods of Critical Discourse Analysis ...... 110 4.3.1 Discourse as Text ...... 112 4.3.2 Discourse as Discursive Practices ...... 114 4.3.3 Discourse as Social Practice ...... 116 4.3.4 The Application of CDA in Accounting Research ...... 118 4.3.5 The Application of CDA in This Thesis ...... 124 4.4 Summary ...... 129 5 Chapter Five: The Discursive Construction of „Convergence‟ ...... 132 5.1 International View of the Convergence ...... 134 5.2 The Chinese Institutional Context – Media Control ...... 137 5.2.1 Party Monitoring of News Content ...... 137 5.2.2 Legal Restrictions and Self-censorship of the Media Industry ...... 139 5.3 Government View of the Convergence ...... 141 5.4 Some Analyses on the Government Discourses ...... 146 5.5 Media‟s View of the Convergence ...... 148 5.6 Academic View of the Convergence and Fair Value Accounting ...... 153 5.6.1 The New Chinese Accounting Standards ...... 154 5.6.2 Supporters of Fair Value Accounting ...... 160 5.6.3 Alternative Views of Fair Value Accounting ...... 163 5.6.4 Financial Crisis and Fair Value Accounting ...... 165 5.7 Conclusion ...... 167 6 Chapter Six – Reconsidering Fair Value Accounting in Neoliberalism ... 169 6.1 Fair Value Accounting: A Belief in the Market Mechanism ...... 170 6.2 The Progress of Fair Value Accounting: A Neoliberalised Value...... 175 6.3 Neoliberalised Income Realisation ...... 179 6.3.1 Balance Sheet vs. Income Statement ...... 179 6.3.2 Income: Measure of Performance or Enhancement of Wealth? ...... 181 vii

6.3.3 The Statement of „Comprehensive Income‟ ...... 182 6.4 Discursive Mediations among Competing Academics ...... 192 6.4.1 The Competing Ideas of „Income‟: Historical Debates ...... 192 6.4.2 The Narrow Idea of the „User‟: Empirical Research ...... 196 6.4.3 Resistance to „Comprehensive Income‟ ...... 201 6.5 Distortion of the Price-Discovery Process ...... 206 6.5.1 Mispricing the „Risk‟ ...... 207 6.5.2 An Accounting „Gearing‟ ...... 209 6.6 Summary ...... 213 7 Chapter Seven – Contextualising Fair Value Accounting in China ...... 216 7.1 „Value Relevance‟ of Fair Value Accounting ...... 219 7.2 Exploring „Relevance‟ ...... 222 7.2.1 Misconception about Resources Allocation in Capital Markets ...... 224 7.2.2 Misconception about the Mediative Function of Capital Markets ...... 225 7.2.3 The Signalling Role of Share Prices in China ...... 226 7.2.4 The Takeover Mechanism in China ...... 229 7.3 Discursive Complexity of „Reliability‟ ...... 232 7.3.1 The Discursive Shifting of „Reliability‟ ...... 232 7.3.2 Destabilising „Faithful Representation‟ ...... 235 7.3.3 Alternative Discourses to the „Reliability‟ in China ...... 239 7.4 Re-examining „Uncertainty‟ and „Volatility‟ ...... 249 7.4.1 An „Extra‟ Volatility...... 251 7.4.2 The Myth of ST Changkong ...... 255 7.4.3 Concerns about Earnings Management ...... 258 7.5 More Political Significance ...... 263 7.5.1 A Critical Reading of Chinese Capital Markets ...... 264 7.5.2 The Dominant Player and Its Reform Agenda ...... 266 7.5.3 The Split Share Structure Reform ...... 271 7.6 Summarising the Social-Practice Analysis...... 282 8 Chapter Eight: Summary and Reflections ...... 285 8.1 The Convergence of IFRS in China ...... 285 8.2 An Inter-disciplinary Approach – Applying CDA ...... 286 8.3 Neoliberalisation and Accounting Change ...... 288 8.3.1 Neoliberalism and Financialisation ...... 288 8.3.2 China‟s Reform Path ...... 290 8.3.3 FVA and Neoliberalism ...... 291 8.4 The Main Observations Revisited ...... 292 8.4.1 A Suspicious Discursive Consistency ...... 292 viii

8.4.2 The Discursive Position of Fair Value ...... 293 8.4.3 The Shifted Notion of Income Realisation ...... 293 8.4.4 Exploring „Relevance‟ ...... 294 8.4.5 Exploring „Reliability‟ ...... 295 8.4.6 The Political Implications of Fair Value Accounting and the Split Share Structure Reform in China ...... 296 8.5 Future Developments ...... 297 REFERENCES ...... 299 APPENDICES ...... 338 Appendix 1 ...... 338 Appendix 2 ...... 344 Appendix 3 ...... 345 Appendix 4 ...... 347 Appendix 5 ...... 349

TABLE OF ABBREVIATIONS

ACCA Association of Chartered Certified Accountants ADCSC Academic Degrees Committee of the State Council of China AICPA American Institute of Certified Public Accountants APB Accounting Principles Board ASBE Accounting Standards for Business Enterprises ASC Accounting Society of China BCA Brilliance China Automotive BIS Bank for International Settlements CAP Committee on Accounting Procedure CAS Chinese Accounting Standards CASC Chinese Accounting Standards Committee CCP Chinese Communist Party CCTV Chinese Central Television CDA Critical Discourse Analysis CDO Collateralised Debt Obligations CECC Congressional-Executive Commission on China CEO Chief Executive Officer CF Conceptual Framework CHSI Centre for Health Statistics and Information CICPA Chinese Institute of Certified Public Accountants CMS Cooperative Medical Scheme CNKI China National Knowledge Infrastructure CSRC Chinese Securities Regulatory Commission CVA Current Value Accounting EMH Efficient Market Hypothesis FASB Financial Accounting Standards Board FVA Fair Value Accounting GAAP Generally Accepted Accounting Principles GDP Gross Domestic Product GFC Global Financial Crisis HCA Historical Cost Accounting JV Joint Venture IAASB International Auditing and Assurance Standards Board IAS International Accounting Standards IASB International Accounting Standards Board IASC International Accounting Standards Committee IFA International Federation of Accountants IFRS International Financial Reporting Standards IMF International Monetary Fund IOSCO International Organisation of Securities Commissions IPO Initial Public Offer MBS Mortgage-Backed Security MOF Ministry of Finance of the People‟s Republic of China MPS Ministry of Public Security

NBS National Bureau of Statistics NFC Non-Financial Companies NRCE National Reference Costing Exercise NYSE New York Stock Exchange OTC Over-The-Counter PC Propaganda Circulars PRC People‟s Republic of China SARS Severe Acute Respiratory Syndrome SEC Securities and Exchange Commission SEZ Special Economic Zones SFAS Statements of Financial Accounting Standards SOE State-Owned Enterprise SSSR Split Share Structure Reform TVE Township and Village Enterprises WHO World Health Organisation WTO World Trade Organisation

Chapter One Introduction

1 Chapter One: Introduction 1.1 The Research Topic

This thesis studies changes in accounting in China, with special attention on the convergence of national accounting standards with International Financial Reporting Standards (IFRS). Historically, China adopted a uniform accounting system to sustain and legitimise its political commitment, which was fundamentally different from many capitalist societies (Zhang et al. 2009a). This, however, has been thoroughly changed since China‟s decision to adopt IFRS – an authoritative guidance on accounting practices within most world economies. On 15 February 2006, the Ministry of Finance of the People‟s Republic China (MOF), the official standard-setter in China 1 , formally announced the issuance of the new “Chinese Accounting Standards” (CAS), also called “Accounting Standards for Business Enterprises” (ASBE). The new CAS consists of the Basic ASBE and 38 Specific ASBEs, which embrace nearly all of the topics of the current IFRS, and became mandatory for all listed companies on 1 January 2007. In doing so, China became the 74th country at the time to adopt IFRS (Vnunet 2007).

The convergence of IFRS in China has been part of a massive collaboration within the accounting profession that happens at the international level – to globalise accounting regulation through promoting the IFRS. This project was initiated by the International Accounting Standards Board (IASB), a private body based in London, and has since been embraced by many other national standards-setting bodies. By April 2010, there have been 121 jurisdictions that permit or require IFRS for their domestic listed companies (Deloitte 2010). All major economies in the world have either adopted IFRS, as have the European Union and Australia, or committed themselves to converging with

1 Public financial and accounting management is under the jurisdiction of the Ministry of Finance. Its function includes formulating and implementing strategies, polices and guidelines, such as drafting laws and regulations on public finance and accounting and proposing tax legislation plans. It is at this level that the adoption of international accounting standards becomes sanctioned. (Appendix 2 provides a brief structure of China‟s government administration.)

Chapter One Introduction

IFRS, as have the United States2, Canada, Japan and others. If accounting is the „language of business‟, as asserted in many accounting journals and textbooks (Lavoie 1987, Robson 1992, Bloomfield 2008, Deegan 2010), this project certainly aims to get all global businesses to speak the same language. This has been a compelling idea and an ongoing work in progress within the accounting profession.

A unified change of this scope and depth that sweeps around the world cannot just happen by chance. There are forces that facilitate this transition, and there are benefits and costs of reconciling national accounting standards with the IFRS. It is also a highly controversial topic that has received significant interest from accounting academics, practitioners and wider communities. As part of the ample discussion aiming to better understand this global trend of IFRS harmonisation, this thesis addresses two areas that have been given insufficient attention in extant accounting literature.

First, there is little research in English about the move to IFRS in China3. This might be because the convergence with IFRS was a recent event, happening in 2007. The language issue may also play a role in preventing Western researchers from engaging with this topic. Thus, this thesis explores the implementation of IFRS in the Chinese context and its effects on China‟s accounting standards and practices – a topical area that has not been well known to the world outside of China.

Second, there is a lack of attention within the current accounting literature on the deeper ideological forces that have driven the globalisation of IFRS. As reviewed in Section 1.2 of this chapter, the extant research draws upon largely normative arguments or descriptive studies on the pros and cons of the international effort of harmonising IFRS. Many of these studies offer inadequate analysis on the socio-political underpinnings of this kind of

2 In 2007 the US Securities & Exchange Commission (SEC) made the landmark decision to allow non-US companies to file their financial statements based on IFRS without reconciling back to the US GAAP. This was widely regarded as the SEC‟s most significant step towards full adoption of IFRS in the near future.

3 More details are provided in Section 1.2. 2

Chapter One Introduction

globalisation. In this sense, China‟s convergence provides a timely opportunity to fill the gap because of China‟s unique socio-political system.

The socio-economic changes that have been taking place within China since the 1980s provide a distinct case of the ideological influences from two fundamentally conflicting ideologies at a societal level. Accounting, as widely recognised, plays an instrumental role in facilitating the accountability of business sectors in a capitalist economy. While facilitating certain aspects of that accountability, however, it hides and distorts others, which contain much broader social and political implications (Lehman & Tinker 1987, Hopwood 2000, Belkaoui & Jones 2002, Gaffikin 2008). By positioning itself in a Chinese context, this thesis is able to provide a concrete example of the intricate relation between accounting and the broad social and ideological context in which it operates.

1.2 Contributions 1.2.1 A ‘Real-World’ Example of the Application of IFRS

The convergence of national and international accounting standards has attracted a great deal of attention from accounting academics, practitioners, policy-makers and wider communities (Wilkinson 1965, Morgan 1967, Bromwich 1980, Fitzgerald 1981, Dopunik 1987, De Pree 1989, Wallace 1990, Goeltz 1991, Ahadiat & Stewart 1992, Chandler 1992, Hopwood 1994, Craig & Diga 1996, Luther 1996, Schweikart et al. 1996, Cooper et al. 2003, Saravanamuthu 2004, Alfredson et al. 2005, Lehman 2005, Chand & White 2007, Gaffikin 2008). There is support for this kind of uniformity in accounting regulation because of the potential contributions to transparency and comparability of cross-border financial reporting (Peasnell 1982, International Accounting Standards Committee 1995, Schweikart et al. 1996, International Accounting Standards Board 2005b, Tweedie 2005). There are also strong arguments that question whether a single regulatory framework could meet the financial reporting needs of all users across different governments and societies (Belkaoui 1983, Violet 1983, Belkaoui & Picur 1991, Ahadiat & Stewart 1992, Chandler 1992, Craig & Diga 1996, Luther

Chapter One Introduction

1996, Zarzeski 1996, Lehman 2005). This has led many to challenge the perceived benefits or outcomes of any convergence of national standards with IFRS. According to the criticism, institutional differences in culture, legal framework, infrastructure, and socio-economic and political systems bring about differences in financial reporting, even with the establishment of a single set of financial reporting standards. The arguments that have developed over time, however, are largely normative and hypothesised4. No matter what the grounds for these arguments, it is relatively difficult to „prove‟ the theory. Neither proponents nor opponents of the convergence have provided sufficient descriptive cases that could be investigated to support the various arguments.

This thesis, taking a different approach, seeks to provide a „real-world‟ example. In many ways, China faces far greater difficulties than more- developed countries in applying IFRS, since the requisite regulatory apparatus of a well-functioning economic market is far less developed. The social, cultural and legal differences may significantly affect the way a Western standard is implemented. By exploring the unique institutional arrangements of China‟s market economy, this thesis challenges the feasibility of the new CAS and hence the benefits of the convergence project. The decoupling of what happened in real-life accounting practices and the proclaimed benefits of using IFRS exemplifies the difficulties of making local communities accountable by harmonising IFRS globally. From the analysis, it is not clear that IFRS actually does help users of financial statements make better decisions, as has been claimed.

In order to tighten the focus, this thesis emphasises one particular aspect: the introduction of fair value accounting (FVA) within this convergence. FVA is one of the most significant changes in the new CAS after its convergence with IFRS. Many Chinese academics (Ge 2006, Liu & Zhang 2006, Wang, L. 2006, Lu et al. 2007) 5 have recognised that the adoption of FVA fundamentally changes accounting practices from those where FVA is completely prohibited.

4 More discussion is provided in Chapter Two: Literature Review.

5 The in-text citations here include the author initials for Wang, L. (2006) in order to differentiate ambiguous citations from other authors who have the same surname and published articles in the same year. This approach is applied hereafter in this thesis. 4

Chapter One Introduction

The introduction of FVA has been controversial, sparking debate from both the accounting community and the broader public. In a pragmatic sense, this approach also provides a strong focus so that the very broad and comprehensive research topic can be reflected and evaluated.

1.2.2 A Perspective of Neoliberalism

This thesis takes a particular position in theorising the promotion of IFRS, with reference to its broader context of neoliberalism and financialisation. The implications of global politico-economic transformation on accounting have drawn significant attention from sociologists in the field of political economy (Martinez-Diaz 2005, Mattli & Buthe 2005, Porter 2005, Boyer 2007, Power 2009). However, the relationship between accounting and broad political economy has been inadequately addressed within accounting literature since the 1990s (Arnold 2009a). The majority of studies that examine the relationship between accounting and neoliberalism have emerged rather recently (Ishikawa 2005, Andrew 2007, Cronin 2008, Arnold 2009a, 2009b, Andersson et al. 2010, Andrew et al. 2010, Cooper et al. 2010, Haslam 2010, Mennicken 2010). Commenting on the current (2007-2011) global financial crisis (GFC), Arnold (2009a, p. 805) remarked:

Accounting research‟s failure to anticipate the crisis or problematize the relationship between financial accounting, the growth of the shadow banking system, and macroeconomic instability can be attributed, in part, to this cultural turn away from political economy and its critique of capitalism.

To engage with this call for deeper understanding of the underlying impacts of accounting on the political economies in which it operates, this thesis contributes to this literature, providing insights into the deeper ideological motivation underpinning the collective effort of globalising accounting regulations, and its influence on China‟s socio-economic transformation.

In a general sense, the significance of this approach of placing the accounting research in a broader context has been advanced by many accounting researchers (Morgan 1988, Dillard 1991, Andrew 2000, Hopwood 2000, Rudkin 2002, Young 2003, Funnell & Williams 2005, Kaidonis et al. 2008). 5

Chapter One Introduction

The adoption of IFRS in China is not an isolated regional event, but connected to much broader global movements. It cannot be fully understood without a proper investigation into the social context in which IFRS is being introduced. This assumption has prompted this thesis to seriously review the contextual factors that have facilitated this event.

Studies in the field of political economy have demonstrated dramatic transformations in human societies across the world since the 1980s, as a result of the expansion of neoliberal policies (Clarke 2005, Harvey 2005, MacGregor 2005, Ong 2006). Although neoliberalism, in theory, promises optimum social outcomes with more market freedom, research has clearly shown that neoliberal policies have had seriously negative impacts in many countries, where social inequalities and concentrations of wealth and power have surged (Harvey 2005, Johnston 2005, Shaikh 2005, Philion 2007).

Within China, the major constituent of this context is an ongoing economic reform that was officially introduced by the Chinese Communist Party (CCP) in December 1978, and since then has dramatically transformed Chinese society. Like many other countries during the 20th century, China, with the establishment of the People‟s Republic in 1949, became an „experimental‟ place for testing socialist ideology. Chairman Mao ruled the nation with a system that strictly wove together political structure, economic production, and social control with a communist ideology (Guthrie 2006). This experiment had subjected China to continuous political campaigns, social chaos and economic failures, which cost tens of millions of civilian casualties (Wang 2003, Chang & Halliday 2005)6. Chairman Mao‟s iron-fist control continued until his death in 1976. Deng Xiaoping took power after that and initiated a series of reforms aiming to save the nation from this „socialist nightmare‟. One of Deng Xiaoping‟s famous political slogans is „groping the stones while crossing the river‟ (Yip 2006, p. 52): in other words, China needed to leave this socialist „side‟ of the river and move to the other side. What Deng promoted later in this economic reform has clearly implied what the „other side‟ of the

6 This part of Chinese history has been a major research topic in other studies (Wang 2003, Chang & Halliday 2005). 6

Chapter One Introduction

river bank is: a free, private and market-oriented economic system with perceived economic prosperity.

China‟s transition to a more market-oriented economy has been gradual compared to the „shock therapy‟ (Klein 2007) in other countries, like Russia. Deng first introduced an individualised „Personal Responsibility System‟ in rural areas to replace the agricultural communes. Later, the CCP permitted for the first time a wholly private sector throughout all rural and urban areas during the 1980s. China‟s economy began to open up to foreign investment as well. The percentage of planned economic activity in the national economy started to decrease gradually with the steady growth of the private economy and foreign investment. Beginning in the 1990s, Deng and his successors accelerated the privatisation of state-owned enterprises (SOEs) and the withdrawal of social welfare provisions including medical care, housing and public education on a very substantial scale (Solinger 2004, Wang, S. 2006). This 40-year process of reform is ongoing. Its major rationale is a belief in the benefit of the „free market‟ – one of the most powerful politico-economic theories that has been transforming human societies since the late 20th century.

What has happened in China echoes what was happening in the rest of the world at the time. The massive privatisation of public assets, substantive reduction in social welfare provision and the constantly reiterated importance of „market freedom‟ have been familiar phenomena across different societies since the 1980s. This particular form of political economy has been termed „neoliberalism‟ in the studies to which this thesis refers.

This thesis, drawing upon studies of other sociologists (Clarke 2005, Harvey 2005, Radice 2005, Gamble 2006, Klein 2007), suggests that this neoliberal ideology has inherent controversies that need to be examined critically. While preaching unfettered free markets with pre-assumed benefits, neoliberals are actually advocating a particular type of state intervention that ensures the „freedom‟ of the markets (Rapacynski 1996, MacEwan 2005, Munck 2005, Gamble 2006, Ong 2006), as being a point of difference with classical economic liberalism. The ideal conditions for a „free‟ economy suggested by 7

Chapter One Introduction

neoliberalism include deregulation, privatisation, weakening labour protection, withdrawn social-welfare provision, free trade, the opening up of international capital markets and so forth (Friedman & Friedman 1980, Munck 2005, Palley 2005, Gamble 2006). In practice, while advancing policies of „deregulation‟ (removal of state regulatory systems that intervene in markets), neoliberalism reconstructs conventional regulations with market-oriented policies and rules to facilitate the development of a new form of capitalism (Harvey 2007). Strong evidence shows that this new form of neoliberal system exposes those less privileged to competition with powerful corporate interests within an untrammelled market environment, which significantly exacerbates increasing social inequality across and within different societies (Harvey 2005, Panitch & Gindin 2005, Soederberg 2005, Toporowski 2005).

The key feature of modern neoliberalism that this thesis emphasises is the increasingly prominent power of the world of finance. This new power position extends the marketisation of all transactions to a single process, often described as a process of financialisation (Toporowski 2005). As a result of the deregulation of the financial markets during the neoliberal era, the world has experienced a significant growth of financial sectors. The dominance of finance over other sectors within macro-economies and its damaging effects have been well recognised within political and economic literature (Epstein 2005). According to the Bank for International Settlements (2007b, n. p.) 7 , for instance, “the amounts outstanding of over-the-counter derivatives contracts reached US$683 which was 11 times of the size of global output”.

Compared to other sectors, financial markets maintain an inherently short- term-oriented trading mode and significant „uncertainty‟ and volatility (Treeck 2009). There are destructive effects when this kind of uncertainty is transformed into traditional production and trading sectors through the proliferation of financial capital. The penetration of finance attracts valuable economic resources into financial trading for speculative investments, which contributes suspicious value into the traditional economy (Stockhammer 2004, Orhangazi 2008, Palma 2009). In a more fundamental way, this also

7 The „n. p.‟ in the in-text reference, hereafter, stands for „no page number‟, because the citation is from a website. 8

Chapter One Introduction

reshapes the traditional corporation governance, when managers are forced or „disciplined‟ by the financial indicators that are largely drawn from financial markets to maximise short-term financial performance (McSweeney 2009).

The great importance attached to a free global capital market by neoliberals sheds light on the global project of IFRS convergence. Neoliberals argue that:

The free mobility of capital between sectors, regions, and countries is crucial which hence requires a removal of all barriers (such as tariffs, punitive taxation arrangements, planning and environmental controls, or other locational impediments) to unhindered capital flow (Harvey 2005, p. 66).

The theories that have driven the establishment of international accounting standards suggest that the implementation of IFRS would enhance the transparency and comparability of general-purpose financial statements across international boundaries (Gaffikin 2008). Proponents of IFRS argue that consistent financial information would reduce the costs of cross-border financial reporting for corporations and facilitate the movement of funds in global capital markets (Schweikart et al. 1996, Tweedie 2005). According to the IASB (2005b, n. p.), “improving a single set of high quality global accounting standards is the logical consequence of the trend of economic globalisation, and all national accounting standard setters of all jurisdictions in the world should continue to work toward this goal.” In this sense, the globalisation of accounting standards aligns itself with the broader neoliberal project in freeing some of the „local impediments‟ for an integrated global market to optimise the conditions for corporations and capital.

Given that free markets do not necessarily optimise social conditions, it is uncertain that the free movement of capital will promote economic development and maintain financial stability all over the world. This thesis, hence, aims to reveal the contradictory ideas and interests behind the supposed prosperities of neoliberal reforms in an accounting context. By adopting the IFRS, China appears to actively manage for this kind of neoliberal form of capitalism through accounting technologies. However, China‟s institutional arrangements might not actually be ready to fully embrace the international standards. And it should not be neglected that the CCP is 9

Chapter One Introduction

founded on a socialist ideology that opposes free markets. All these have brought about queries of China‟s motivation to adopt the international standards and their consequences in practice. This thesis suggests that the rationale behind the move lies outside the realm of technical logic and is driven by other rationales.

1.2.3 Fair Value Accounting

In this thesis, the above argument regarding the influence of neoliberal ideology on accounting is exemplified through the example of FVA, which is based on a belief in the closely intertwined relation between accounting and its broader social context. As part of politico-economic infrastructures, accounting not only is influenced by its wider social environment, but also contains a power that “shapes what society measures and values” (Rudkin 2009, n. p.). In this sense, this thesis explores the functional role that FVA plays in sustaining the neoliberal free-market ideology. This is, as Chapter Two: Literature Review on China’s Accounting Change identifies, an aspect that has not been adequately addressed in current accounting literature.

The power and influence of accounting have always meant that it has been implicated in every major economic crisis since the early 20th century. The ongoing GFC triggered by the US sub-prime crisis in late 2007 has again put accounting, particularly FVA, at the centre of debate. For instance, according to Steve Forbes, Chairman of Forbes Media, the primary cause of the current GFC was not sub-prime mortgages, credit default swaps, or excessive debt, but “the most disastrous Bush policy that Mr. Obama is perpetuating [that] is mark-to-market or „fair value‟ accounting for banks, insurance companies and other financial institutions” (Forbes 2009, n. p.). This is because FVA requires that banks and other financial institutions revalue assets with reference to „current market prices‟, which declined sharply during the credit crisis. Further, the decrements of fair value are also to be included as part of loss and profit according to the accounting standards based on FVA. This accounting treatment wiped off much of the value of assets and profits, which forced many institutions to become unviable, including the biggest financial

Chapter One Introduction

institutions8 in the US. This „unexpected‟ effect has led to a vigorous debate about the pros and cons of FVA among accounting academics, regulators and broader communities across the world.

To a large extent, existing discussion focuses on the technical aspects of FVA. For proponents, FVA provides the most relevant financial information for users. As Ernst & Young (2005, p. 2) noted, for instance, “IASB advocates its fair value approach on the grounds of relevance: the Board quite simply considers „fair value‟ to be the most relevant measurement basis.” This is also supported by many accounting researchers (Holthausen & Watts 2001, Hoogendoorn 2003, Khurana & Kim 2003, Storm 2003, Barth 2004). However, this „mark-to-market‟ accounting approach has been increasingly challenged, particularly since the GFC. The major thrust of the criticism centres on the „unreliable‟ implementation of fair-value-based measurement methods given the significant amount of subjective „professional‟ judgement involved (Dietrich et al. 2001, Landsman 2007, Benston 2008, Ronen 2008, Ryan 2008, Sunder 2008, Laux & Leuz 2009, Zack 2009).

Instead of defining the technical problems, this thesis explores the implications of FVA with reference to its deeper ideological motivation. It draws upon theories of neoliberalism to show how the progress of FVA has been heavily laden with ideology associated with neoliberal free-market fundamentalism. As pointed out by studies on neoliberalism (see Chapter Three: Theorising China’s Change), the creation of a neoliberal system has entailed much destruction of human societies over the past four decades; the real effect of FVA is therefore suspect. This thesis also explores the technical nature of FVA to reveal its role in sustaining a neoliberalised economic system. Instead of providing sober and risk-avoiding information, the accounting framework starts to legitimise this „mark-to-market‟ measurement method, which contains significant „professional judgement‟ with inadequate stress on the problematic assumptions of financial market efficiency upon which it is built. This approach disrupts many traditional accounting artefacts and concepts such as the balance sheet and income realisation. It misprices the

8 This refers to Lehman Brothers Holdings Inc., which declared bankruptcy in 2008. 11

Chapter One Introduction

risk associated with this financialised economic model and further pushes the level of, and hence the damage from, financial „gearing‟ into macro-economies. It is believed that the argument of free markets presents wonderful-sounding words to hide the grim realities of the fair-value-based accounting technique. This is demonstrated through real cases and practices that this thesis identifies from both within and outside China.

China‟s experiences with neoliberalism not only exemplify the technical difficulties caused by contextual differences, but also challenge the fundamental purpose of the accounting community‟s globalisation efforts.

1.3 Methodological Framework

This thesis draws upon Critical Discourse Analysis (CDA) from works of Fairclough (1989; 1992; 1995; 2006) as the research methodology. CDA has established itself internationally since the 1980s as a cross-disciplinary teaching and research method in social science (Fairclough 2006). There have also been a number of studies within the accounting literature that have adopted this form of discourse analysis (Gallhofer et al. 2001, Craig & Amernic 2004b, Llewellyn & Northcott 2005, Burchell & Cook 2006, Craig & Amernic 2006, Ezzamel et al. 2007, Ferguson 2007, Craig & Amernic 2008, Ferguson et al. 2009, Cortese et al. 2010, Seal 2010).

According to Fairclough (1995), CDA examines the relationships between discursive practices and wider social and cultural relations, with an aim to reveal how such discursive practices are ideologically shaped by relations of power and struggles over power; and to explore how relationships between discourse and society are themselves a factor that secures certain power. In a general sense, CDA functions by revealing the connections between a social practice and its discursive representation. According to Fairclough (1989), the discursive moment (the discursive representation) of any social practice is constituted not only as a single articulation of elements, but as a spread of articulations of elements that are potentially conflicting. In other words, the relationship between a practice and its representation in discourses can be

Chapter One Introduction

very different, and there are conflicting factors that shape the representation of that particular practice on human discourses. Many elements, such as social relations of class, gender and ethnicity, are constituted in such differences within discursive practices and across networks of other related social practices in society.

Fairclough (1989) maintains, on the one hand, that this complex network often causes the discursive representation to diverge from its practical manifest, which makes it difficult to decode the „truth‟ of a particular social practice from its discursive representations; on the other hand, such a decoupling provides the discourse with certain ideological powers to influence people‟s perception, and hence practice. So the relations between particular discourses and social positions, or in other words, the ideological effects of discourses, are established through a process of discursive articulations among various social spaces. It is, therefore, critical to examine how a particular practice is transcended by its discursive representations within this complex network. A re-examination of this discursive process to reveal how social „elements‟ are embedded or re-contextualised could yield a fuller understanding of a social practice or event.

Accordingly, this thesis focuses on how the event under investigation is represented and then articulated by various discourses. More specifically, this thesis seeks relevant discourses that are related to the convergence of IFRS in China as a construction or representation of this event. Whether and how this discourse works ideologically can then be determined by looking at how the discourse moment of a practice (the specific issues promoted in that particular discourse) articulates with other moments of that practice (other issues related to the convergence and its practical influences in China) within the network of practices (all the constitutive elements of the Chinese socio-economic context in which the new CAS is implemented). In doing so, this thesis illustrates how the event of IFRS convergence in China has been represented by interested parties to influence a favoured outcome. A better understanding of this event is then enabled through an exposure of alternative discourses that have been sidelined, and of the contradictions that have manifest themselves in other social practices in China. 13

Chapter One Introduction

In terms of the specific method, Fairclough (1992) proposes a three-layered framework for critical analysis (Figure 1.1).

TEXT

DISCURSIVE PRACTICE (production,

distribution, consumption)

SOCIAL PRACTICE (institutional settings)

Figure 1.1: Three-dimensional conception of discourse (Fairclough 1992, p. 73)

This is an attempt to link „text‟ itself with its broader social settings. As such, „text‟ is only one dimension of a discursive event that is manifested in linguistic form. It‟s embedded within the processes of text production, distribution (how the text is articulated) and consumption (how the text is interpreted or perceived) within the society. Fairclough (1992) emphasised that all these processes were social and required reference to the particular economic, political and institutional settings within which discourse was generated.

More specifically, as suggested by Fairclough (1992), the first layer (textual analysis) focuses on language and grammar issues, such as the use of vocabulary, sentence structure and keyword analysis. The second layer (discourse practice analysis) is more about revealing the meaning construction of discourses through analysing how the research topic has been constructed discursively within multiple discursive spaces. This analysis is to reveal the processes of discourse production, distribution (how the discourse is articulated) and consumption (how the discourse is interpreted or perceived). The third layer (social practice analysis) contests the meaning that has been constructed by the discursive construction revealed in the second layer of analysis, to demonstrate its partiality in representing and rationalising the event. This is conducted in two stages. First, it reveals the context or social 14

Chapter One Introduction

structure within which the dominant discourse is put forward, enabling the relationship between discourse, power, dominance and social inequality to be discerned and illustrated. Second, it contrasts the meaning that has been put forward by the dominant discourse with the social practice (real-world practices) to show possible gaps or inconsistencies.

The sources of data for exploring the issue in this paper are archival, and fall into four categories. The first consists of academic literature by Chinese scholars writing about the new CAS. The second category is the set of official government announcements and regulations. The third category is information from Chinese news media covering related economic events and the financial markets. The fourth category consists of economic and accounting data regarding the Chinese capital markets and certain listed companies. These data will construct the narrative context for this paper. A similar approach has been adopted previously by Ding and Graham (2007) in their study of accounting and the reduction of stated-owned shares in China.

1.4 The Structure

The rest of this thesis is organised as follows. Chapter Two: Literature Review on China’s Accounting Change examines literature about Chinese accounting and China‟s participation in the IFRS project in general. It provides an overview of what existing research has been undertaken regarding China‟s accounting change, identifying the position and contribution of this thesis in a general sense.

Chapter Three: Theorising China’s Change describes the theory of neoliberalism, upon which this thesis is framed. This chapter explains the contradictions between neoliberal theories and their practical manifestations in detail, and offers a brief discussion of the neoliberalisation of Chinese society. The connections between neoliberal theory and the arguments of this thesis are presented in this chapter as well.

Chapter One Introduction

Chapter Four: Methodology – Critical Discourse Analysis gives an overview of CDA, the methodological framework that has been adopted by this thesis. This chapter begins with a discussion of reasons and contributions for using CDA. It then clarifies the theoretical foundations and the detailed methodology of CDA.

Chapter Five: The Discursive Construction of ‘Convergence’ fulfils the second layer (discourse practice analysis) of the CDA framework and sets up a contextual platform, upon which later analysis will be drawn and elaborated. It reveals how the adoption of IFRS in China has been represented in dominant discourses by referring to comments rendered by key players such as government officers, China‟s official media institution and Chinese academics. Connecting this with neoliberal theory further sheds light on the purpose of the discourses in mediating the event under investigation.

Chapter Six: Reconsidering Fair Value Accounting in Neoliberalism focuses on the first stage of the third layer (social practice analysis) of the CDA framework. It evaluates the socio-institutional aspects of discourse as part of the social practices that influence the discursive construction. In doing so, this chapter reveals the conflicting meanings constructed within notions of FVA and how those narrowly constructed discourses help to create a limited belief system compatible with neoliberal free-market ideology. This chapter also analyses some keywords that the first layer (textual analysis) of CDA framework incorporates.

Chapter Seven: Contextualising Fair Value Accounting in China fulfils the second stage of the third layer (social practice analysis) of the CDA framework by contesting the meanings presented by discourses with real-world practices (social practices) that have been contextualised into Chinese society. The „gap‟ identified between the „form‟ and „content‟ of discourses demonstrates that the dominant discourse perpetuates neoliberal interest, while being devoid of the regulatory and socio-political context apparatus in rationalising its relevance and reliability in the Chinese context.

Chapter One Introduction

Chapter Eight: Summary and Reflections summarises the key issues raised in this thesis and explores the implications that its findings may have for the development of accounting in response to emerging social contexts and pressures.

Chapter Two Literature Review

2 Chapter Two: Literature Review on China’s Accounting Change

This chapter offers a brief review of the extant Western literature 9 on the changes in accounting in China since the establishment of the People‟s Republic of China (PRC) in 1949. The purpose is to position this thesis in the broad literature to demonstrate its contribution to current knowledge. The review also provides background information to contextualise the research questions. It should be noted, however, that this is a very general and macro- level review of the literature concerning the development of China‟s accounting standards and practices. Other chapters have also integrated relevant literature within the content itself.

In order to show the historical progression, this chapter categorises the literature into four stages, each covered by a section. The first section, The Mao Zedong10 Society, evaluates the peculiar features of Chinese accounting under the Maoist regime between 1949 and 1978; the second section, The Reform and Opening-up of the Chinese Economy, discusses the changes in accounting regulations and practices after the introduction of economic reform and an opening-up policy after 1978; the third section, The Emergence of a Capital Market and Financial Accounting, focuses on the development of financial accounting regulation since the re-emergence of a capital market in the 1990s; the last section, The Harmonisation of International Accounting Standards, reviews the trends in research on international accounting harmonisation and identifies relevant Chinese literature. By placing the literature in its historical context, this approach also demonstrates a broad argument that accounting is context-related: accounting standards and practices are both under constant change to meet the pressing challenges of the socio-political environment in China.

9 This refers to academic research published in English journals.

10 This is also transliterated as Mao Tse-Tung. 18

Chapter Two Literature Review

2.1 The Mao Zedong Society

The Mao Zedong Society is defined as the period from 1949, the time Mao announced the establishment of the PRC, to his death in 1976. Mao‟s regime was largely marked by a thorough implementation of socialist orthodoxy in its economy and society (Chesneaux 1979). This section begins by briefly introducing the socio-political situation of the Mao Zedong society11 to provide a better understanding of the background of the literature that emerged in this period.

Under Mao‟s leadership, China went through a series of political campaigns and economic experiments driven by his visionary belief in the socialist ideology. During the early period of recovery between 1949 and 1952, China‟s industry and agriculture output increased rapidly, surpassing previous peak levels in nearly every industrial sector (Lippit 2000). At the same time, the CCP carried out a complete overhaul of the land-ownership system, in which the agricultural land was redistributed equally within each village among all people. Beginning in 1953, the government used Marx‟s theory of class struggle to justify various political campaigns of persecution (including execution) against former landlords, merchants and „bureaucratic capitalists 12 ‟, as they were deemed class enemies. As a result, private economies as well as foreign investment were largely wiped out (Lippit 2000).

Following the success of the first Five-Year Plan (1953-1958)13, Mao envisioned an ambitious project, which is often described as the Great Leap Forward, of achieving rapid growth in the modern industrial sectors. In this movement, people were encouraged to use labour-intensive techniques to contribute to that goal. A notable example of this was the creation of tens of thousands of

11 Although this introduction makes specific reference to some work, such as Lippit (2000) and Chesneaux (1979), the social situations introduced are common knowledge of the Mao Zedong regime that is available in many books of Chinese history.

12 These were large-scale capitalists who enjoyed their position as a result of state support.

13 A detailed economic-development guideline for all sectors in the nation, based on a Soviet-style centrally controlled economy. 19

Chapter Two Literature Review

backyard steel furnaces in rural areas. Whilst agricultural workers were pulled off to produce poor-quality steel that was unusable in industrial production, large amounts of crops rotted unharvested (Chesneaux 1979). During this period, a dramatic new form of social organisation, called a people‟s commune, emerged, and over time as many as 98 percent of rural households joined these communes. The commune functioned as an all-encompassing unit for economic, political and social purposes, including farming activities, small- scale rural industry, education, health care and all other local government activities. For instance, as described by Lippit (2000, p. 8), “by adopting the communist principle of distribution according to need, the communes provided meals free of charge, and a range of services from haircuts to communal baths”. Many scholars (e.g. Roderick 1974, Teiwes & Sun 1999) believed that the Great Leap Forward resulted in sharp declines in land productivity and caused widespread starvation and famine, which was responsible for the deaths of over 30 million in China between 1958 and 1961.

From 1961 to 1966 the nation recovered its economy with a renewed attention to material incentives and living standards. By that time, failed political campaigns had reduced Mao‟s power in the CCP, which triggered Mao‟s institution of the Cultural Revolution in 1966 to eliminate resistance from within the CCP (Lowell 1974). The Cultural Revolution brought the nation into political turmoil and an economic halt that lasted for 10 years until Mao‟s death in 1976.

During Mao‟s regime, the former Soviet accounting model provided important guidelines for Chinese accounting practice (Hilmy 1999). As revealed by researchers (Ezzamel et al. 2007, Zhang et al. 2009a), it was typical of the time that the battleground of accounting development was not in the arenas of academia or practice, but in politics 14 . The political reality was Mao‟s philosophy that a powerful central leadership and nationally upheld principles are the prerequisite for building a powerful socialist country (Mao 1993).

14 China was largely isolated from the rest of the world during the Mao Zedong period; hence there was very little research of Chinese accounting undertaken during that time. Most of the English-language literature studying Chinese accounting practices of that period has only emerged rather recently, such as Hilmy (1999) and Ezzamel et al. (2007). 20

Chapter Two Literature Review

Under these premises, the dominant political ideology under Maoism was characterised primarily by class struggle, public ownership and central planning.

Therefore, while early 20th century Anglo-American accounting theorists proposed relationships between accounting and economics (Paton 1922, Hatfield 1927, Canning 1929, Gilman 1939), early Chinese accounting practitioners were debating whether „foreign‟ accounting methods should be adopted based on political considerations (Yan 1951, Ezzamel et al. 2007). A major question was whether accounting was class-based according to the Marxist notion of class struggle. Some academics argued that capitalist accounting theory and practice were suited to a capitalist economic system and functioned as a means of accelerating class exploitation (Xin & Huang 1951). Practitioners believed that socialist accounting should be based on a Marxist political economy and started to ask questions such as, “whose interest does accounting serve? who controls accounting?” (Ezzamel et al. 2007, p. 677) The legitimated view was that the purpose of accounting information was to meet the needs of the working class or proletariat, rather than those users such as managers or investors, as proclaimed by theorists in the West (Grady 1965, Paton & Littleton 1970).

The principle of conservatism was brought into the debates in a distinctly political context. Capitalists‟ interests were believed to be protected because “if a high profit is desired, assets are valued high whereas if a reduced profit is desired, assets are valued low” (Xin & Huang 1951, pp. 13-14). Conservatism also was accused of disguising the exploitation of surplus value and concealing capital accumulation, as conservative principles would inadequately recognise profits (Yan 1951). Similar standpoints overwhelmed countering views due to the dominant political atmosphere during the time, as revealed by relevant research (Hilmy 1999, Ezzamel et al. 2007). People who held a political view that conflicted with the central government faced significant risks, including prison and even the death penalty15.

15 There is ample literature describing the political control during the time (Chang & Halliday 2005).

Chapter Two Literature Review

Central planning was another reality of the Chinese economy during Mao‟s era16. Under this economic system, the government planned the demand and supply of resources and outputs, and enterprises had little autonomy. Accounting basically served to ensure that, regardless of cost, the goals that were set up by the government were achieved (Hilmy 1999). Among accounting theorists and practitioners, according to Ezzamel et al. (2007), the uniform accounting system was regarded as helpful in sustaining and legitimising the adopted soviet-style central planning, and there were serious political risks if accountants made unauthorised changes in the accounting system. Because a peaceful and flourishing economy was used as a symbol of political success, it was common that concerns for production, economic efficiency or profitability were sidelined (Hilmy 1999). Ezzamel at al. (2007) further argued that the discourses that prevailed in Mao‟s society created a context that banished the principle of conservatism, which was believed to reduce government control over profits of the enterprise.

Under state ownership, state-owned enterprises (SOEs) simply submit their profits (surplus) to the state and the state allocates funds to the SOEs. The state‟s fiscal revenues of the state are obtained from profits collected from the SOEs. To serve this economic model, Gu (1982) believed that socialist accounting was built to reflect public ownership and the distribution relationship between the enterprise and the state17 although accounting in a capitalist system focuses on capital and the distribution of dividends. Since the state controlled everything from production quantities to product quality, distribution channels and costs, conservatism was deemed unnecessary. Some regulators even believed that “there was no accounting for individual SOEs, but the one for the national economy” (Ezzamel et al. 2007, p. 681). The role of accounting was marginalised because of extreme political sentiments.

16 Although in 1956 there began a reform effort to decentralise the administrative system in China, it was interrupted by the Great Leap Forward. In his conversation with district coordinators, Mao demanded that the powers (over personnel, industrial, commercial, and financial issues) decentralised in the past few years be reverted into the hands of the central and provincial governments.

17 More details of the Uniform Accounting System that China adopted at the time are provided in the Appendix 1 – The Chinese Uniform Accounting System.

Chapter Two Literature Review

For example, in 1958, during the Great Leap Forward 18 , the government assigned absurd targets for production and required the national economy to grow exponentially, as Mao wanted China to catch up with England in 15 years. As “he refused to see bad news, lies and exaggerations prevailed” (Wang 1992, p. 149). Conservatism and transparency were absolutely discarded during the movement while enterprises reported extremely exaggerated outputs19 (Yang 1998, Yang 2008).

The central bureaucracy had brought the nation economic chaos and overwhelming red tape, which forced people to rethink the country‟s administrative system. Proposals emerged appealing against the decentralisation of administrative power over production. In 1963, a central government document on industrial development indicated that “[i]ndustries and enterprises should be managed by economic means, not administrative means” (Ren 1998, p. 162). On 17 August 1964, the Party Central Committee and the State Council approved the Report of Opinions on Experimenting with Industrial and Communication Trust. As a result, 12 industry trusts were established to increase economic efficiency by shifting the administrative power into the hands of businesses. However, such a movement was against Mao‟s agenda, and it was interrupted by Mao‟s Cultural Revolution.

It has been suggested by many scholars (Lowell 1974, Meisner 1986) that Mao started the Cultural Revolution to secure power from the Party‟s administrative executive, Liu Shaoqi20. This political movement lasted from 1966 to 1976 and brought catastrophe not only to the culture, but also the

18 This was advanced in the Second Plenary Session of the Eighth National Congress (the highest level of the power hierarchy in China; see Appendix 2) based on Mao‟s passion.

19 It was common that local officials were pressured to falsely report ever-higher grain production, which was often inflated to 10 times the actual production to obtain political plaudits (Yang 2008).

20 Liu Shaoqi was the Chairman of the PRC from 27 April 1959 to 31 October 1968, during which he implemented policies of economic reconstruction in China. He was attacked in the later 1960s during the Cultural Revolution because of his perceived 'right-wing' viewpoints. He was labelled China's premier 'capitalist-roader' and a traitor. He disappeared from public life in 1968 and died under harsh treatment in late 1969 (see Lowell 1974).

Chapter Two Literature Review

whole nation‟s economic development 21 . Nationwide political campaigns replacing economic construction brought the Chinese economy to the edge of collapse (Hua 1978, Meisner 1986). Millions of Chinese intellectuals, including accountants, were sent to labour camps in rural areas for „thought rectification‟. Formal accounting education became virtually impossible as accounting classes were eliminated in universities nationwide (Jopson 2006, Gao 2008).

Generally, the Mao Zedong Society is distinguished by its political characteristics, namely its prioritising of class struggle, public ownership and central planning. Early debate of accounting issues was based on political orientation rather than the economic considerations that were familiar in the Anglo-American societies. In practice, a uniform accounting system was adopted to report adherence to the central plans. Accounting was perceived to ensure that the central plan‟s goals were achieved, rather than to support other economic concerns such as production, efficiency or profitability. The understanding of the role of accounting common in the West was condemned as a result of extreme political sentiments. The literature examining accounting practices in this period exhibits exactly how contextual influences diverted the evolution of accounting theory and practice in China from that of Western countries.

2.2 The Reform and Opening-up of the Chinese Economy since 1978

Beginning in 1978, increasing research on Chinese accounting practices emerged and became available along with economic reforms in China. More accounting literature (Wang 1979, Ge 1980, Yang & Yan 1980, Jia 1987, Skousen & Yang 1988, Zhou 1988, Firth 1996, O'Connor et al. 2004) worked from the perspective of business and the economic nature of accounting

21 It is often understood that the Cultural Revolution was designed by Mao to purge capitalist thought from the country. It involved much violence across the country committed by Red Guards against those whom they perceived as trying to restore capitalism (Gao 2008). The changes brought by the movement profoundly affected the lives of the vast majority of the Chinese people, as described by Meisner (1986, p. 373), as “a bitter legacy of grief, distrust, hatred, and a thirst for revenge”. 24

Chapter Two Literature Review

practices, rather than from the earlier political slant22. The change of economic conditions derived from the introduction of a competitive market generated a new sense of acceptance of market ideology. This influenced people‟s mode of thinking and activated changes to their accounting practices. According to Ezzamel at al. (2007), discourses that framed accounting as a technical and neutral technology, in contrast to the class-based view of accounting, circulated within the accounting community. This was introduced into accounting practices, as this section shows later, that adopted more Western- style management accounting techniques rather than solely producing information used for the macro-control of the economy.

After Mao‟s death in 1976, Deng Xiaoping23, representing the people‟s desire for better economic welfare after the ceaseless political campaigns, seized political power and became China‟s leader. Deng initiated an overall economic reform and „opening-up‟ policy from 1978. The Maoist ideological principles were gradually changed during this period. The principle of class struggle was replaced by that of economic development. The CCP (1981) claimed that the main contradiction in China was between increasing material and cultural demand24 and lagging social production25. In September 1978, when he visited major cities in northeast China, Deng pointed out that the foremost task of the Party was to shift the focus to socialist economic construction. Deng articulated his famous „Cat Theory‟: no matter whether it is a white cat or black cat, as long as it can catch a mouse, it‟s a good cat (Deng 1977). This was regarded as a powerful message to persuade people to no longer judge a

22 More background information about this reform is provided in Chapter Three: Theorising China’s Change.

23 Deng was a reformer who led China towards a market economy. While Deng never held the positions of head of state, head of government or General Secretary of the CCP (historically the highest position in Communist China), he nonetheless served in practice as the paramount leader of the PRC from 1978 to 1992 (see Yahuda 1993).

24 This is a direct translation of the Chinese text “文化需求”, which contains an ambiguous meaning in Chinese as well.

25 Social production is a direct translation from a Chinese term that means economic development. In order to be consistent with its political sentiment, the CCP avoided directly adopting economic terms used in capitalist systems, although they are very similar in nature.

Chapter Two Literature Review

thing based on its socialist or capitalist orientation. It also encouraged people to use any means, regardless of the political designation, to develop economic production.

The class struggle orientation became even vaguer in the „Three Represents‟ theory formulated by Jiang, Zemin, the successor of Deng, in February 2000. This theory claimed that the CCP must always represent: 1) the requirement of the development of China‟s advanced productive forces; 2) the orientation of the development of China‟s advanced culture; and 3) the fundamental interests of the overwhelming majority of the people in China. It was aimed at expanding the party‟s popular support and broadening its base from representing only workers and peasants to include private entrepreneurs26.

In a more relaxed political climate after the 1978 economic reform, a discourse framing accounting as a technical and neutral technology started to challenge the class-based view of accounting (Ezzamel et al. 2007). As Deng viewed science and technology as the most important productive forces in social production (Yahuda 1993), academic journals began to publish papers proclaiming that as a management science, accounting theories and methods adopted in capitalist countries could also be used in socialist countries to serve the needs of production and control (Wang 1979, Ge 1980, Yang & Yan 1980). Jia (1987) argued that the adoption of conservatism was inevitable and well suited to a commodity economy like that of China at the time. Scholars (Li 1980, Liu 1981) also pointed out that conservatism was necessary in order to solve problems in SOEs where managers often exaggerated profits to meet targets set by the government. Under the former Maoist regime, such a view might have been charged as a serious political offence.

However, during the early stages of economic reform, there were still debates about conservatism because of the enduring influences of previous political campaigns under Mao. It was always difficult for people to speak out when

26 Under this theory, private entrepreneurs who were previously regarded as the Party‟s revolutionary enemies are allowed to join the CCP as representing China‟s advanced productive forces. Leftists in the CCP hold that the theory changed the nature of the party‟s view towards capitalism and its dangers. 26

Chapter Two Literature Review

they were not sure about the political climate. For instance, academics such as Yu (1981) and Zhang (1991) still claimed that conservatism was a means to protect capitalist interests and hide exploitation of the working class.

Since 1978, nevertheless, economic development has remained the central task of the Party‟s agenda. Hu Jintao, the president of China and the top person in the Party‟s hierarchy, stressed in his 2007 New Year Address that the government would strive to give impetus to the shift in economic restructuring and in the mode of economic growth. He said that “2007 is an important year in building a socialist harmonious society under the guidance of the scientific development concept” (Xinhua 2007a, n. p.). „Scientific concept of development‟ – a catchphrase in China today that was introduced by Hu in 2002 – was enshrined in the Party constitution during the 17th CCP Congress in 2007 (Xinhua 2007b).

After the 1978 economic reform, the reliance on a planned economy was replaced by a limited market economy. The concept of a „commodity economy‟ was adopted to support the proposal that socialist products should be shifted to an economy where production and exchange are regulated by supply and demand in the market, rather than centrally planned by the State. The Planned Commodity Economic Theory proposed by the CCP (1978) implies that the laws of value and competition are important in any commodity- economy system. In 1992, during a visit to some coastal cities in southern China, Deng released a series of speeches aimed at renewing people‟s confidence in the government‟s opening-up and economic reform policy. Although Deng‟s objective was to create a market economy, his theory about a socialist market economy was conveyed in an ambiguous way, with constant reference back to the Marxist agenda:

A planned economy is not equivalent to socialism, because there is planning under capitalism too; a market economy is not capitalism, because there are markets under socialism too. The essence of socialism is liberation and development of the productive forces, elimination of exploitation and polarization, and the ultimate achievement of prosperity for all. (Deng 1992, p. 94)

Chapter Two Literature Review

Deng expressed similar ideas in many other speeches, as did his adherents, such as Jiang and Hu. Ezzamel et al. (2007) believe that the new political climate offered an ideological motivation for accounting change as people were exposed to the view that accounting is an integrated means to facilitate economic construction. For example, in the late 1980s, business enterprises began to adopt conservatism in a limited way. In 1992, conservatism was stipulated as a principle in the ASBE to replace the traditional uniform accounting system (Ministry of Finance 1992). By the end of 2000, conservatism had been fully adopted in the ASBE to replace the previous accounting system, which had been largely industry-specified and ownership- oriented (more details are provided in Section 2.3).

The changing economic environment also served to intensify the technical view of accounting and the enforcement of Western-style management accounting practices. China had adopted the former Soviet economy model in 1949. The Soviet economy did not make any distinction between financial and managerial accounting. This approach was reflected in the Chinese presentation of financial reports that had characteristics of internal accounting; for example, “the financial statements included the disclosure of the costs and charges structure, but none of them provided information about the changes of financial situation” (Ding 2000, p. 36). At the time, most Chinese enterprises were owned by the state and their objectives and functions were determined by the political and economic policies of the Chinese socialist system. Accounting regulations and laws were developed to produce information for “the macro-control of the economy, strategies of proportional development, the rational allocation of scarce resources as well as in the assessment and evaluation of performance between state enterprises” (Zhou 1988, p. 219).

Firth (1996) revealed some differences in accounting practices between these Chinese entities and those of the West in terms of different emphases on responsibilities, ownership, incentive structures, production, and profits. One of Firth‟s general observations was that Chinese enterprises adopted fewer management accounting procedures than foreign firms. Firth provided some examples: many SOEs used standard cost systems even though variable 28

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costing had been accepted widely as a major method of product costing in Western enterprises for its often-claimed advantages of aiding decision- making. This was due to the different orientation seen in Chinese SOEs, which were assigned few responsibilities for decision-making in the centrally planned economy model. Managers only conducted the production plans allocated by the state and regional governments. They took no initiative in product and market development. Hence there was no need for the cost data suitable for the market-oriented capitalist system. Also, very few SOEs used cash and sales budgets because all economic activity was centrally planned and controlled by the state. Sales were made at fixed prices with guaranteed quantities. There was little need for sales projections and cash budgeting when compared with Western enterprises. Also formalised capital expenditure projects were absent because major capital-investment decisions were approved by the state collectively. In this sense, there was no need for firms to design a profitability criterion for investment decisions, and no need for the capital expenditure evaluation methods seen in Western enterprises.

With the 1978 economic reform, the public-ownership and central-planning model started to change. As SOEs gained increasing autonomy in their management, rather than solely complying with centrally planned targets, management accounting techniques such as budgeting, cost-volume-profit analysis, quality management and others inevitably became more important. Consequently an increasing amount of literature started to examine management accounting theories and practices in China.

Skousen and Yang (1988) gave a brief introduction to a new profit-oriented “increased autonomy” management system implemented in the first eight years (1978-1986) of Deng Xiaoping‟s leadership. The study showed that many of the Western management accounting techniques and concepts dealing with cost behaviours were readily introduced and applied in Chinese enterprises during the economic transition.

Firth (1996) investigated the change of management accounting practices in Chinese enterprises after China introduced competitive markets and private ownership of firms in the early 1990s. A dramatic change was witnessed after 29

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the formation and operation of the joint venture27. For instance, enterprises started to allocate service-department costs to products and increasingly emphasised participative budgeting. The calculation of standard cost variances and the comparisons of budget numbers and actual results became common. Another example was the shift in emphasis to calculate efficiency and profitability. Also, some concepts were introduced that were new to Chinese enterprises, such as various capital expenditure analyses and measures of profitability. Firth‟s (1996) study showed the same conclusion as that of Skousen and Yang (1988): as China moved towards a free-market economy, firms started to adopt management accounting concepts or practices typically used in a market-oriented economic system. Similar findings can be identified in Xu-Ying‟s (1998) research, which compared management accounting practices between China and the West in 1993.

While the above studies were based on data from early in China‟s economic reform, succeeding literature (Hassard et al. 1999, O'Connor et al. 2004, Islam & Kantor 2005, O'Connor et al. 2006, Xiao et al. 2006, Wu et al. 2007) documented a further understanding of Chinese SOEs‟ management accounting practices by examining the underlying institutional environment in which accounting operates. O‟Connor et al. (2004) explored further the influences on the adoption of Western management accounting practices by China‟s SOEs based on data from 1996 to 1999, a period when dramatic changes took place such as the introduction of stock exchange listings and contracts for jobs sanctioned in the Labour Law. The study extended the focus from accounting controls to the level of functional management. Nine factors were categorised into three levels: macro-environmental (market competition); institutional (limited-term employment contracts, joint-venture experience, stock-exchange listing and government influence); and the organisation (size, Chinese management norms, age and training). The findings indicated that while market competition, limited-term employment contracts, joint-venture

27 This is a business agreement in which the CCP agrees to develop, for a finite time, a new entity and new assets by contributing equity that is combined with capital from an overseas entity. Both entities exercise control over the enterprise and consequently share revenues, expenses and assets.

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experience and stock-exchange listings increased the use of Western management accounting controls, government influence, size, Chinese management norms, age of the SOE and training generated a negative effect. This study enhanced understanding of Chinese SOEs‟ management accounting control practices and further highlighted the institutional influences on firms‟ accounting practices. O‟Connor et al. (2004) emphasised that policy-makers needed to be aware of those complex institutional factors, rather than narrowly presuming a homogenous result.

O‟Connor et al. (2006) extended their research on variations in the organisational design of China‟s SOEs. The study (O'Connor et al. 2006) indicated that liberalisation forces (industry, export sales, joint venture experience, stock-exchange listing) and political constraints over labour decision-making in the SOE played opposite roles during the adoption of Western management controls. While liberalisation factors led SOEs to more efficient management control, political constraints manifested via the power of CCP representatives to appoint, fire and promote divisional managers (Hassard et al. 1999) negatively influenced on the transition to Western management accounting techniques.

Wu et al. (2007) explored the issue by conducting a questionnaire survey of a sample of 64 joint ventures (JVs) and 115 SOEs. The findings suggested that the depth of adopting western management accounting practices was greatly influenced by the firms‟ type of ownership (JVs or SOEs), rather than the nature of those accounting techniques. An interesting finding was that three management accounting techniques – budgeting for controlling costs, profit and sales budgeting and target costing – were considered to be more beneficial to SOEs than to JVs. Responsibility accounting, which had been traditionally linked with SOEs, was shown to be less beneficial to SOEs than to JVs. The same accounting techniques had been received with various levels of understanding and compliance in the Chinese context compared to that in the West.

This implication was consistent with prior research (Hopper 2000, Luther & Logden 2000) that argued that management accounting practice was not 31

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universally uniform and could not be understood without reference to political, cultural and economic factors. Islam and Kantor (2005) reinforced the argument by showing the difficulty in implementing the expected changes in the accounting system without recognising the significance of culture-based management accounting systems and practices. They identified three influencing factors: first, the Chinese Guanxi28 system – a distinct cultural dominator – impeded anticipated changes in the desired direction and at the expected speed; second, Chinese management accountants were not competent enough to use management accounting techniques due to insufficient training; and third, it was not anticipated that the Chinese government would fully open the accounting sector to international practices until the domestic sector grew strong enough to compete in international markets. A general concern of these studies was that there was still much instability in accounting practice because supporting institutional arrangements were not fully developed and there was an absence of trust in the macro-economic system.

The impact of the economic reform on accounting practice was evident. Management accounting research (Xiao et al. 2006) showed that more firms were using a wide range of management accounting techniques than had been the case before 2000. Nevertheless, Xiao et al. (2006, p. 34) suggested that it was important to recognise that “the increased adoption did not guarantee improved efficiency, effectiveness and, ultimately, profitability and competitiveness”. Some firms might have adopted techniques only because they were told to by the government. Forced adoptions could be beneficial, but more likely they only satisfied political needs. This was particularly common when the state was a major shareholder of the firm.

In summary, accounting research and practices in China have undergone significant changes since the introduction of economic reform and an opening- up policy in 1978. The relaxed political climate brought about distinct reappraisals of accounting, from a tool of capital exploitation under Mao to a technology under Deng. Academic journals began to publish papers

28 This is a Chinese term that describes the basic dynamic in personalised networks of influence as a central idea in Chinese society (Islam & Kantor 2005). 32

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proclaiming that as aspects of management science, accounting theories and methods adopted in capitalist countries could also be used in socialist countries to serve the needs of production and control. The literature identified in the early stages of economic reform emphasised the changes in accounting practices caused by the shift from a centrally planned economy to a socialist market economy. Succeeding research provided a further understanding of Chinese SOEs‟ management accounting control practices with reference to broad structural and institutional influences rather than purely economic considerations. Literature identified in this section shows the progress of Chinese accounting practice, particularly in management accounting. Having evolved to adapt to the changing environment for management control and decision-making, both in terms of the macro- and micro-economies, Chinese accounting approaches are products of the changing socio-economic environment in China.

2.3 The Emergence of a Capital Market and Financial Accounting in China

Until the early 1990s, the economic reform introduced in 1978 saw China‟s economy flourish, with significantly increased living standards. The annual growth rate averaged more than 9 percent, and living standards were double what they had been in the early 1980s (Lachica 1992). The country‟s economic structure had been transformed in substance from a planned, socialist model to a socialist market economic system. Private enterprises, cooperatives and foreign joint ventures emerged to occupy a notable proportion of the nation‟s economy. In the early 1990s, “at least 50 percent of China‟s industrial output [was] now generated outside the state sector” (Tanzer 1991, p. 70). The reform of introducing a share system of ownership and the development of organised stock exchanges intensified. Two nationwide stock exchanges were established: in Shanghai in December 1990 and in Shenzhen in July 1991 respectively (Wu 2001).

The changes in the underlying economic structure, however, exposed the limitations of the old financial-reporting system. Traditional Chinese

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accounting practices were influenced by the information needs of a planned economy and rested heavily on the stewardship objective. There was a lack of a nation-wide accounting system or standards to unify accounting practices. As pointed out by Xinhua General Overseas News Service (1992), Chinese accounting was complicated, as financial and accounting rules differed amongst enterprises with different types of ownership, in different industrial sectors and with different business natures. Furthermore, those enterprises adopting the uniform system could make individual modifications with the approval of the Ministry of Finance (Zhou 1988). As a result, accounting standards were different from “province to province and even city to city” (Sweeney 1993, p. 29).

It was considered in the literature that these diverse accounting practices were problematic to investors interested in entering the emerging Chinese share markets. Winkle et al. (1994) argued that the existing financial statements‟ different foci provided irrelevant information for investors. The annual reports under the previous „pure‟ socialist system had been more like statements of sources and uses of funds, and concentrated on production rather than profits (Kaye & Cheng 1992). Chinese companies had not operated on a profit and loss basis for a long time; moreover, many enterprises had been engaged in a number of social welfare services including housing, education for workers‟ children, communications and community administration. The previous accounting system had been designed to reflect the goal of the enterprise: “to meet the country‟s planning targets and take care of people” (Sweeney 1993, p. 30). This feature was considered by Winkle et al. (1994) to undermine the capacity of accounting to serve the needs of investors.

Furthermore, when Chinese companies sought to list their shares overseas, their financial statements had to be translated to conform to international standards, which was an extremely labour-intensive process. Sender (quoted in Sweeney 1993, p. 50) provided a typical example of this: Brilliance China Automotive (BCA) was able to complete an $80 million Initial Public Offer (IPO) on the New York Stock Exchange in November 1992; the IPO, led by First Boston, required 18 months to transact. Restructuring the company and

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presenting the company‟s financial statements in accordance with Western standards required 11,000 hours.

The re-emergence of the capital market and the difficulties with traditional Chinese accounting provided direct incentives and pressures for creating a market-oriented accounting disclosure system (Peng 2005). During 1992, the MOF released a series of accounting regulations including the ASBE and Thirteen New Industry-Specific Accounting Regulations (Systems), aimed at standardising accounting practices in China and reconcile them with Western financial-reporting practices (Ministry of Finance 1992). All enterprises regardless of the industry or the form of their ownership were required to comply with the new ASBE.

The new accounting standards drew great attention in academic literature at the time. Many researchers viewed the 1992 regulations a landmark and revolutionary progress in Chinese accounting (Ge & Liu 1995, Chen et al. 1997b) as Anglo-American accounting principles were adapted to replace the rigid Soviet accounting model that had been practiced in China since 1949 (Chen et al. 1997a, Lin et al. 2001, Chen et al. 2002). Literature at the time (Ge & Liu 1995, Chen et al. 1997b, Hilmy 1999) indicated some of the changes of the new accounting standards, such as introducing the concept of equity capital; distinguishing product cost from period cost; incorporating the Western notion of the capital maintenance concept; and allowing a number of Westernised standards that reflected the principle of conservatism. Lin et al. (2001) argued that most of the business-accounting stakeholders in China (including users and providers of accounting information) agreed that the new standards had affected Chinese accounting practices positively.

However, there was much research pointing out that a substantial gap still existed between the new accounting regulation and Western principles (Liu & Turley 1995, Graham & Li 1997, Xiao & Pan 1997). Many studies (Liu & Turley 1995, Chen et al. 1997a, Graham & Li 1997, Xiao & Pan 1997) reflected the problems or limitations encountered since the implementation of the new standards in 1993.

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Some studies explored the problems of the new accounting regulation by addressing contextual factors, such as the prevailing business contracting system, property rights, legal enforcement and the deficiency of accounting professionals. For instance, Chen et al. (1997a) argued that Anglo-American accounting principles and standards had been developed over a long period of time in a market economy based on private ownership, and therefore could hardly be transplanted overnight to the PRC. The common management mode at the time was a contracting responsibility system introduced in 1984 to improve the efficiency of SOEs. Under the system, individuals were allowed to sign business contracts with the state to stipulate respective rights and obligations, which “preserved state-ownership but accorded management specific economic responsibilities and corresponding autonomy” (Ezzamel et al. 2007, p. 692). Chen and Tran (1995) believed that adopting the new standards implied a significant increase in expenses and reduction of profits for most SOEs. For instance, financial and administrative expenses must be charged against revenues as period costs rather than being included in the cost of production and carried forward to future periods as part of the inventory costs under the new standards. In addition, Zhou (1994) pointed out that in order to avoid the adverse economic consequences of failing to achieve contracted targets, the contractors had incentives not to comply with the new standards.

Problems associated with agency costs, according to Chen et al. (1997a), were also distinct under such a business contracting system. Previously there had been a lack of effective control mechanisms for the state (the principle) to monitor the performance of contractors (the agents). There were incentives for contractors to defer recognition of expenses and losses in order to increase reported profits and their remunerations. The resulting hidden losses were passed on to the next contractor at the end of the contract period, and ultimately to the state as the owner of the enterprise.

The ambiguous nature of property rights brought about another kind of agency cost. Property rights in the PRC had never been properly delineated because of the proclaimed commitment to public ownership. In theory the assets of SOEs belonged to the state on behalf of all the people of the PRC, so 36

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practically no collective groups or individuals were regarded as owning SOE assets (Zhao 1994). At the time, SOEs were granted loans for acquisition of non-current assets; these loans required them to pay interest to the state. However, those assets remained the property of the state; consequently, enterprises were reluctant to charge interest expenses against revenues because of the negative impact on profits. Instead, they “capitalised interest expenses as part of the cost of fixed assets and recognition of interest expenses was deferred” (Chen et al. 1997a, p. 147). In addition, the ownership problem complicated debt recovery for SOEs. „Chain debts‟ or „triangular debts‟, as they were called in the PRC, were considered by many SOEs to be the most serious issue (Liang et al. 1995). Many enterprises considered accounts payable to be a cheap source of finance and tried to defer settlement for as long as possible, and it was difficult to enforce recovery of debts through legal channels because in the final analysis, both creditor and debtor were part of the same entity, the state (Wang, S. 1995). This resulted in “chains of trade debts that were difficult to collect” (Chen et al. 1997a, p. 148).

Similar legal problems existed in the accounting regulatory framework. Chen et al. (1997a) suggested that the sanctions that the Accounting Law 1995 provided were difficult to enforce, as it was hard to determine who had violated the new accounting rules. Chapter 5 of the Accounting Law 1995 provided that the manager in charge and the accounting personnel of an enterprise or an organisation who were in breach of the Accounting Law 1995 should be subject to administrative sanction or should be prosecuted if the infringement amounts to a crime. But “no penalties were actually specified in the Law” (Chen et al. 1997a, p. 147).

A serious impediment encountered in the accounting reform was the lack of qualified accounting professionals to implement the new standards. Up to 1995, the PRC had approximately 10 million accounting workers. Less than 10 percent of this workforce had received accounting education at the tertiary level; 70 percent of them had never received any formal accounting training (Lu 1995).

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During the period, more researchers started to explore the effects of new accounting standards, focusing on the technical aspects of accounting practices (Yu 1994, Wang, J. 1995, Graham & Li 1997, Xiao 1999). The sharp increase of foreign investments and the proliferation of joint-venture entities in the 1990s created a new environment and new demands on accounting practices and regulation. Increasingly accounting information became the basis for more decision-making by management, investors and creditors (Yu 1994). Graham and Li (1997) evaluated three major areas of accounting practice for foreign or joint-venture entities that differed greatly from Western principles: 1) limiting the foreign intangible contribution to a new venture to 20 percent of registered capital; 2) establishing a statutory ceiling on the amount of bad debts that can be written off in a period; and 3) restricting the write-off of inventory for pricing or cost-or-market issues. These differences in accounting principles had been heavily influenced by factors beyond accounting theory. Graham and Li‟s (1997) study implied that while China had forged many principles that were similar to Western and international practice, there were differences that could not be easily explained without a more detailed understanding of the cultural, economic and political environment emerging in China.

Xiao (1999) examined compliance with disclosure requirements for listed companies. The disclosure requirements in the new accounting regulations were considered to be comprehensive and detailed (Wang, J. 1995); however, it was suggested that the requirements were largely based on foreign disclosure standards rather than users‟ information needs (Xiao 1999). Although the level of compliance was high, companies tended not to disclose important information (for example, material events) enumerated in the regulations, which revealed a fundamental problem in the standards: “the lack of an overriding principle to ensure a company gives a true and fair view of its performance and conditions” (Xiao 1999, p. 361).

In summary, during this period the changes in the underlying economic environment, such as sharp increases in foreign investment, development of organised stock exchanges and listing of shares of Chinese companies on Western exchanges exposed the limitations of China‟s old financial reporting 38

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system. Beginning in 1992, a series of new accounting standards were introduced to standardise Chinese accounting practices and harmonise them with Western financial-reporting practices. Literature at the time reflected great interest in the new accounting reform. Some researchers evaluated this regulation reform by examining relevant accounting practices derived from the new standards; others contributed to a deeper understanding of the broad socio-economic influences. Differences in perspective were attributed more to the Chinese historical, cultural and economic environment than to specific accounting rules.

2.4 Harmonisation with International Accounting Standards

China‟s shift to a more Western style of accounting standards from the 1990s also prompted researchers to look at the general trend of harmonising Chinese with international accounting standards. Before presenting the review of literature on China‟s effort on this, it is necessary to outline the broader literature of this global harmonisation project to provide a fuller picture for later analysis.

2.4.1 Literature on Harmonisation of Accounting Standards

Research into international accounting harmonisation has produced a sizeable literature. At times academic communities have both supported and criticised harmonisation through IFRS. Relevant research can be identified as early as the 1960s (Baker & Barbu 2007). Theorists supporting harmonisation through international accounting standards indicated a strong interest in accounting uniformity (Wilkinson 1965, Morgan 1967, Bromwich 1980, Fitzgerald 1981, Dopunik 1987, Wallace 1990, Goeltz 1991, Schweikart et al. 1996). Wilkinson (1965, p. 11) proposed even that “each company presents only one set of accounts for all investors, of whatever nationality”. Both the academic literature and practicing accountants showed significant interest in the achievement of greater levels of international harmonisation, with the eventual goal of achieving uniformity in accounting practises. Some normative arguments supporting accounting uniformity included: the increasingly

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globalised nature of business activities; the needs of the common market within the European Union; the increasingly globalised nature of capital markets; the privatisation of many formerly public enterprises; and the need to reduce the costs of financial reporting (Schweikart et al. 1996).

At a very general level, advocates presented normative arguments in favour of the establishment of international accounting standards, relying on subjective analyses or descriptions to support their argument. For instance, Schweikart et al.‟s (1996) study supported harmonisation by using an interview with Sir Bryan Carsberg, the General Secretary of the International Accounting Standards Committee (IASC).

Other theoretical efforts to legitimise the harmonisation processes have been largely developed or promoted by relevant „lobby‟ groups such as the IASC. The establishment of the American conceptual framework project developed by the Financial Accounting Standards Board (FASB) over a seven-year period between 1978 and 1985 (Baker & Barbu 2007) was a beginning. Theorists began to discuss building a conceptual framework for international accounting standards-setting as a means of fostering greater international harmonisation. Peasnell (1982) advocated for creating a conceptual framework for financial accounting in the UK, suggesting that this should be extended to international accounting standards-setting. DePree (1989) discussed the applicability of the FASB‟s conceptual framework for this purpose. Other authors arguing for a conceptual framework included: Frank (1979), Nobes (1998), Violet (1983), and Taylor (1987). In keeping with these trends the IASC developed a statement explaining the conceptual basis for the accounting standards it was to issue. This research dialogue resulted in the 1989 adoption of the Framework for the Preparation of Financial Statements – essentially the IASC‟s conceptual framework (Gaffikin 2008). The framework provided a reasoned basis for facilitating and achieving accounting harmonisation.

Many practitioners and academics also believed that international accounting harmonisation could be achieved through a better understanding of differences in accounting practices in different countries (Beazley 1968, Alhashim & Garner 1973). These discussions created a need to explain such 40

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differences. Barrett (1976) investigated the degree of financial accounting disclosure by examining 103 companies in seven countries, and concluded that the financial disclosure of English and American companies was more complete than in five other countries: Germany, France, Japan, the Netherlands and Sweden. Gray (1980) studied the impact of differences in accounting standards on different measurements of company performance and suggested the possibility of studying relationships between capital-market variables and accounting practices in the international setting by understanding the differences in financial-performance measurements. Similar comparative research has been conducted by Briston (1978), Evans and Taylor (1982), Goodrich (1986) and Cooke (1989).

On the other hand, many have questioned the feasibility of a single regulatory framework that could meet the financial reporting needs of all societies. Rather than just illustrating normative and descriptive reasoning, opponents showed further arguments by embracing both normative and empirical methods. Research focused on environmental factors such as difference in culture (Belkaoui 1983, Violet 1983, Belkaoui & Picur 1991, Zarzeski 1996), economic factors (Chow & Wong 1987, Gray 1988) and political systems (Ahadiat & Stewart 1992, Chandler 1992, Craig & Diga 1996, Luther 1996). Some of these studies examined the impact of language; the historical development of a nation; different legal systems; differing conceptions of property rights; the size and complexity of the economy within a nation; the education system; social stabilities; and differences in capital markets. The prevailing argument among the studies was that accounting standards-setting could be seen primarily as a political process where the point of view of the most powerful often predominates.

At the time, these arguments for and against the harmonisation of accounting standards were highly normative and hypothesised. There had been a lack of descriptive cases that could be investigated to support the theory, as the actual progress of international harmonisation was still slow. The situation changed in 1995 when an agreement was reached between the IASC and International Organisation of Securities Commissions (IOSCO) – “an international „federation‟ of the world‟s securities markets regulators” (Gaffikin 41

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2008, p. 118). The two committees agreed that the IASC would first develop a core set of accounting standards, which would then be used for financial reporting in global capital markets (International Accounting Standards Committee 1995). Gaffikin (2008) argues that the progress of global capital markets accelerated concern for the adverse effects on the flow of financial investment. A material factor contributing to these adverse effects was the risk that investors might face in reading the different financial reports. Accordingly, IOSCO, together with other influential lobbying groups, such as the International Monetary Fund (IMF) and the World Bank, generated great pressure on member nations to consider a single set of international accounting standards – IFRS. By June 2008, over 100 countries (including Australia) and the European Union as an entity, have either adopted IFRS or based their local standards on IFRS (Deloitte 2009).

One consequence of such changes in practice was that researchers had opportunities to review the rules or investigate what would happen during the actual harmonisation processes. The primary argument for IFRS, on the grounds of economic rationality, was still to achieve a global accounting uniformity that brings about an open and accountable world (Lehman 2005). For example, Saravanamuthu (2004, p. 296) asserted that “the IFRS project(s) an aura of objectivity by transcribing complex local reality into universal recognisable and acceptable information”. These arguments have both a descriptive and normative nature. No research has been identified that actually „proves‟ those perceived benefits by concrete cases or empirical analysis of real data.

There have, on the other hand, been considerable counter-arguments embracing more concrete cases (Saudagaran 2004, Ampofo & Sellani 2005, Chand & White 2007) For instance, Chand and White (2007) studied the IFRS harmonisation in Fiji‟s economic context to illustrate the inapplicability of IFRS in a developing country without a well-established capital market. This has led some to challenge the perceived benefits or outcomes of the convergence. It is believed that those institutional differences in culture, legal framework, infrastructure and socio-economic and political systems have brought about differences in financial reporting even with the establishment of 42

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a single set of financial reporting standards (Ampofo & Sellani 2005, Zhang & Andrew 2010).

There are a number of corresponding concerns that IFRS satisfies only a selected group of users without addressing the needs of others (Hopwood 1994, Miller & O'Leary 1994, Lehman 2005). This view is supported by Chandler (1992) and Saudagaran (2004), whose studies demonstrated that the convergence was actually not intended to meet the needs of an individual society, but to provide accountability by multinational enterprises to the world‟s major capital markets. Hopwood (1994) also pointed out that international accounting was the outcome of worldwide lobbying pressure from multinational enterprises and large international accounting firms. Those multinational enterprises benefitted from lower costs in preparing financial reports when securing finances through international capital markets; also they could avoid being accused of ambiguity in their reporting and confusing users by reporting different outcomes in different jurisdictions. Large multinational accounting firms, as Hopwood (1994) explained, being considered experts in harmonised financial standards, can monitor their branch offices closely and provide highly structured training programmes to regulate, standardise and control their accountants all over the world. This standardisation of training represents a significant cost saving to the accounting firms.

Clearly, the issue of harmonisation or convergence is still a matter of ongoing debate, which has been either supported or opposed vigorously by various parties from a range of different perspectives. No matter what the grounds of these arguments, the debates have been largely of a descriptive and normative nature as any investigation trying to „prove‟ the overall effectiveness (or ineffectiveness) of a global accounting system would be unfeasibly big.

2.4.2 China’s Efforts toward Harmonisation

Although discussions of the 1992 accounting regulation reform traced China‟s efforts toward international harmonisation, Chinese accounting standards were not recognised by researchers as equivalent to the current IFRS until the 43

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promulgation of the new CAS in 2006 (Ge 2006, Liu & Zhang 2006, Wang, L. 2006, Lu et al. 2007). While a number of studies have focused on trends toward international harmonisation in Chinese accounting, there has been very little research to date directly addressing the 2006 IFRS convergence in China.

A major agenda of the accounting reforms in China was to reconcile Chinese accounting with internationally accepted practices, as this was believed to enhance the reliability and comparability of accounting information and related disclosures (Lin 2000). At the same time, the academic literature reflected a strong interest in the constraints or obstacles of international accounting harmonisation in China. It was noted that the prolonged influence of the traditional accounting patterns developed in the previous highly centralised planned economy would cause severe resistance to the practical implementation of accounting harmonisation (Ng 1999, Ding 2000, Lin 2000, Tang 2000).

Some researchers looked at problems in the content of the accounting standards themselves. Lin (2000) claimed that although new regulations and standards had been formulated at a rapid pace, overlaps or contradictions were apparent. For instance, varied sets of accounting regulations segregated by business ownership and industry co-existed without clearly stated logical connections. Ng (1999) believed that in many ways the accounting policies and regulations adopted did not truly reflect enterprises‟ actual economic results. Tang (2000) revealed that users of financial information had not been clearly identified. According to Tang (2000), the basic accounting standards identified three groups of users: the government; investors, creditors and other relevant parties outside the enterprises; and management. Compared with the framework of other countries, Tang (2000) considered this problematic, as accounting regulations could hardly be designed to satisfy government, enterprise managers and outside investors equally well. In addition, Tang (2000) emphasised that reliability and relevance of accounting information should have been appropriately weighted in the new standards.

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Academics also expressed concerns about the applicability of international practice in institutional arrangements that were unique to China (Xiang 1998, Ng 1999, Ding 2000). For example, Ng (1999) assumed that from a cultural sense, pragmatism dominated thinking in a socialist society, and that people tended to focus only on practice, which hindered the development of a theoretical framework of accounting. Ng thought this might be the reason why accountants in the PRC usually paid little attention to abstract and complicated accounting concepts. In addition, at a political level, Ding (2000) considered that the public authorities still wished to preserve the socialist regime in China, with strong emphases on macroeconomic considerations, which presented a barrier for successfully adopting international accounting standards and practices.

The competence of accounting professionals was another issue to draw great attention. A large number of Chinese accountants had received little education or training on accounting practices suitable to a market-oriented economy. According to Lin (2000, p. 76) “they are unqualified or unable to exercise professional judgment needed for effectively interpreting and implementing the new accounting and auditing standards.” Along a similar line, Tang (2000, p. 99) pointed out that “CPAs [public certified accountants] do not have a clear understanding of ethical and unethical behaviour in their practice.” The intense competition and lack of an orderly market also contributed to CPAs‟ neglecting professional ethics (Tang 2000). Central administrators were deeply influenced by traditional customs and attitudes, and had insufficient modern management knowledge and techniques, according to Ng (1999, p. 34): they “largely ignore both the theoretical issues and practical aspects of accounting and management information systems”.

Some researchers recognised the problems of lacking an effective mechanism for rigorous enforcement of accounting standards (Lin 2000, Lin & Wang 2001, Chen & Cheng 2007). Non-compliance or even scandals in falsifying accounting numbers or auditing reports had not been exposed in a timely manner, or properly disciplined. Without an effective monitoring and disciplinary mechanism, the new accounting standards “could not be meaningfully enforced” (Lin 2000, p. 76). 45

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In terms of the convergence of IFRS in China, very limited research has been identified in the extant literature. Zhang et al. (2007, 2009a) explored the political influences that enabled the convergence of IFRS in China. The findings demonstrated that the shifts of political environment from Mao‟s anti- bourgeoisie to Deng‟s theory on the socialist market economy, Jiang‟s Three- Representative Theory and Hu‟s Scientific Concept of Development established the necessary political environment that facilitated the convergence of IFRS in a more fundamental way.

Zhang et al. (2009b) investigated the implementation of FVA in the Chinese capital market as a result of the convergence with IFRS in 2007 29 . The research demonstrated that the accounting term „fair value‟, when applied in China, was imbued with assumptions about the state and the market that had little bearing on the realities of a Chinese capital market.

Zhang et al. (2010) explored the tension between neoliberal theory and practice by using China as an example, arguing that, rather than advancing the public interest in China as neoliberals would propose, the adoption of FVA introduced more chaos and struggles into Chinese capital markets.

Zhang and Andrew (2010) re-considered the notion of „comparability‟ as it has been applied to the accounting standard harmonisation project and its implications for accounting practices emerging in China. The paper argued that too heavy a focus on regulatory standardisation that prescribes comparable techniques without considering their broader economic context can give rise to accounting representations that could mislead users. This was exemplified through the unique legal status of land in China and how it is classified and represented in Chinese financial reports.

Other research since 2010 covered very limited aspects of the new CAS and the convergence process in China. Baker et al. (2010) studied the difference between the acquisition method for business combinations adopted in the new CAS and that stipulated in IFRS: Chinese standards-setters allowed the

29 The new Chinese Accounting Standards were released in 2006 and implemented in 2007. 46

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pooling-of-interests method of accounting for business combinations despite the prohibition of this method by both the FASB and the IASB. Baker et al. (2010) attributed the difference to the different political economic context for financial accounting standards in China. Qu and Zhang (2010) focused on the methods for measuring the level of harmonisation between any two sets of accounting standards. Based on empirical findings, they concluded that the new CAS has achieved its goal of substantial convergence with IFRS. Without examining the new CAS specifically, Peng and van der Laan (2010) reviewed the development of Chinese accounting standards over the period of 1992- 2006, with a goal of identifying the process of convergence and the practices that have been successful in that process. They suggested that “convergence has been achieved both from the direct import of standards from IFRS and through progressive changes to Chinese Generally Accepted Accounting Principles (GAAP)” (Peng & van der Laan 2010, p. 29).

As shown above, international accounting harmonisation has attracted great attention in academic literature since the 1960s, along with interest in achieving an ultimate uniformity in accounting practices. It was often believed that international accounting harmonisation could be achieved through a better understanding of differences in accounting practices in different countries, which brought about a need to explain these differences. Many researchers have attributed them to environmental factors such as differences in culture and in economic and political systems. There has been relatively little research on the trend of international harmonisation specifically in Chinese accounting. Most has discussed the impacts of Chinese unique institutional arrangements on the series of accounting internationalisation efforts before the new CAS was released in 2006; only very limited attempts to study the new CAS and the convergence process in China have been identified.

2.5 Summary

During the Mao Zedong Society, early theoretical construction in accounting was dominated by political ideology. Discussions were only considered from the perspective of „class struggle‟, rather than that of the economic nature of

Chapter Two Literature Review

accounting. A Soviet-style uniform accounting system was adopted to report adherence to the needs of a centrally planned economy. Concerns for productivity, economic efficiency or profitability were virtually neglected within the accounting discussions. The technical function of accounting that prevails today went largely unmentioned due to extreme political sentiments.

The introduction of economic reform in 1978 opened up China‟s economy to the outside world. With the more relaxed political climate, literature emerged that viewed accounting as a neutral technology rather than as a means of capital exploitation. Some academics began to claim that accounting theories and methods adopted in capitalist countries could also be used in socialist production. While the old economic mode was gradually replaced by a „limited‟ market economy, the changing socio-economic environment demanded that accounting, rather than serving macro-economic plans, meet more micro-level management control purposes. Thus, the literature in the early stage of the economic reform emphasised changing management accounting practices in Chinese enterprises. From recognising broad structural and contextual factors, succeeding research expanded the previous studies and offered an advanced understanding of the function of management accounting in facilitating the control of corporations.

Beginning in the early 1990s, more comprehensive economic reforms, such as the share ownership system and the development of organised stock exchanges, brought increasing attention to the instrumental role of accounting and financial reporting in China‟s economic development. Academics and practitioners started to note that the old Chinese accounting system was problematic under the new economic conditions. Since 1992 a series of accounting standards have been introduced by the MOF to standardise Chinese accounting practices and harmonise them with Western financial- reporting practices. This accounting reform has attracted great interest in academic literature, which has had various emphases, such as the changes caused in practice by the new standards, or the broad contextual influences on the development of new standards in China.

Chapter Two Literature Review

Although research into international accounting harmonisation has produced a sizeable literature, little has addressed this process in the Chinese context. Most of the research has focused on the accounting regulation reforms before the release of the 2006 standards. The review of the literature shows that the convergence of IFRS in China, or the new CAS, is still a largely unexplored area.

Chapter Three Theorising China‟s Change

3 Chapter Three: Theorising China’s Change

This chapter sets up the theoretical foundation for this thesis. As a fundamental position, this thesis holds that the context in which knowledge is situated is very influential (Hines 1988). Likewise, the research topic (the convergence of IFRS in China) is a social artefact that is specific to the context in which it has emerged. From this perspective, although the adoption of IFRS was a remarkable change in China‟s accounting standards-setting, it nevertheless constituted a small fraction of the massive socio-economic transformations that have taken place in Chinese society since the late 1970s.

Given the political commitment on which the ruling Communist Party is founded, the changes that have occurred are quite dramatic. It has been well recognised that the emergence of China‟s economic and political power in the 21st century has resulted from systemic economic reform, which has reshaped contemporary China into a comprehensive market society (Nolan 2004, Guthrie 2006). There is a vast body of literature researching this radical reform (Solinger 1993, Wang 1994, Walder 1995, Parris 1999, Wang 2003, Nolan 2004, Song 2004, Yao 2004, Guthrie 2006, Yip 2006). However, it is somewhat less clear what global and local forces have initiated this reform and directed its progress. In the context of this thesis, China‟s economic reform is the immediate setting in which the convergence of Chinese accounting standards with IFRS occurred. Hence, exploring those forces and trends that shaped China‟s change in a theoretical framework becomes crucial. It provides not only necessary historical background, but also a critical framework to theorise the research topic.

In doing so, this chapter aims at explaining the driving forces behind China‟s economic reform and accounting change. It begins with a brief introduction of the history of China‟s reform in its economic system. The chapter then places the reform into its neoliberal context – a socio-economic movement that has transformed the world since the 1980s. The theory of neoliberalism and its practical manifestations are described in detail thereafter.

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3.1 The Context of China’s Economic Reform

The ongoing economic reform in China was initiated in the late 1970s. By 1976, almost three decades after the Communist Party took over power, China had found itself in a state where “agriculture was stagnant, industrial production was low, and the people‟s living standards had not increased in twenty years” (Nathan 1990, p. 200). Mao‟s death in that year undoubtedly triggered serious political uncertainties for the party since nobody else in the CCP had the same political capability as Mao to sustain the „iron-fist‟ control over the nation (Meisner 1986). The traumatic experience of the endless political campaigns in the name of serving the people and maintaining the class struggle, such as the Great Leap Forward and the Cultural Revolution, had dismantled public trust towards the CCP (Shirk 1993). Without appropriate measures to ease the anger and really „serve the people‟, the leadership of the party was inevitably under threat.

One pressing issue at the time was the devastating poverty that was widespread across the nation. Annual per-capita net income in rural areas of China, where about 80 percent of population resided in 1978, was “RMB 133.6 Yuan (about US$16.25), or about US$70 in total annual household income30” (Guthrie 2006, p. 44). It was therefore not hard to see that the CCP leaders came to grasp economic reform as a way to regain the people‟s acceptance. This point was supported by a number of researchers, such as Shirk (1993), Nathan (1990), Wang (1994), Solinger (1993) and Wang (2003).

During that time, the rising tide of capitalist development in the rest of East and South-East Asia, particularly South Korea, Taiwan 31 and Singapore,

30 The number was calculated according to the exchange rate in 2005.

31 Between 1962 and 1985, Taiwan's economy experienced the most rapid growth in its history: an average annual rate of nearly 10 percent, over twice the average economic growth rate of industrialised countries during that period. Another major achievement of this economic development was the equitable distribution of income: in 1953, the average income of the top one-fifth of families was estimated at 20 times that of the lowest one-fifth; in the 1980s this 1:20 ratio was reduced to a range of between 1:5 and 1:4, indicating a highly equitable distribution of income. (from the Republic of China Yearbook – Taiwan 2001, accessed 10 Feb 2011, available from: http://www.gio.gov.tw/taiwan-website/5-gp/yearbook/2001/chpt04-4.htm). 51

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provided appealing examples for the CCP. The domestic and international environments certainly had significant impacts on members of the CCP leadership, and contributed to Deng Xiaoping‟s ability to discredit his political rival, Chairman Hua Guofeng32, and take over control of the party in 1978 (Shirk 1993). These can be considered as the major factors which led the Chinese government to begin a reform program. In December 1978, Deng unveiled his vision of economic reform to the Third Plenum of the Eleventh Central Committee of the CCP33. Afterwards, China began its transition from a socialist-planned economy to a capitalist market-oriented economy. This ongoing effort, as this chapter later shows, has indicated major characteristics that align with a neoliberal economy.

It should be noted that the reforms that have infiltrated every aspect of Chinese society are massive and complex in nature. Any attempt to cover them in full would be inevitably far too brief. To avoid doing so, and given the focus of economic liberalisation, this chapter examines the key factors of China‟s reform, including the emergence of markets, the opening up of its domestic economy and privatisation, that align with neoliberal policies adopted in other countries.

3.1.1 The Emergence of Markets: a Two-track System and Freedom in Economic Decision-making

The path of these reforms in China has been radical in scope but very slow and gradual in pace compared to those undertaken in many other pre- communist nations, such as Russia. An often-used phrase to describe reform in Chinese is „one step go, one step watch‟, a similar sentiment to Deng‟s „Groping the stones while crossing the river34‟. Both phrases imply a cautious attitude, using a feedback and adjustment mechanism in a perilous situation to handle uncertainty and avoid possible failures (Wang 1994). This attitude

32 Hua, the immediate successor of Mao, attempted to bolster his own legitimacy by adopting Mao‟s policies (Shirk 1993).

33 Appendix 2 provides a brief illustration of the government structures of China.

34 Chinese text: “摸着石头过河”.

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has framed China‟s reform as an incremental and cumulative progression instead of a sudden change.

The first and most critical issue of this reform was to create a „market‟ – a place or a concept that people in the West take for granted. There were, however, virtually no „markets‟ in existence in such a strictly centrally planned economic system as China‟s at the time.

The gradual emergence of markets could be seen as a plan that had been carefully designed. Even though the government had explicitly announced its goal of developing a „market economy‟ only in late 1992 (Wang 1994, p. 108), in practice institutional changes for facilitating a market-oriented economy had begun at the very beginning of this reform. By using a covert term, an individualised „personal responsibility system35‟ was introduced in rural areas early in the reform process. Under this scheme, families were given a degree of autonomy in decision-making, which had previously been restricted to collective production units, such as communes and brigades, to create incentives for individuals to produce and hence improve outputs (Solinger 1993). Peasants were allowed for the first time to lease land from the state and produce agricultural goods as if they were running a household business. Although they still had to turn in a minimum quota of grain to the government, they were free to sell the surplus to others. In this sense, the peasants can be viewed as independent market actors and were encouraged by this arrangement to participate in buying and selling, which spontaneously established rural markets of primary products for a large portion of the Chinese populace (about 80 percent of the population at that time) (Hudson 2000).

At the same time, to cope with this mode, a dual-price system (the purchasing price nominated by the government and the price determined by the market) operated. In 1985, further reforms were introduced by granting long-term contracts to farmers and by freeing “city prices of fruit and vegetables, fish, meat, and eggs… from government controls so they could respond to market

35 Chinese text: “承包责任制”. 53

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demand” (Shirk 1993, p. 39). These reforms were accompanied by a surge of private and collective industry and commerce in the countryside.

These changes stimulated a great percentage of the population to be involved in private enterprise and investment in family or group ventures. Many of these enterprises were operated under the name of Township and Village Enterprises (TVE) at the time. According to Oi and Walder‟s (1999) research, the rapid growth of China‟s economy in the 1980s was largely attributed to the exceptional growth of the rural industrial economy, where the vast majority of TVEs were located. More significantly, this „dual-track‟ arrangement – the coexistence of both central planning and market mechanisms (Wang 1994, p. 136), which had been successful in improving the economic welfare of people in rural areas, later became a model for enterprise reform in the industrial economy in urban areas.

Industrial reform was the next step, with a similar dual-track system. Industrial firms were allowed to sell any goods produced above plan quotas, and keep their extra profits. Managers of industrial firms were given more autonomy over managerial decision-making while they were driven by market competition. This economic policy ensured that some elements of the planned economy were maintained while SOEs were given incentives to develop market-oriented strategies to increase outputs (Guthrie 2006). The dual-price system allowed anything that SOEs produced beyond the state‟s plan to be sold within China‟s newly emerging markets at a market price. The SOEs were also allowed to transact and cooperate with non-state and foreign business firms. The market mechanism started to play a role in the nation‟s industrial economy, and, over time, the „plan‟ became proportionately less and less important in the transition process (Wang 1994, Naughton 1995, Walder 1995, Gao 1996, Oi & Walder 1999, Parris 1999, Guthrie 2006).

At the early stage of the reform, China was slowly setting out important institutional arrangements for the implementation of a free-market economy. Economic policy and decision-making were decentralised to the rural and industrial economic areas. Household individuals and managers of enterprises were given more freedom to control managerial decision-making. The pricing 54

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mechanism was also freed from being strictly centrally planned to partially market-determined.

3.1.2 Joining the World Economy

Another significant aspect of Chinese economic reform was the decision to join the world economy: an „opening-up policy‟ that radically diverged from that of Mao‟s regime (Shirk 1993, p. 47). Generally this policy was enacted by expanding domestic enterprises‟ foreign trade on the one hand, and encouraging foreign companies to invest in Chinese enterprises on the other.

The „opening up‟ of the economy was introduced in several coastal cities. The Joint Venture Law was first introduced in 1979 as one of a series of regulations to allow foreign capital to flow into China (Guthrie 2006). Over the next decade, Special Economic Zones (SEZs) were established along some coastal areas36 to further attract foreign investments. The SEZs were originally designed to match those manufacturing export areas of Singapore, Taiwan and elsewhere, and aimed to attract foreign investment and promote exports (Lardy 1995). SEZs were granted priority in market regulation and greater decision- making authority to sell their products in world markets, to boost an export- oriented economy. Foreign entrepreneurs who invested in the SEZs received favourable rates of taxation and other preferential treatment. According to Lardy (1995), at their early stage of development, these SEZs were far less regulated than those of Japan, South Korea and Taiwan. This experiment met with great economic success as the SEZ areas became the most dynamic and rapidly growing regions in China. In the 10 years from 1979 to 1988, “the total industrial production in the first four SEZs increased 16 times, much faster than the national average of 2.3 times during the same period” (Wang 1994, p. 121).

36 Shenzhen, Zhuhai and Shangtou in Guangdong province and Xiamen in Fujian province were the first cities granted the status of „special economic zone‟ in 1979. In 1984, the same economic policy was implemented in 14 more coastal cities: Tianjin, Shanghai, Dalian, Qinhuangdao, Yantai, Qingdao, Lianyungang, Nantong, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhangjiang and Beihai. 55

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The strategy was later introduced and integrated into other areas within the nation. By the end of 1988, most of China‟s provinces had adopted similar policies to the institution of SEZs (Gao 1996). This change loosened the restrictions of the previous planned-economy mode and stimulated growth across many sectors of China‟s domestic economy. Along with increasing connections with foreign business, SEZs brought a huge infusion of capital into China to fuel economic development. Gross capital inflows into the nation had been minuscule before the early 1980s. However, they increased dramatically during the reform period. Over the 1990s, China “accounted for about one-third of gross Foreign Direct Investment flows to all emerging markets and about 60 percent of these flows to Asian emerging markets” (Prasad & Wei 2008, p. 268).

The export industry was another sector that benefited from the liberalisation of trade and investment policies. China‟s export growth over the period was remarkable, being “approximately 16 percent per year, more than double the world growth rate and fast enough to double every four and a half years” (Martin & Manole 2008, p. 209). For the first decade of the reforms, China ran a trade deficit with the world. However, China had a trade surplus of $28.7 billion in July 2010 (National Bureau of Statistics of China 2010).

The effort of integrating the Chinese domestic economy with the outside world also had a very fundamental influence on the facilitation of a market-oriented economy. The market participants in the PRC were exposed, for the first time, to real business competition common in a market-oriented economy. Individuals, enterprises and the government itself were under pressure to adapt to this new environment through learning how to compete and cooperate with others in the market. It is often recognised that JVs with foreign businesses contributed significantly by introducing innovations to Chinese enterprises: not only more advanced technologies, but also experienced management skills (Song 2004).

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3.1.3 Privatisation

Given the Marxist ideology on which the CCP is founded, a private economy and private-property rights were not regarded as legitimate in China. „Privatisation‟ had always been an extremely politically sensitive word in Chinese discourse37. Over time the government has tried to sideline the use of this word with more obscure expressions, such as „a commodity economy with Chinese characteristics‟, or „the socialist form of market economy with Chinese characteristics‟, or even „a preliminary stage of socialist development‟38. There is, however, a good deal of evidence that privatisation has been a core agenda behind the economic reform. The privatisation that this chapter refers to includes both the emergence of privately owned businesses and the privatisation of SOEs.

The government took a very slow and cautious approach towards the development of the private economy. When the Communist Party took over power in 1949, private businesses in China were virtually eliminated under the central planning that new regime stipulated (Song 2004). Although they re-emerged after the reforms of the late 1970s, the private sector took almost two decades to overcome various political, institutional, economic and social barriers. Until the National People‟s Congress passed an amendment to the Constitution to recognise the legal status of private property ownership in March 1999, Chinese private enterprises 39 had been developed widely in informal or even hidden ways (Krug 1997, Francis 1999, Song 2004, Eesley 2009).

37 Framed in Marxist ideology, the CCP has explicitly described its task as to maintain the dictatorship of the proletariat, which is practiced over all class enemies, such as the imperialists, the capitalists, the landlords and the rich peasants (Teiwes & Sun 1999).

38 A number of theories have been developed by party theoreticians in China trying to legitimise this economic reform. More details can be found in Wilson (1989).

39 During this transition, the private sector in China contained many different forms, including “individually operated private business in urban and rural areas; private enterprises from urban collectives and rural Township and Village Enterprises (TVE); private enterprises transformed from State-Owned Enterprises (SOE); foreign-invested enterprises, including both joint ventures and wholly owned foreign firms.” (Song 2004, p. 31)

Chapter Three Theorising China‟s Change

The first re-emergence of private business was a response to the series of institutional reforms in the rural areas, such as the introduction of the „household responsibility system‟, the decentralisation policies and the dual track price system (McMillan & Naughton 1996, Huang 1998). Lin (1992) examines some of the social impact of these reforms: first, the liberalisation attempts significantly enhanced productivity, which improved farmers‟ income, but at the same time created also a labour surplus in the rural areas; farmers were then encouraged to engage in small-scale, non-agricultural activities to accommodate the labour surplus; similar unemployment problems were serious in the cities at the time after a large number of urban youths who had been sent to the countryside during the Cultural Revolution returned home; self-employment businesses were encouraged in order to create more jobs in the urban areas to ease the situation. As a result, a new business category – Getihu (a Chinese word meaning sole industrial and commercial proprietorships) – emerged and became very popular in the 1980s (Lin 1992).

The development of Getihu, however, was not easy at the time. The government had reiterated that individual economic units 40 were regarded as only supplementary to collective units and SOEs, and abundant limits still existed in regulations on their development. For instance, the maximum number of employees a Getihu could hire was initially set at five; also, Getihu had to be self-financed, as the government provided no credit or bank loans (Lin 1992).

What was more difficult, however, was the uncertain political climate. After going through continuous political upheavals, people were fearful of the possible political risks associated with this kind of business model. To cope with this circumstance, a new type of firm, called „red hats‟ (Song 2004, p. 33), grew rapidly: there were firms that registered themselves as collectives but were actually privately owned and operated. They were given not only ideological protection, but also favourable regulatory policies and government support that were ordinarily available for the „collective sectors‟. At the time,

40 Again, the Party used the word „individual‟ rather than „private‟ to seek more political legitimacy.

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many „true‟ collective firms had experienced similar problems to those of the SOEs, resulting in poor business performance.

In order to enhance performance, the government started to rent collective firms to private operators. By paying a fixed rent to the collective firm, private entrepreneurs were allowed to run the firm as if it were their own business. Research in this area (Wang 1994, McMillan & Naughton 1996, Huang 1998, Song 2004, Tian 2004, Guthrie 2006, Eesley 2009) has observed significant contributions made by the private sectors, including Getihu, „red hats‟ and rented firms, in terms of productivity gains and economic growth during the first two decades of the economic reform.

The fledgling private sector suffered a setback in the sudden shift in political climate in 1989 after the Tiananmen Massacre41. According to Garnaut et al. (2001, p. 14), “the number of registered Getihu declined from 23.1 million at the end of 1988 to 19.4 million at the end of 1989…[and] the number of registered private firms declined from 90,600 at the end of 1989 to 88,000 in June 1990”. The private sector did not fully recover from this setback until Deng Xiaoping visited Southern China in 1992, where Deng reassured people of the continuation of the reform and called for a more amiable social and political environment for private entrepreneurs (Song 2004).

After Deng‟s Southern Tour, the Fourteenth Party Congress in September 1992 officially stated that the goal of economic reform in China was a socialist market economy (Eesley 2009). Together with the later promulgation of the „Decision of Issues Concerning the Establishment of a Socialist Market Economic Structure‟ in the third Plenary Session of the Fourteenth Party Congress in November 1993, the government clearly endorsed privately owned

41 This is also called the „June Fourth Incident (六四事件)‟ in Chinese. The event was organised mainly by university students and intellectuals to protest the government‟s corruption and authoritarianism. It called for economic change and democratic reform in China. The demonstrations began in Tiananmen Square and were followed by large- scale protests throughout Chinese cities. The protests lasted about seven weeks (from 15 April 1989 to early June) after the People‟s Liberation Army was called into Beijing by the government to clear Tiananmen Square with live fire. The exact number of deaths is yet to be known. (Gao 2008)

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business. In 1995, after several rounds of investigation and discussion, the central government imposed a policy known as „grasping the large and releasing the small‟ – a program to sell off – or in other words, privatise – small SOEs in China (Young 1995).

In Chinese discourse this program is called Gaizhi42. This is a very vague term, which means „changing the system‟, and covers “not only privatisation but incorporation, listing on the stock market, and the restructuring of internal and external governance” (Yao 2004, p. 91) of the SOEs. According to the policy, the policy focused only on 500 to 1,000 large SOEs; for smaller ones the policy changed their ownership structure through contracting and leasing (the two methods that had been used previously), as well as selling the enterprises, or in the government‟s term „transforming‟ them into employee- held companies or cooperatives. The process started on a large scale in 1995. By the end of 1996, 11.5 million workers had been laid off and 50 to 70 percent of SOEs had been „transformed‟ (Qian 2000).

Concurrently, significant institutional changes created public consensus to support this privatisation attempt. In September 1997, the Fifteenth Party Congress made a large rhetorical shift in recognising private ownership as an important component of the economy and state ownership (Zheng & Zou 1997). Through careful wording, such as that “public ownership could be realised through joint stock corporations with many owners investing” (Eesley 2009, p. 9), the government essentially legitimised the private ownership of corporations43. Less than two years later, the Second Plenary of the Ninth People‟s Congress approved an amendment to the Constitution that gave the private sector the same legal status as the public sector for the first time (National People's Congress 2004). In 2002 the 16th National Congress of

42 Chinese text: “改制”.

43 In official discourse, after changing the system, many of the SOEs would be taken into „public ownership‟ – a concept that was not clarified. Chinese officials denied that this meant privatisation, even though it was acknowledged that share floatation would take place (Garnaut et al. 2001).

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Communist Party of China even made a groundbreaking move to allow private entrepreneurs to join the Communist Party44.

This chapter has illustrated the socio-economic changes that contributed to China‟s economic reform. Domestically this reform has allowed China to engage with continuous liberalisation in the market and mass privatisation of SOEs. Externally it has strengthened corporations‟ ties to overseas business by opening up domestic markets and boosting international trade and seeking membership of international bodies such as the World Trade Organisation (WTO). All these changes in China, this thesis argues, were not isolated events in one particular country. The massive privatisation of public assets, the constantly reiterated significance of „market freedom‟ and, as will be shown in Section 3.3.2, substantive withdrawal of social welfare provisions have been familiar phenomena across different societies since the 1980s. This particular form of politico-economy has often been described as neoliberalism.

This thesis suggests, besides other interpretations of China‟s economic reform, that the very facts manifested in this reform are reflective of China‟s openness to this modern free-market ideology – neoliberalism. This thesis reveals in more details the connection between China‟s change and neoliberalism to reinforce this argument and set up a theoretical framework for later discussions.

It should be noted that the following sections draw heavily on Harvey‟s (2005, 2007, 2010) work on neoliberalism45. There are statistics referenced directly from Harvey (2005, 2007, 2010), Klein (2007), Epstein (2005) and others. For instance, Neoliberalism: A Critical Reader edited by Saad-Filho and Johnston (2005), includes 30 research papers on the damage from neoliberal policies in

44 Many consider that this decision was legitimised through President Jiang Zemin‟s „three representative‟ theory, which argues that the Party has always represented the developmental needs of China's advanced production capacity, the progressive direction of China's advanced culture and the fundamental interests of the broad majority. The business (i.e. capitalist) class represents China‟s advanced production capacity; therefore, it is legitimised to join the party. 45 A search of David Harvey‟s work on neoliberalism from Google Scholar (on 29 May 2011) showed that his book A Brief History of Neoliberalism has been cited by 2,673 research articles since its publication in 2005. 61

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various countries from a range of perspectives. These statistics were adopted in the chapter without further verification by the author because most of them are already peer-reviewed academic research, and the argument these statistics support has been consistent throughout the publications that this chapter has examined. This approach ensures that this chapter fulfils its task, which is not to initiate a research on neoliberalism itself but to explain what has been established in this well-researched field, and how this particular theoretical position can be used in the analysis of China‟s adoption of IFRS in later chapters.

The theory established by the opponents of neoliberalism, such as Harvey, challenges the traditional belief in the benefits of a free-market system. Like any other theory, it can be contested from different perspectives. This chapter, however, adopts this critical view of neoliberalism rather than trying to comprehensively analyse the criticism itself. This approach ensures that the theoretical position of this thesis is illustrated in a tightened and clear way and is consistent with the moral position this thesis has taken. The approach of critical inquiry with which this thesis is embedded rejects a universal or „objective‟ position on the research topic; rather it intends to provide an alternative explanation that might have been neglected in the current knowledge. For instance, in this chapter, there are always other factors that have contributed to the socio-political failures mentioned. Although neoliberalism is referred to when evaluating those failures, it is not the intention of this thesis to argue that neoliberalism is the only reason they occurred. Instead, it aims to demonstrate that neoliberalism might be one cause, and perhaps one that has not been acknowledged adequately in the current accounting studies.

3.2 The Rise of Neoliberalism

Neoliberalism, as defined by Harvey (2005, p. 2), is:

…in the first instance a theory of political economic practices that proposes that human well-being can best be advanced by liberating individual entrepreneurial freedoms and skills within an institutional

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framework characterized by strong private property rights, free markets, and free trade.

In the social sciences, it is recognised that neoliberalism has become one of the top forces that have shaped different aspects of contemporary societies (Ong 2006). A full disclosure of this massive topic requires much more room than this chapter could offer. Also, given that the theme of this thesis is China‟s accounting change, this section therefore intends only to describe a brief history of neoliberalism, focusing more on those of its key features that closely relate to China.

3.2.1 Classical Economic Liberalism

At a fundamental level, neoliberal theory is a belief in the benefits of the „free market‟. It can be traced back to 18th-century economic liberalism – a political and economic philosophy that supports and promotes the capitalist economic system in the laissez-faire sense (Adams 2001). Theories of economic liberalism emerged during the Enlightenment, and are believed to be fully advanced with Adam Smith‟s (1776) Wealth of Nations and David Hume‟s writings on commerce (Gray 1995). The theory argues that if individuals are allowed to freely pursue economic activities without intervention, such as control by the state, the „invisible hand‟ of the market would produce the best results, leading to a harmonious society with ever-increasing economic prosperity (Adams 2001). According to theorists advocating economic liberalism (Smith 1961, Hayek 1973, Sally 1998, Adams 2001), this form of liberal model was based on the assumption of human rationality, private- property rights, individual contracts and civil liberties, and that the economic actions of individuals are largely based on self-interest. It is commonly believed (Adams 2001) that these ideas underpinned the progress of the capitalist economic system in the late 18th century, and were widely adopted to guide government policies throughout much of the 19th century.

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3.2.2 Keynesianism

Although there were increasing state interventions in fiscal policies towards the end of the 19th century, the turning point of the classical economic liberalism was believed to be at the end of World War II (Harvey 2005, MacGregor 2005, Palley 2005, Harman 2007). Harvey (2005) noted that at the end of World War II, the primary objective among Western industrial countries was shifted to constructing an economic system that would avoid failures such as the Great Depression in the 1930s. In addition, the rapid industrialisation of the Soviet Union during the time also helped create an environment that increased the acceptance of government control as a means of securing rapid economic development (Hobsbawm 1995).

The new economic orthodoxy during the time was based on the ideas of the British economist John Maynard Keynes („Keynesianism‟). Many researchers (Piketty & Saez 2003, Harvey 2005, Harman 2007) consider that Keynesianism was the fundamental cause that led to the surge of economic prosperity in the 1950s and 1960s among Western capitalist societies. In contrast to classical liberalism, Keynesian economics advocates active policy actions from the state, including monetary policies by the central bank and fiscal regulations by the government, as private-sectors decisions sometimes lead to inefficient macroeconomic outcomes (Sullivan & Sheffrin 2003). Consequently, what all those states adopting this policy had in common, as described by Harvey (2005, p. 10), was:

…an acceptance that the state should focus on full employment, economic growth, and the welfare of its citizens, and that state power should be freely deployed, alongside of or, if necessary, intervening in or even substituting for market processes to achieve these ends.

The post-war periods within which the Keynesian economic model prevailed had witnessed a high rate of economic growth among most Western capitalist countries, with low, stable unemployment and modest inflation (Armstrong et al. 1991).

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The post-war developments, however, were reversed during the 1970s, with surging inflation, unemployment and other fiscal crises across advanced capitalist economies, such as the United Kingdom, France, Italy and the United States. The changing economic conditions were accompanied with a series of social unrests:

…the OPEC oil price hike in 1973; the election of Allende in Chile; the defeat of the USA in Vietnam; the dissolution of the last remaining colonial empire (that of Portugal); the launching of the liberation war in Rhodesia; and the overthrow of the Shah of Iran; and so forth. (Radice 2005, p. 95)

In searching for a cure for the economic stagflation that Keynesian policies seemed incapable of addressing, a number of theories were developed. Harvey (2005, p. 13) indicated that the debate was centred between those who advocated “social democracy and central planning on the one hand” and those “concerned with liberating corporate and business power and re-establishing market freedoms on the other”. The latter group emerged as the leader, advocating and creating a global economic system that became known as neoliberalism (Helleiner 1994, Harvey 2005).

3.2.3 Neoliberalism in Theory

The core idea of neoliberalism centres on the relationship of the state to the market. On the one hand, the neoliberal theories build on the foundation of classical economic liberalism, assuming that markets efficiently use economic resources and optimally meet all economic needs if allowed to function without restraints (Smith 1961, Hayek 1973, Friedman & Friedman 1980, Adams 2001). The views of Milton Friedman (the founding father of neoliberal theories) are representative of those who favour the power of the market. Friedman and his wife Rose Friedman, in their influential book Free to Choose: a Personal Statement, maintained that:

Adam Smith‟s flash of genius was his recognition that the prices that emerged from voluntary transactions between buyers and sellers – for short, in a free market – could coordinate the activity of millions of people, each seeking his own interests, in such a way as to make everyone better off. It was a startling idea then, and it remains one today, that economic order can emerge as the unintended consequence of the actions of many

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people, each seeking his own interest (Friedman & Friedman 1980, pp. 13- 14).

By suggesting that the market mechanism is superior to other systems for organising the economy, neoliberal theories helped provide a strong rationale for neoliberalism‟s opposition to state interventionist theories such as the Keynesian approach (Harvey 2005). Also, by referring to an appealing notion of „trickle down‟, neoliberals argue that the overall output growth will be trickled down from the top to the poorest, leading to an improvement in living standards for all people (Harvey 2005, Johnston 2005). A further extension of this doctrine also offers grounds for later economic globalisation, in that the globalisation of free markets would be the best way to extend these benefits to the whole world. To quote Mike Moore, former Director General of the World Trade Organisation, “the surest way to do more to help the [world‟s] poor is to continue to open markets” (quoted in Shaikh 2005, p. 41).

On the other hand, neoliberals recognise that an ideal market order requires a particular kind of state to secure it. This has been noted by many theorists in this field, such as Freeden (1996), Rapacynski (1996), MacEwan (2005), Munck (2005), Gamble (2006) and Ong (2006), as being at odds with classical economic liberalism. The role of government, as suggested by Friedman, is to “facilitate voluntary exchanges by adopting general rules – the rules of the economic and social game that the citizens of a free society play…a valid duty of a government directed to preserving and strengthening a free society” (Friedman & Friedman 1980, p. 30). More specifically, the best rules or conditions for markets that these theorists suggested include:

…deregulation of financial markets, privatisation, weakening of institutions of social protection, weakening of labour unions and labour market protections, shrinking of government, cutting of top tax rates, opening up of international goods and capital markets, and abandonment of full employment under the guise of the natural rate (Palley 2005, p. 25).

This kind of „deregulation‟ advocated by neoliberalism, as has been challenged by critics (Harvey 2005, MacEwan 2005, Palley 2005, Gamble 2006), is actually a different kind of regulation to overcome the obstacles and resistance to the institutions of a free economy. MacEwan (2005, p. 172) cautioned that:

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Neoliberalism requires a strong state that can ensure the primacy of private property, preserve the dominance of markets over social control, and thus limit the operation of democratic power. Also, neoliberalism often requires a strong state, sometimes a dictatorial state, for its implementation.

3.2.4 Neoliberalism in Practice

The “great convulsion in world capitalism” (Gamble 2006, p. 21) during the late 1960s and 1970s changed the intellectual climate for neoliberalism. Theories of economists such as Milton Friedman and Friedrich Hayek, which were marginalised when first published 46 , began to draw wider attention through critique of Keynesianism. Cockett (1995) suggested that by the early 1970s there had been a systematic effort to disseminate Friedman and Hayek‟s theory by think-tanks, such as the Institute of Economic Affairs in Britain and the Heritage Foundation in the United States, and by influential financial journalists such as Peter Jay with the New York Times and Samuel Brittan with the Financial Times. In 1974 Hayek was awarded the Nobel Prize in economics, as was Friedman in 1976. Under their influence, free-market fundamentalism and neoliberal orthodoxy was successfully accepted as the best „medicine‟ for a sick and stagnant economy at the time.

Outside the academic arena, Margaret Thatcher and Ronald Reagan were widely regarded as the political leaders who initiated the penetration of this neoliberal orthodoxy into public policies at the state level (Harvey 2005, Klein 2007). The regulatory changes during the Thatcher and Reagan regimes showed a strong mandate to dismantle all forms of social institutions that were regarded as hindrances to competitive flexibility. This dismantling included, for example, confronting trade union power; withdrawing commitments of social welfare provision; privatising public assets; reducing taxes; deregulating financial markets; and introducing monetary policies in favour of entrepreneurial initiative and foreign investment (Harvey 2005, MacEwan 2005, Gamble 2006). These initiatives were depicted ideologically as the best ways to maximise the social good because of the enhanced

46 As acknowledged by Friedman himself in Friedman (2002). 67

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competition and innovation when markets are freed from the state intervention.

During the three decades since the Thatcher and Reagan regimes, an uneven geographical development of neoliberal reforms has spread across the rest of the world, such as in the Russian Federation (Oversloot 2006), Indonesia and Southeast Asia (Hadiz 2006), Africa (Harrison 2006), Latin America (Saad- Filho 2005) and Japan (Itoh 2005). While some countries voluntarily moved to some version of neoliberal reforms such as the mass privatisation and government deregulation in Chile (Saad-Filho 2005) and Slovakia (Oversloot 2006), more were compelled by coercive pressures to embrace neoliberal policies and practices, such as the surrender of Latin American countries (including Mexico, Brazil, Argentina, Venezuela and Uruguay) to the IMF‟s neoliberal institutional reforms in exchange for debt relief of some $60 billion by 1994 (Saad-Filho 2005, Klein 2007). During the last three decades of the 20th century, from the advanced economies such as the US and Britain to developing societies such as Indonesia, Mexico or Turkey, and from the former communist countries in Europe to contemporary China, neoliberal theory and rhetoric have proliferated from a conceptual construct in academic settings to a common understanding that many people use to live the world (Harvey 2005).

3.2.5 Critics of Neoliberalism

An obvious flaw pointed out by critics is the inherent inconsistency in neoliberal theories. The theme advanced in Friedman‟s works is the liberalisation of markets from state interventions. Harvey (2005, 2010), among many others (Clarke 2005, Munck 2005, Gamble 2006, Harman 2007, Merino et al. 2010) have asserted, however, that the political influences from interest groups involved in any government policy-making should not be ignored, and thus it is questionable that a state could be trusted in “defending the rights of private property, individual liberties, and entrepreneurial freedoms” (Harvey 2005, p. 21). Gamble (2006, p. 28) also illustrated this:

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The paradox for neoliberals is that their revolution in government requires that a group of individuals be found who are not governed by self-interest, but are motivated purely by the public good of upholding the rules of the market order.

Theoretically there are concerns about neoliberals‟ capacity to ensure „individual freedom‟ and social justice through applying a strong and often coercive state power.

3.2.5.1 A Grand Theory?

A fundamental issue for neoliberal theorists, this thesis argues, is the belief in such an inherent market mechanism and its omnipotent power. Philosophically, the assumption of the market‟s „invisible hand‟ is grounded in a physical realism – a claim that “a world of objective reality that exists independently of human beings and that has a terminate nature or essence that is knowable.” (Chua 1986a, p. 606) If there is a reality that is „real‟ out there somewhere, this reality would be the same for every observer. We may come to know this single and ultimate reality by searching out the underlying laws and mechanisms that regulate its behaviour (Tinker et al. 1982, Chua 1986b). This philosophy provides the possibility of discovering one single, absolute and objective reality that can be regarded as the final „truth‟, and possibly a grand theory that could be used to understand the reality (Giddens 1974, Morick 1980, Simon 2005).

This realist view forms the ontological basis of the philosophy of science known as „positivism‟. Given its great success in natural science, positivism has been the most popular approach to pursuing knowledge in the social sciences since the 1970s (Chua 1986a, Gaffikin 2008). It is widely understood that this is the intellectual tradition of the most influential academy in economics – the University of Chicago, where Milton Friedman led. To those who believe in positivism, the reality of human societies (the markets in the case of neoliberalism), like the natural world, has a static structure in which a final or absolute law (similar to the law of gravity in physics, for instance) exists to coordinate the constituents of the markets. The law, according to neoliberals, is a law of market competition through voluntary exchange, which

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is believed to bring about the most efficient economic outputs and hence the greatest economic benefits to all.

This is a very constructivist view of understanding the world, and it has been increasingly challenged in the social sciences (Gaffikin & Aitkin 1982, Tinker et al. 1982, Dillard 1991, Gaffikin 2008). The most distinctive idea among the alternative views of realism is often described as „social constructionism‟, which has been discussed fairly frequently within certain branches of sociology and philosophy for some decades (Schutz 1967, Blumer 1969, Gadamer 1975, Tinker et al. 1982, Chua 1986b, Dillard 1991). The fundamental difference is about the role that human beings play in the reality construction. To quote Tinker et al. (1982, p. 169), it is about “verifying propositions involving man-made intangibles and constructs”. Social constructionists believe that instead of being real and separated from human beings, the reality is socially constructed; people are no longer passive or outside observers of reality, but active participants whose actions objectify social reality (Chua 1986a).

The involvement of human agents means that social reality is no longer single and absolute. As has been recognised by many social theorists (e.g. Marcus 1968, Habermas 1987), a construction of reality is essentially constituted through the meanings people ascribe to it, and perpetuated by people acting on their interpretations and knowledge of it. As Chua (1986b, p. 584) writes, “human action is such that what we take to be an action, and even the „proper‟ description of it, is internally related to the interpretations that are intrinsically constitutive of it.” Implicating this philosophy in the context of neoliberalism, the critical question is not „How do markets operate?‟, but „How are they believed to operate?‟

Social constructionists believe that human beings also have inner potentialities that are alienated through restrictive mechanisms (Marcus 1968). The construction of reality is seen as an ongoing, dynamic process that needs to be understood as a result of countless human selections, rather than as laws fixed by divine will or nature. The establishment of a grand theory, such as the liberal theories of „market freedom‟ or the „invisible hand‟, is 70

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considered by many social scientists to be a mystery47 (Tinker et al. 1982, Skinner 1985).

3.2.5.2 Political Nature of Neoliberal Policies

One of the major consequences of adopting this positivist approach is the neglect of the social context in studying a social phenomenon. This is a view that has been advanced by many critical social theorists (Tinker et al. 1982, Hopwood 1983, Andrew 2000, Lehman 2005, Gaffikin 2008). Trying to be „value-free‟, and hence more „scientific‟, positivism attempts to reduce reality into measurable representations, such as numbers in accounting research. The broader context of social, historical and political factors, which are hard to measure in a positivist sense, draws no attention in a „scientific‟ study. Neoliberal theories, this thesis argues, preserve this feature leaving its political nature untouched, either accidentally or intentionally. While preaching the technical virtual and economic benefits of unfettered markets, neoliberals leave the other significant aspect – the political nature and hence the practical consequence of neoliberal policies – largely unaddressed. This is a matter that has been increasingly challenged by critics. As has been claimed by Clarke (2005, p. 58), neoliberalism “is not merely an intellectual fantasy, it is a very real political project”.

Within this project, according to the critics of neoliberalism (Clarke 2005, Munck 2005, Shaikh 2005, Harrison 2006, Robinson 2006), modern societies incorporate all sorts of powers, such as monopoly power, class power and state power, that change the way a market functions. As Gamble (2006, p. 28) pointed out, “since all power corrupts, even the most selfless neoliberal government will soon find itself taking decisions which benefit the interests of the state or of corporate interests rather than those of the wider public.”

47 The philosophical issues raised here are vast and comprehensive. They are, however, not the core matters associated with arguments this thesis tries to establish. Instead, this section aims to present a brief introduction only; a deeper analysis may be found in the referenced works. 71

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In the first place, the establishment of markets, or “the making of markets” (Munck 2005, p. 61), has always been a contested political process, and not a natural event, as many neoliberals assert. Karl Polanyi, commenting on the 19th-century Industrial Revolution, proposed that “the emergence of national markets was in no way the result of the gradual and spontaneous emancipation of the economic sphere from governmental control” (Polanyi 1957, p. 258); rather, “the market has been the outcome of a conscious and often violent intervention on the part of government which imposed the market organisation on society for non-economic ends” (Polanyi 1957, p. 258). In the context of contemporary economic globalisation, for instance, the global market cannot be self-developed without institutional supports, such as international rules to ensure intellectual-property protection or trade arbitration, and the construction of this institutional environment is often negotiated among powerful states with unequal terms attached, in such forums as the World Trade Organisation (Munck 2005). Politics play always a significant role in this process; this role will not be overlooked when the actual construction and operation of a neoliberal market in China are evaluated later in this thesis.

To many theorists (Peters 1999, Clarke 2005, Gamble 2006, Robison 2006), those institutional frameworks that ensure the flourishing of markets are ultimately about power and its distribution. This point was clearly made by Robinson (2006, p. 11):

While economic crises and the advance of the market may reshape the political and social landscape, at the same time existing or evolving amalgams of power and interest in turn impose their own agendas on the emerging market state.

While advancing policies of „deregulation‟ (removal of state regulatory systems that intervene in markets), neoliberalism actually reconstructs new forms of regulation with rules and policies that ensure and facilitate the „freedom‟ of the market.

As a result of neoliberal policies, free-trade agreements were set up among nations, capital movement was facilitated across borders and workers were

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exposed to a much more „flexible‟ working environment, within a market- oriented corporate governance model (Munck 2005). All these could be viewed as a shift of power relations between capital and labour, following Kalecki (1943)‟s argument. Kalecki evaluated the political significance of Keynesianism, finding that if governments were committed to policies of full employment and the comprehensive provision of social welfare, labour‟s bargaining power would be fundamentally stronger than the disciplinary power that capital would otherwise display. On the contrary, the spread of neoliberal policies, as this thesis shows next, has indeed led to a surge of the power of capital, particularly financial capital, over labour and production across the world during the neoliberal era.

3.2.5.3 Financialisation and Neoliberalism

One major shift in socio-economic power relations during the neoliberal period was the increasingly prominent role of finance (Epstein 2005, Gamble 2006, Harvey 2007). In political-economy literature (Helleiner 1994, Krippner 2004, Dumenil & Levy 2005, Epstein 2005, Mishel et al. 2007, Palley 2007, Dore 2008, Foster 2008, van Treeck 2009), this systemic process of perpetuating financial interest has often been described as „financialisation‟. The term itself is widely defined. Some refer to financialisation as the ascendancy of „shareholder value‟ as a mode of corporate governance (Crotty 2005). Some use the term to describe the increasing political and economic power of a particular class grouping: the rentier class48 (Dumenil & Levy 2005). Krippner defines financialisation as “a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production” (Krippner 2005, p. 174). More broadly, however, financialisation is understood as the increasing dominance of financial markets, financial motives, and financial institutions in the operation of domestic and international economies (Epstein 2005, Froud et al. 2006, Dore 2008).

48 This term originated from Karl Marx‟s notion of „rentier capitalism‟, in which the majority of income is generated from the ownership of property rather than productive activities. In the context of financialisation, it refers to those whose income is largely derived from the ownership of financial capital but not necessarily from producing anything new in the traditional production and trading sectors. 73

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It is argued that financialisation, neoliberalism and globalisation have determined the characteristics of the world economy since the late 1970s (Epstein 2005). The relationship among these three major phenomena is collaboration. Krippner (2005) believed that financialisation was firmly linked with neoliberalism because the free-market doctrines of Milton Friedman and the Chicago School of Economics reconfigured the ideological and theoretical basis for the increasing deregulation of financial systems and the banking sector that began in the 1970s. Dumenil and Levy (2005, p.17) took a firmer stand: Most, if not all, analysts on the left now agree that neoliberalism is the ideological expression of the reassertion of the power of finance… [Moreover]… although the return of finance to hegemony was accomplished in close connection with the internationalization of capital and the globalization of markets…it is finance that dictates its forms and contents in the new stage of internationalization.

The current research has provided strong empirical indices to demonstrate the rising hegemony of finance in the post-70s period. Crotty (2005, p. 85), for example, reports that in the US, share-market capitalisation as a percent of gross domestic product (GDP) rose from 13.1 percent in 1970 to 185 percent in 1999; the ratio of the profits of financial corporations to the profits of non- financial corporations rose from about 15 percent between the early 1950s and the early 1960s to almost 50 percent in 2001; total credit market debt divided by GDP was about 1.5 from 1961 to 1981; it accelerated rapidly in the decade of the 1980s – from 1.6 in 1981 to 2.3 in 1989. Moreover, the federal budget deficit soared, corporations became loaded with debt due to hostile takeovers and leveraged buyouts, and household borrowing increased. These numbers suggest that the value of financial assets and finance-based income as a percent of GDP has increased dramatically in many countries across the world. This is also supported by Huffschmid‟s (2008) finding that world nominal GDP and the value of the capitalisation of world share markets were about the same size in 1980, whilst by 2006 the latter had become 3.5 times larger than the former.

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The surge of financial capitals has expanded further with the recent proliferation of financial instruments. According to the March 2007 49 Quarterly Report from the Bank for International Settlements (BIS), trading on the international derivatives exchanges in the fourth quarter of 2006 reached $431 trillion, which equals roughly $1,200 trillion a year (Bank for International Settlements 2007a, p. 24). This was about 92 times the US GDP in 2006, which was only $13.18 trillion (Bureau of Economic Analysis 2007, p.30). By any measure, derivative markets have outstripped all traditional financial transactions, such as bank lending and securities and insurance. Dodd (2004) discovered that in 2004 over-the-counter (OTC) contracts amounted to $197 trillion and exchange-traded derivatives to another $36 trillion, giving a total of $234 trillion; by June 2007, the figure for OTC contracts alone had grown to $516 trillion, whereas world GDP in 2006 was calculated to be $66 trillion at purchasing-power parity (Dore 2008). In other words, the world‟s GDP was only one-eighth the figure for outstanding derivative contracts.50

This thesis argues that what is behind this massive financialisation process is a systematic attempt to convert all value (tangible or intangible, present or future) into exchangeable financial instruments, such as the securitisation of government debts, off-balance-sheet financing, tradable corporate bonds and the packaging of mortgages and consumer credit into securities, options and many other financial derivatives. Those financial innovations, together with creative accounting, have been able to transform any type of fixed asset into liquidated financial instruments, which are immediately exchangeable in the financial markets; or turn liabilities into assets and/or equities by expanding their span into the future. A common feature of all these „advanced‟ techniques is their extreme sophistication, which not only is incomprehensible to many people, but also poses great fundamental risks to the macro- economy.

49 This is the time right before the 2007 subprime crisis.

50 The above statistics are far from exhaustive; more evidence can be found in many other studies, such as Palley (2007), Foster (2008) and Epstein (2005). 75

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This comprehensive financialisation has insinuated the uncertainty of financial markets and its associated volatilities into the whole economic system, which leads inevitably to macroeconomic instability. It is believed that an inherent feature of financial markets is a short-term focus on higher returns and riskier investments (Keynes 1936, Parenteau 2005). As Boogle and Sullivan (2009, p.22 ) warned, “any system whose revenue depends upon persuading investors to trade actively is, by definition, going to focus on short- term speculation”. During the neoliberal era, the world economy has witnessed common phenomena created by financialisation: The speculative and excessively liquid financial flows create debt-laden balance sheets, overly short-term perspectives, volatility and mispricing of important asset prices, including exchange rates, and subsequent misallocation of resources and unstable economic growth (Epstein 2005, p.12). The overriding influence of financial capital over other non-financial sectors makes the whole economy financially vulnerable. The best example is the current (2007-2011) GFC, which was triggered by defaults in only a very small fraction (subprime-mortgage) of the financial sector.

At the micro-level, the financialisation process has enormous influence on managerial behaviours in non-financial companies (NFCs). A major shift, according to Crotty (2005), is from viewing large NFCs as integrated combinations of relatively illiquid real assets pursuing long-term growth and innovation, to a „financial‟ portfolio of liquid capital seeking immediate returns from the financial markets. It is believed (Crotty 2005, Coles et al. 2006, Boogle & Sullivan 2009) that this approach has brought about fundamental changes into NFC management: from valuing long-term success to shortened planning horizons that undermine the sustainability of healthy economic growth. The inherent nature of capital as perpetuating higher returns and dominating production (Marx 1894) has driven NFCs to focus on raising their return on equity, or in other words, pursuing „shareholder value‟.

On the one hand, the spreading use of financial incentives for chief executive officers (CEOs), such as share options, has tended to align the interests of those top decision-makers with those of institutional investors. Crotty (2005) found that the incomes derived from exercised share options constituted about

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22 percent of the earnings of the top 100 CEOs in 1979; this increased substantially to about 50 percent in the late 1980s, and to 63 percent during the financial boom years of 1995 to 1999. Meanwhile, the remuneration package of top CEOs rose from $1.26 million in 1970 to $37.5 million in 1999 (Piketty & Saez 2001). An article in the Wall Street Journal (Quoted in Crotty 2005, p. 94), stated:

The incentives to do almost anything to increase the stock price were huge. And the incentives weren‟t to increase profit and share prices over a decade or two, but rather to increase profits – never mind if they have to be restated later – just long enough for executives to cash out.

Managers are also constrained, on the other hand, by the possibility of a takeover from the markets if they fail to maximise returns (Palley 2007). All sorts of financial innovations, such as leveraged buyouts and private equity investment financed by junk commercial papers, are created to measure management performance and facilitate this kind of financial takeover. The huge turnovers of such transactions, according to many scholars (Morin & Jarrell 2001, Palley 2005, van Treeck 2009), contribute suspicious value to real income flows and physical investment at the macroeconomic level, and at the same time compelling managers to satisfy the interests of shareholders, or in other words, the owners of capital.

Also, financialisation contributes directly to the increased income inequity that has marked the neoliberal era (Crotty 2005, Harvey 2005). Crotty (2005) argued that by responding to the pressure from financialisation, NFCs cut wages to workers which led to wage stagnation and widening income inequality. For instance:

The median real wage of all US workers at the end of the 1990s was little changed from its value in 1973 (while the median real wage for male workers was still below its 1973 level), the ratio of the pay of top managers to that of average workers exploded. For the CEOs of the 100 largest corporations, this ratio rose from 38 in 1970, to 101 in 1980, to 222 in 1990, and finally to the rocky level of 1,044 in 1999 (Piketty & Saez 2001, Table B4). (Crotty 2005, p. 94)

With the exception of NFCs, the wages of many professionals in financial markets are much higher than their peers. For instance, the top 20 hedge-

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fund managers earned more than all 500 CEO‟s of the S&P 500 in 2005 (Kaplan 2008).

The process of financialisation has been viewed by some (such as Epstein 2005) as a carefully planned and well-organised project pushed by economic and political elites working closely with neoliberal governments to develop policies that ensured the free mobility of financial capital. In a de-regulated global market, capital is freed away from inflexible environments, such as those with strict labour protection or high taxation. This has changed the economic structure in a more fundamental way. Robison (2006, p. 13) wrote:

It was a central feature of the neo-liberal revolution in the 1970s that the weight of power and influence in business within America shifted from the old manufacturers of the Northeast to new sectors of capital that operated more specifically in the global arena, especially in the finance and banking sector and also including the resource and energy corporations and contractors in infrastructure projects, based predominantly in the West and the South.

Similarly, Harvey (2005, p. 33) wrote:

While the slogan was often advanced in the 1960s that what was good for General Motors was good for the US, this had changed by the 1990s into the slogan that what is good for Wall Street is all that matters.

3.2.5.4 Survival of the Fittest

Another critical impact of neoliberalisation is the increasing likelihood of market failures such as monopolies. In theory, unfettered market competition favours more economically advanced and/or politically powerful parties, as has been pointed out by Shaikh (2005, p. 43):

It is not the absence of competition that produces development alongside underdevelopment, wealth alongside poverty, employment alongside unemployment. It is competition itself. Free trade between nations operates in much the same manner as competition within a nation: it favours the strong over the weak.

From this perspective, the neoliberal approach pushing for unfettered free trade and global markets can be viewed as benefiting most the advanced firms in the rich and powerful countries. Polanyi (1957) had warned in his famous 78

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book The Great Transformation about letting the free-market mechanism be the sole director of the fate of the social and natural worlds. Polanyi (1957) advocated strongly for state legislation to regulate markets and thus protect societies. To neoliberals, however, any increased economic inequality or deteriorating social conditions can be regarded as a trade-off for the sake of entrepreneurial innovation or economic growth, and the failures of certain classes are considered to be the result of personal, cultural and political incompetence (Harvey 2005). Harvey (2005, p. 157) illustrated that “in a Darwinian neoliberal world, the argument went, only the fittest should and do survive.”

3.2.5.5 Increasing Social Inequality

Critics have said that while it has improved the economic development of certain sectors and countries, neoliberal competition has broadly failed to stimulate worldwide growth; rather, it has enhanced the polarisation in wealth distribution (Harvey 2005, Klein 2007). By referring to some works on globalisation51, Harvey (2005, p. 154) indicated that

Aggregate global growth rates stood at 3.5 per cent or so in the 1960s and even during the troubled 1970s fell only to 2.4 per cent; but the subsequent growth rates were only 1.4 per cent and 1.1 percent for the 1980s and 1990s; and the rate had barely touched 1 per cent since 2000; almost all global indicators on health levels, life expectancy, infant mortality, and the like show losses rather than gains in well-being since the 1960s (up to 2005).

Sociologists such as Klein (2007) and Ong (2006) attributed the catastrophic social losses occurred in Eastern Europe and South American during the neoliberal era to the neoliberal „shock therapy‟ imposed by the IMF and World Bank. Harvey (2005, p. 154) described such deterioration in the case of Russia, where “per capital income declined at the rate of 3.5 per cent annually during the 1990s; a large proportion of the population fell into poverty and male life expectancy declined by five years.”

51 For example, the World Commission on the Social Dimension of Globalization, A Fair Globalization: Creating Opportunities for All (International Labour Office, 2004); United Nations Development Program, Human Development Report, 1999 and Human Development Report, 2003. 79

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It is further pointed out (George 1988, Wade & Veneroso 1998, Clarke 2005, Harvey 2005) that some of the „successes‟ observed – the fast economic development in certain areas – have been at the expense of others, due to global-level neoliberal policies. One example was the IMF‟s „bail-out‟ plan, which was designed to resecure developing countries during the debt crisis of the 1980s. At the time the significant rate increase by the Federal Reserve had not only directly accelerated the debt crisis in developing countries, but also provided advanced Western economies, such as the US, a chance to dispossess assets through neoliberal reconstruction plans when those developing countries were forced to open up their domestic markets. Wade and Veneroso (1998, p. 20) wrote:

Financial crises have always caused transfers of ownership and power to those who keep their own assets intact and who are in a position to create credit…there is no doubt that Western and Japanese corporations are the big winners…. The combination of massive devaluations, IMF-pushed financial liberalization, and IMF-facilitated recovery may even precipitate the biggest peacetime transfer of assets from domestic to foreign owners in the past fifty years anywhere in the world, dwarfing the transfers from domestic to US owners in Latin America in the 1980s or in Mexico after 1994.

Harvey (2005)observed that debt crises in individual countries, which had been uncommon during the 1960s, became frequent during the 1980s and 1990s; since 1980, it has been calculated that “over fifty Marshall Plans (over $4.6 trillion) have been sent by the peoples at the Periphery to their creditors in the Center” (Harvey 2005, p. 162).

In every financial crisis or economic downturn, the free market principle has always been a central issue for debate. For example, the Asian financial crisis in late 1990s was viewed in two completely different ways: Western observers interpreted it as the outcome of reckless borrowing and lending, the building of major infrastructural projects and inadequate market functions in the tiger economies; what was needed, accordingly, was to impose neoliberal rules of global market efficiency through the IMF (Ong 2006). Asian observers, however, pointed out that the global bankers and institutions like the World Bank had launched neoliberal projects in Asia for decades, which implied a close relationship between the crises and neoliberal policy. Politicians like 80

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Malaysia‟s Mahathir (1997, quoted in Ong 2006, p. 93) preferred to blame international financiers like George Soros, whom Mahathir demonised as anti- Asian, and “anti-poor countries”:

We are told that we must open up, that trade and commerce must be totally free. Free, for whom? For rogue speculators. For anarchists wishing to destroy weak countries in their crusade for open societies, to force us to submit to the dictatorship of international manipulators. We want to embrace borderlessness, but we still need to protect ourselves from self- serving rogues and international brigandage.

Interestingly, a similar debate resurfaced in the economic meltdown driven by the US sub-prime crisis in late 2007. Political leaders and notable economists had to come forward once again to defend the free market ideal52 (Leonard 2008).

Neoliberal reforms within a nation also exhibited a similar polarising effect concerning wealth distribution. A major agenda of neoliberalism, as has described, is to withdraw the state from social-welfare provision such as social housing, education, health care and pensions, to free the market from state intervention. An immediate effect of this approach is to make ordinary people more vulnerable to lack of basic services such as medical care. A less-direct impact of neoliberal policies on increasing income equality occurs during the process of privatising public assets (Harvey 2005). A large number of workers often become redundant to the interest of powerful corporations when wealth is covertly transferred from once-publicly owned to private property. Many socialists doing research on the social impacts of neoliberalism (Wang 2003, Harvey 2005, Ong 2006, Klein 2007) have noted the emergence of several new processes during this process: huge remuneration to CEOs of financial corporations; individuals acquiring immense wealth because of close ties to state power, such as the Suharto family in Indonesia or the newly emerged

52 In the 2008 G20 meeting in Washington, the US president George W. Bush called on world leaders not to abandon free-market capitalism, insisting that it was not responsible for the international financial crisis. While he acknowledged that critics were “equating the free enterprise system with greed, exploitation and failure”, Bush asserted that “the answer is not to try to reinvent that system…. It is to fix the problems we face, make the reforms we need, and move forward with the free market principles that have delivered prosperity and hope to people around the world…. And the surest path to that growth is free markets and free people.” (Leonard 2008, n. p.) 81

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Chinese entrepreneurs; or reallocation of extreme wealth to those who had privileged access during the privatisation of public assets, such as Russia‟s notorious oligarchs or „the princelings‟ in China.

These redistributive effects and increasing social inequality can be further supported by some empirical data. Harvey‟s (2005, pp. 15-19) work provides striking statistics:

In the US, for example, the share of the national income taken by the top 1 per cent of income earners was 8 per cent by the end of the World War II and stayed close to that level for nearly three decades… after the implementation of neoliberal policies in the late 1970s, this number soared to reach 15 per cent by the end of the 20th century… In the UK the top 1 per cent of income earners have doubled their share of the national income from 6.5 per cent to 13 per cent since 1982… globally while the income gap between the fifth of the world‟s people living in the richest countries and the fifth in the poorest was 74 to 1 in 1997, up from 60 to 1 in 1990 and 30 to 1 in 1960.

Similar evidence has also been provided by other research (Johnston 2005, MacGregor 2005, Cahill 2010), and the argument has been consistent that this trend of extraordinary concentration of wealth and power emerged across the world during the neoliberal period.

In summary, the process of neoliberalisation across different societies was a huge success from the standpoint of the more economically advanced and/or politically powerful parties, both nationally and internationally. Many studies have shown that without proper checks and balances, real competition inevitably rewards the strong and punishes the weak. Across national borders, an unfettered market becomes an ideal environment for the powerful nations to depredate the disadvantaged. Within a nation‟s border, neoliberal markets redistribute wealth and power to economic elites at the expense of those less privileged. Among all the economic unrest and capitalist crises caused by neoliberalism, as Harvey (2005, p. 153) stated, “it is ordinary people who suffer, starve, and even die…rather than the upper classes.”

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3.3 The Impact of Neoliberalisation in China

Although China‟s economic reform has been well researched, this regional event has only recently been examined through the lens of neoliberalism. Some of this influential work has emerged only since the start of the 21st century (Wang 2003, Harvey 2005, Breslin 2006, Ong 2006). Each of these works examines certain aspects of the far-reaching influences of neoliberalism in Chinese society. For instance, Wang (2003) pointed out the neoliberal force that lay behind China‟s intellectual movement, particularly after the 1989 massacre; Ong (2006) adopted neoliberal insights to explore China‟s politics, especially regarding labour and citizenship protections; and Harvey (2005) dedicated one chapter in his book A Brief History of Neoliberalism to explore the socio-economic consequences of neoliberalisation in China. Taking a similar approach, this thesis aims to explore the penetration of neoliberalism into changes in China‟s accounting practices, which has been the most part overlooked in current literature. Before describing Chinese accounting practices in detail, however, it is necessary to provide more information about the broader impacts of neoliberalism in China as part of the essential background for later analysis53.

3.3.1 Income Inequalities

The performance of China‟s economic reform has been extraordinary. By February 2011, China had officially overtaken Japan as the world‟s second- biggest economy (British Broadcasting Corporation 2011). Many people would argue that ongoing economic reform has enabled this profound economic success for China. Behind those impressive numbers, however, is a fundamental socio-economic restructuring with enormous human and environmental costs, which parallel those socio-economic failures that have been witnessed in other regions during the neoliberal era.

53 In order to tighten the focus, this section explains key areas of China‟s socio- economic changes that are related to neoliberalism, instead of providing a comprehensive review of China‟s economic reforms; such a review is beyond the scope of this thesis.

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Along with prominent achievements within the national economy, income inequalities have surged domestically. China‟s GDP per capital ranks only 104th among 179 countries as measured by the IMF in 2008 (International Monetary Fund 2009b). Calculations of the Gini coefficient – an economic concept that measures economic inequality – have indicated that China‟s situation has passed the „alarm level‟54 continued to worsen (Mackerras 2006, Wang, S. 2006). China has been transformed from one of the most egalitarian countries in the world during Mao‟s regime to one of the most unequal, with a widening gap between rich and poor (World Bank 2006, Asian Development Bank 2007).

Studies on China‟s social development have shown that rising social inequality has also become one of the key factors in increasing social instability in contemporary China (Tubilewicz 2006); this instability has even been acknowledged by the strictly censored official media55. Pei‟s (2002, p. 108, as cited in Tubilewicz 2006, p. 6) study on China‟s governance crisis argued that “rising inequality is fuelling public anger against the state and party bureaucracy and stoking the Chinese public‟s perception that only those with privileged access to power benefit from economic reforms.”

A search of the cause of this rising wealth disparity indicates a similar trend to those experienced in other countries when they submitted to neoliberal reforms. In rural areas, hundreds of millions of farmers were left with no land and no job when agricultural land was converted to industrial development (Mackerras 2006). Many of these people had to move to the cities to find a job56. In urban areas, unemployment surged while thousands of SOEs were

54 China's Gini coefficient reached 0.469 in 2006 – higher than any other country in Asia except Nepal, according to the Asian Development Bank (2007).

55 For instance, the top official newspaper People’s Daily noted the following persisting problems: an ageing population; inadequacy of social security; rising unemployment; widening regional inequalities; ongoing environmental degradation; and ecological deterioration (Programme of Action for Sustainable Development in China in the Early 21st Century, People’s Daily, 26 July 2003, p. 2).

56 Each year during the spring festival travel season, the number of passenger journeys has exceeded the population of China, hitting 2.26 billion in 2008 (National Bureau of Statistics of China, 2008), which has been called the largest annual human migration in the world. This has created dreadful challenges to China‟s transportation 84

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closed or restructured during the privatisation process. According to Harvey (2005, p. 144), “between 1998 and 2002, 27 million workers were let go from SOEs as their numbers fell from 262,000 to 159,000.” Those lucky enough to find work were still exploited as proper regulatory protections for workers were not enacted or enforced. Besides suffering from the lack of welfare and pension obligations on the part of enterprises, Chinese workers have been paid at the lowest possible level in comparison to other developing countries providing similar labour resources. For example, hourly wages in textile production in China in the late 1990s stood at 30 cents, compared to $2.75 in Mexico and South Korea, around $5 in Hong Kong and Taiwan and more than $10 in the US (Dicken 2003, p. 332). These incredibly cheap labour costs have enabled China to win against other low-cost countries such as Mexico, Indonesia, Vietnam and Thailand as the „world factory‟ (Deloitte 2003)57.

Widespread labour abuse in China is also commonly reported in the media. A typical example is the Foxconn suicides: in 2010, where 18 workers attempted suicide and 14 succeed due to the inhumane and abusive management style in the Foxconn factory58. In spite of profound anger from wider communities, there was no official inquiry or any form of regulatory sanction initiated by the government. This tragedy is indicative of the widespread absence of regulatory protection for workers in all sectors in China. The great flexibility in the Chinese labour market, as reflected through extremely cheap labour with minimum regulatory costs, however, ensures the maximisation of corporations‟ interests – ideal for a neoliberal economy. Based on Harvey‟s (2005) argument that neoliberalism requires greater flexibility in the labour system. A major reason for this travel is that those rural workers who work in big cities need to go home for family reunions, and the spring festival provides the only chance each year for them to see their family.

57 According to the Deloitte research study, China produces more than 50 percent of the world‟s cameras, 30 percent of air conditioners and televisions, 25 percent of washing machines, and almost 20 percent of refrigerators – and the list goes on.

58 Foxconn International Holdings Ltd is a multinational subsidiary of a Taiwanese company – Hon Hai Precision Industry Co. Ltd. The suicides occurred in Foxconn factories in Guangdong Province between January and November 2010. There was an 83-page report was produced jointly by 20 universities in Hong Kong, Taiwan and mainland China, using evidence gathered from interviews with 1,800 workers at 12 Foxconn factories that revealed the extremely harsh working conditions (see „Foxconn factories are labour camps: Report‟, South China Morning Post, 10 October 2010, p. 1). 85

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market with a large, easily exploited and relatively powerless labour force, China certainly qualifies as a neoliberal economy.

On the other end of the social scale is the rapid accumulation of wealth by a small group of people during the transformation into a „freed‟ market economy. This happened, as Harvey described (2005, p. 145), “in part via a combination of corruption, hidden ruses, and overt appropriation of rights and assets that were once held in common.” As public assets are „restructured‟, such as the privatisation of SOEs, managers who themselves were party members or had privileged relationships with the party were given significant portions of the shares (Shi 2003). The marketisation of major social welfare provision such as housing, health care and education offers new opportunities for a few to accumulate immense wealth.

Real-estate development provides an example. Because China maintains strictly a public ownership system on land, no individual holds title to the land. This gives government officials power to expel urban residents or peasants from the property, and individuals have no grounds to defend themselves. During huge urban infrastructural projects, the economic benefits often flowed to those with power while the individuals who were expelled bore the costs (Harvey 2005). There have been riots and protests across China over the land seizures; for instance, “the Chinese Ministry of Land and Resources reported that 168,000 cases of illegal land expropriation had occurred in 2003” (Gilboy & Heginbotham 2004, p. 258), and So (2007, p. 570) reported that “34 million peasants have been dispossessed of their holdings” since 1987. A study prepared by the Congressional-Executive Commission on China (CECC) – an organisation created by the US Congress in 2001 to monitor social development in China – showed that:

Unlawful land seizures and embezzled compensation payments led to numerous land disputes…. In 2004, public security authorities reported 74,000 public protests involving more than 3.5 million people, and a seven-fold rise from the 10,000 protests recorded in 1994. In October 2004

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alone, more than two million farmers reportedly took part in more than 700 protests59. (Congressional-Executive Commission on China 2005, n. p.)

Research (Wang 2003) has proven that a significant amount of national property was transferred „legally‟ and illegally to the personal economic advantage of a small minority during similar reforms.

As the government has withdrawn from its responsibility of providing public housing 60 , speculation in real-estate markets has surged, particularly in urban areas. In contemporary China, the housing price has escalated beyond what common people can bear. In Beijing, for example, according to the Chinese National Bureau of Statistics (NBS), in 2007 the average housing price in Beijing was RMB11,553 per square meter, while the average earnings of employed persons was RMB45,823 per year (National Bureau of Statistics 2008)61. It takes an average of 48 years for ordinary people to afford a house (100 square meters) if they spend their income only on basic food and clothing62. This is true not only for Beijing: housing prices have been rising exponentially across all Chinese cities over the past 10 years, even during the global economic downturn (Powell 2010).

The housing market, along with many others, such as medicine, education and infrastructural construction, has enabled some, particularly those agents of state power, to become extremely wealthy. In its World Development Report

59 These protests often turned violent in response to government crackdowns. For example, in November 2004 the government sent out over 10,000 troops and police officers to control a demonstration involving more than 100,000 farmers angry over a hydroelectric project and related land confiscations. In June 2005, hundreds of armed thugs linked to a local government project reportedly killed 10 villagers and seriously wounded more than 100 while trying to evict them from their land in Henan province (Congressional-Executive Commission on China 2005, n. p.).

60 During the Maoist era, most housing was provided by the government through SOEs after the CCP converted private land ownership to public during the 1950s.

61 The average housing price in Beijing increased to RMB 19,679 per square meter in 2010 (more than 70% over 2007), whilst the average earnings of employed persons was RMB50,415 per year (an increase of only about 10% over 2007) (available from: http://www.stats.gov.cn/tjsj/ndsj/2010/indexch.htm, accessed 28 April 2010).

62 This calculation includes only the necessary expenditure on food and clothing, which according to NBS (2008) occupy 36.29 percent and 10.42 percent, respectively, of urban households‟ annual living expenditure.

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2006, the World Bank described China as one of the countries with highest income inequality in the world (World Bank 2006). The newly formed economic elites have proven to be those with the most political power (Far Eastern Economic Review 2007) 63 . A survey conducted by the official newspaper People’s Daily online, although in its English version only, actually reported in 2006 that “48.5 per cent of China‟s richest entrepreneurs were CCP members” (People's Daily 2006, n. p.). The CCP has apparently transformed from the one that “stood alongside the workers in their fight against capitalist exploitation” to the one “fighting shoulder to shoulder with the cold-blooded capitalists in their struggle against the workers” (Cody 2004, p. A01).

3.3.2 Social Welfare Provision

Another issue is the regulatory changes in social-welfare provision in China that comply with the policy implications of neoliberalism. In addition to the immediate impacts on tens of millions of workers who were laid-off in China, the closure, restructuring or privatisation of thousands of SOEs significantly damaged the welfare of ordinary Chinese people. Since the establishment of People‟s Republic, the CCP has applied a „work unit‟ system to maintain state control over society (Yip 2006). Under the system, workers were bound to their work unit for life. Each work unit not only provided jobs but also created various institutions for welfare provision, including housing, child care, clinics, shops, services, post offices, etc. The influence of a work unit on the life of an individual was substantial, as permission had to be obtained from the work units before undertaking everyday events, such as travel, marriage and/or having a child 64 . The rules have effectively constrained the social mobility of ordinary Chinese people and hence ensured the party‟s severe control. This system was integrated into all urban state agencies, including factories, hospitals and schools, and operated as a multi-functional „miniature

63 Far Eastern Economic Review reported in April 2007 that 3,220 people had personal wealth exceeding RMB100 million in mainland China; of these, 2,932 (over 90 percent) had direct family relationships with high-ranking officials in the CCP.

64 As an example, the requirement to obtain permission from one‟s work unit to marry was not abolished until 1 October 2003, and many other requirements, such as the household registration system, are still maintained strictly (Zhu 2009). 88

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society‟ where most of the social welfare costs were paid by the unit, or in other words, the government (Yip 2006).

Without a collective system providing social welfare, such as the one in Australia, ordinary people have to rely on their work units for getting necessary help in housing, education and medicine, etc. The massive privatisation of SOEs since 1980s has systematically changed the old welfare system. The NBS reported that up to 2003, 73.2 percent of the urban employed working population was no longer in state work units (National Bureau of Statistics 2004). Those people have had to seek social security elsewhere, but it has become increasingly rare in a society where the responsibility for it has been shifted from government to the market.

As in other neoliberalised countries, the Chinese government has withdrawn from its direct responsibility by substantially cutting back expenditure in social-welfare provision and „outsourcing‟ it to private business. China now has an exceptionally low budgetary expenditure on welfare supports such as education, health care and social security. For instance, in the 2009 budget, government expenditure on education was 159.85 billion RMB, only 4.5 percent of the total government budget; the expenditure on social security such as pension funds was 274.36 billion RMB, only 7.8 percent of the total government budget (Ministry of Finance 2009a). This is an enormous change given that the majority of those welfare costs were covered by the government before the economic reform. The following section uses the case of health care to illustrate the grim results of applying neoliberal policies.

Before the economic reform, China had had great success in its health-care system. China had used 2 percent of the world‟s health resources to provide 22 percent of the global population with accessible basic health care prior to the 1980s (Bloom & Gu 1999). Since the reform, however, huge disparities in health and health care have been observed between rural and urban areas, regions, and population groups. Some figures from the National Health Economics Institute (2005) shed further light on this: between 1978 and 2004, the growth rate of health expenditure was 12 percent, higher than the GDP growth (9.4 percent); however, the proportion of government expenditure in 89

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total health expenditures declined from 32 percent in 1978 to 17 percent in 2004; government budget for health expenditure in 2004 was 129.36 billion RMB, only 4.5 percent of the total government budget and 0.81 percent of China‟s GDP for that year. In the 2009 budget, health expenditure fell to 85.45 billion RMB, only 2.4 percent of the total government budget (Ministry of Finance 2009b). The welfare health system supported by public funds now essentially exists in name only because people must pay for most medical services on their own. In a report prepared for the World Health Organisation (WHO), Meng (2007, p. 1) wrote that in China‟s public health-care system, the “majority of finance for both curative and preventive services come from out- of-pocket payment”.

Without government subsidies, individuals especially the poorer patients now suffer heavier financial burdens when they need to seek health care. For instance, “in 2003 the average stay in a Ministry of Health-run hospital in Beijing costs almost 11,500 RMB, equivalent to about half a year‟s salary for the typical city resident in China” (Murphy 2003, p. 25). A survey conducted by the Centre for Health Statistics and Information (CHSI), Ministry of Health, showed that about 13 percent patients refused to undergo any treatments when they were ill, about 5 percent higher for rural patients than for urban patients; nearly 40 percent of those refusing cited financial difficulties. Nearly 30 percent of patients did not use inpatient care for the same reason when they were advised by doctors to stay in hospital (Center for Health Statistics and Information 2004). The same survey revealed that in rural areas, the proportion of health expenditures in total non-food expenditures was 28.9 percent for the lowest-income families, but only 17.6 percent for the highest- income families. One-third of poor rural families cited disease expenditure as a contributing factor to their poverty in 2003 in China.

Without government assistance, China‟s private health-insurance schemes are regarded as a failure. According to statistics of Ministry of Health (cited from Center for Health Statistics and Information 2004, p. 12), between 1993 and 2003, about 70 percent of the Chinese population had no any type of health insurance at all; in 2003, about 45 percent of the urban population and 80 percent of the rural population were not covered by any health insurance 90

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schemes; in 2003, the Cooperative Medical Scheme (CMS) – the major social health insurance scheme – covered less than 10 percent of the rural population.

Efforts to reform the health-care system have been continuing, although with questionable effects. In 2005 a report by the Development Research Centre under the State Council harshly criticised the health-sector reforms and concluded that reforms over the past decade had been basically unsuccessful (Xinhua news agency 2009). A report from Xinhua (the official Chinese news agency)65 noted:

Soaring medical costs in recent years have plunged many rural and urban Chinese back into poverty as a result of the government's failure to implement an adequate medical insurance network after it cut subsidies for medical costs in 1992… According to a recent survey by the National Bureau of Statistics (NBS) on „unsafe‟ factors upsetting the public, rising medical costs have become the top concern among Chinese people. The high costs usually result from expensive medicines. (Xinhua news agency 2008, p. 1)

The success of any future reform, however, is questionable if the government still refuses to fund the necessary expenses and supports.

3.4 Some Reflections

This chapter has briefly reviewed China‟s economic reform and connected it back to a broader neoliberal context. Although maintaining certain „Chinese characteristics‟, the construction of a market economy in China increasingly incorporates neoliberal elements: 1) the establishment of „markets‟ in an essentially centrally planned economy adhering to public ownership; 2) the expansion of markets by fostering international trade and opening up domestic markets for overseas capital; 3) the massive privatisation of public assets and SOEs; 4) the substantial withdrawal of the government from social- welfare provision; 5) active participation in the world economy by seeking membership in international organisations such as the WTO; and 6) the

65 This news was reported in the English version; the same content could not be identified in its Chinese version. 91

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voluntary convergence of domestic standards with international ones, such as the IFRS. These activities have sent a clear signal that China wants to change the role that the government plays in the economy and delegate its responsibility to a more „freed‟ market mechanism.

China‟s path has been not unusual compared to approaches adopted by many other countries in solving similar economic difficulties at a similar time. The „stagflation‟ across the world in the 1970s generated conditions that made neoliberal principles more attractive than the then-dominant Keynesian policies. Following the lead of major economies such as the Thatcher government in the UK and the Regan administration in the US, the rest of the world has been experiencing a widespread, persistent and deepening neoliberal transformation. Neoliberal values have become kind of „commonsense‟ criterion to judge practices across a vast range of social and political activities.

Although China has not explicitly preached the perceived benefits of neoliberal approaches for its economic revolution, and certainly has not officially used the term „neoliberalism‟, it is not difficult to see the influence of the force of neoliberal movements on China‟s transition. Internally, the devastating social conditions at the time before the economic reform initially pressed China to find a way to pull the nation out of economic chaos. Externally, the neoliberal solution officially endorsed across advanced capitalist societies has had an inevitable appeal to China. The fact that Milton Friedman was invited by Deng in 1980 and again in 1988, along with other economic gurus from the US, to advise on China‟s economic reform, and the fact that both of the meetings were highly publicised and praised by Chinese official media (Friedman & Friedman 1998), have certainly indicated the willingness of Chinese government to embrace this global trend. Some influential studies, such as Wang (2003), Harvey (2005), Breslin (2006) and Ong (2006), have indeed interpreted Chinese socio-economic reforms through the lens of neoliberalism.

A major feature of neoliberalism that distinguishes it from classical economic liberalism is the role governments play in maintaining an institutional arrangement that ensures a „freed‟ market. The reality of such arrangements 92

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has turned out to be in favour of the most economically and politically powerful parties. Across borders, the interests of the most powerful nations and the multinationals have prevailed at the cost of those less advanced. Domestically skyrocketing economic inequality has taken place and new classes of economic elites have been reconstituted.

A significant achievement of neoliberalism has been the strong increase in financial capital and its power in contemporary global economy. An immediate reason for this appears to be mass deregulations in financial sectors through applying neoliberal policies. More fundamentally, it is also a result of the successful proliferation of idea that free markets are benevolent; this idea has become a driving force in the facilitation of „freed‟ global markets.

In this context, the ongoing efforts of promoting a single set of financial reporting standards globally can be viewed as an expansion of the driving force of neoliberalism in the accounting field. Neoliberals want free mobility of capital between sectors, regions and countries. They therefore see it as crucial to remove all barriers, such as “tariffs, punitive taxation arrangements, planning and environmental controls, or other locational impediments” (Harvey 2005, p. 66). The „locational impediment‟, from an accounting perspective, is the different domestic accounting standards that different countries adopt; this impediment is considered to add substantial costs and „unnecessary‟ hassles for multinationals seeking cross-listing or financial capitals pursuing a freer mobility in global capital markets (Gaffikin 2008). A convergence of national accounting standards with the IFRS will effectively eliminate this extra burden and, more importantly, make a significant step towards a more „freed‟ global capital market.

The real-life stories of neoliberalism, however, have introduced significant doubts as to the proclaimed benefits of „free-markets‟. In theory, the particular institutional arrangements that neoliberals advocate are indeed different forms of regulation, and this particular form of regulation cannot be freed from the influences of vested interests of economical and political powers. The result of this influence has been manifested through those social failures, such as soaring income inequalities, that have been revealed by the studies examined 93

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in this chapter. It is, therefore, critical to reconsider neoliberal reform of globalising financial reporting practice, if the possible social damages are to be avoided in this globalisation project.

Although a vast amount of literature has challenged the perceived benefits of globalising IFRS, the arguments, as has been shown in Chapter Two, remain contestable. There has been a lack of case studies that look at real-world experience, and little research has addressed this from a neoliberal perspective. This thesis fills the gap by providing a case of the penetration of neoliberalism in the accounting discipline, and its possible impacts. More specifically, this thesis, as later chapters exhibit, reveals how the IFRS have been implemented in a Chinese context, the difficulties this has brought to the Chinese accounting discipline and what damages and/or potential harm it has produced.

Chapter Four Methodology

4 Chapter Four: Methodology – Critical Discourse Analysis

This chapter illustrates the methodology this thesis adopts – Critical Discourse Analysis (CDA) – and the rationales for this choice. In a general sense, CDA studies the relationships between discursive practices and wider social and cultural processes in order to reveal how such practices are ideologically influenced by power relations; and to explore how these relationships between discourse and society are themselves a factor that sustains power (Fairclough 1995). CDA is a topical area that has been developed and elaborated quite comprehensively in the discipline of social linguistics (Chouliaraki & Fairclough 1999).

There have been a number of notable writers who have applied CDA in the humanities and social sciences, such as Fairclough, van Dijk, Chilton, Thompson, Wodak and Hodge. While they use different terms, their underlying meanings are similar. For instance, Thompson (1990) defined the CDA framework as A „tripartite approach‟ that considers three aspects of discourse: 1) the production and transmission or diffusion of symbolic forms; 2) the construction of the media message; and 3) the reception and appropriation of the media message. This is similar to what Fairclough (1995) described as a „three-layered framework‟: 1) discourse as text; 2) discourse as discourse practice; and 3) discourse as social practice. Given his significant contribution to this field66, this thesis focuses on Fairclough‟s version of CDA exclusively for its analysis.

Although CDA has established itself internationally since 1980s as a field of cross-disciplinary research and has been widely drawn upon in the social science field (Fairclough 2006), such a synthesis in accounting research has been relatively new because of the traditional isolation of language studies

66 Fairclough has published more than 10 books on CDA since 1989. The theories and arguments of CDA have been consistent in the references (Fairclough 1989, 1992, 1995, 2006) this thesis reviewed. It should also be noted that this thesis makes some specific references to Chouliaraki and Fairclough (1999), which provides some practical examples of applying CDA in social research, and builds upon the same theories as Fairclough‟s previous work. 95

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from other social sciences, and the contemporary domination of positivism in the paradigm. This chapter therefore explains the reasons and significance of using this methodology in this thesis. It then explores the philosophical assumptions and social theories upon which CDA is based, for a fuller understanding of this research method. Finally, this chapter outlines the specific CDA procedures that have been used in this thesis.

4.1 The Reasons and Contributions of Using Critical Discourse Analysis

In Discourse and Social Change, Fairclough (1992, p. 75) asked an interesting question: “what would you call those who participated in the September 11 attacks: Terrorists or Freedom Fighters?” Surely the answers would be very diverse, depending upon different personal understandings and/or political agendas. This reflects a very important question in any kind of social activity – how do people use language or discourse in their social interaction? The language people use in their social communication and representation is the tip of the iceberg. There are far richer insights under the surface than those representational words or discourses. This is perhaps why language analysis has become an important method for studying social and cultural change (Halliday 1978, Fairclough 1989). As has been pointed out by many specialists in sociological and linguistic studies, social questions are in part questions about discourse (Chouliaraki & Fairclough 1999). Accounting research, as one of disciplines in the social science, requires as well a conception of discourse that attends to the relationships between discursive and social change.

This, however, has been widely marginalised in current accounting practises by attempts to embrace only „scientific‟ methods „borrowed‟ from the natural sciences. There has been a tendency to believe that the social content of accounting practises can be reduced to numbers (Chambers 1966, Watts & Zimmerman 1986). As a result, mainstream accounting journals, according to Chua (2007, p. 487), “remain highly committed to a modernist narrative form; replete with models of the design, management and use of accounting numbers that are largely founded on images of economic rationality and

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„scientific method‟.” Statistical and mathematical models have dominated the relevant research area, pursuing objectivity, neutrality, representational faithfulness and quantifiability (Gaffikin 2008). While it is still debateable whether the attempts to emulate the natural sciences have made real contributions in producing explanatory and predictive theory in accounting research, the approach has definitely achieved great success in dominating acceptable research methods (Gaffikin 2008). Whether this is a desirable trend in the profession is yet to be determined.

Mainstream approaches have increasingly received criticism from various perspectives (Tinker et al. 1982, Hopwood 1983, Chua 1986a, Andrew 2000, Rudkin 2002, Young 2005, Gaffikin 2008). Most fundamentally, one prerequisite that needs to be critically re-examined is whether social science should have the same epistemic qualities as natural science. The two types of science have their respective strengths and weaknesses. As has been argued by Flyvbjerg (2001), on the one hand, the social sciences contribute in only a limited way to explanatory and predictive theory; on the other, the natural sciences are unable to conduct a reflexive analysis and discussion of values and interests, which is the prerequisite for enlightened political, economic and cultural development in any society.

There are also fundamental properties of accounting research that prevent it being scientific in the same sense as natural science. First, the world under investigation in accounting research is socially constructed (Chua 1986a). Based on this ontological assumption, as has been addressed in Chapter Three, organisations, economic activities, accounting standards and so forth are constructed by human beings. They are not „things-in-themselves‟ that exist independently of people, waiting to be „discovered‟, such as stars or molecules. Social phenomena are highly contingent and dependent on people for their existence, usage and interpretation (Chua 1986a).

Taking this particular ontological view, the alternative perspectives to mainstream accounting research (Hopwood 1983, Tomkins & Groves 1983, Chua 1986a, Dillard 1991) challenge the dominance of the mainstream positivist studies. They question the capacity of accounting research to achieve 97

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universal results that are statistically sound and proven by „hard data‟, as there is no such neutral and objective world of facts to act as the final arbitrator. Alternative approaches advocate recognition of human factors and influences in accounting studies. There is greater emphasis on the understanding of accounting in the life-world of actors, rather than constructing artificially rigorous models to explain and predict human behaviours (Chua 1986a).

Given the central role of language in all processes of inquiry and knowledge (Gaffikin 2008), a significant feature of these alternative studies is that they draw upon language or discourse associated with the social implications of accounts. Since the 1980s there has been a substantial body of literature highlighting what might be termed rhetorical and ideological dimensions of accounting language (McCloskey 1985, Lehman & Tinker 1987, Hines 1988, Williams 1989, Tinker 1991, Mouck 1992, Arrington & Francis 1993, Shearer & Arrington 1993, Walters-York 1996, Reiter 1998, Young 2003). To a large extent, the literature provides theoretical discussion indicating the significance of an understanding of accounting discourse as a symbolic mediator that has played a powerful role in shaping and constructing accounting and organisational knowledge, practices and structures. Lehman and Tinker have (1987, p. 503) suggested that “discursive accounting practices are more productively regarded as ideological weapons for participating in conflicts over the distribution of social wealth.”

From this perspective, if accounting is viewed as the most important language used in the modern business world (Lavoie 1987, Robson 1992, Bloomfield 2008, Deegan 2010), it is also critical to study it from a language perspective. As widely acknowledged in other social studies, language is not only a vehicle transporting meaning, but conveys cultures and personalities as well (Sapir 1985). Thus it is important to ask questions such as, how do we use this accounting language? What are the „culture‟ and „personality‟ that accounting language conveys? An exploration of these questions provides much more insight into the purpose and meanings constituted by complex discursive processes in accounting as they affect notions of power, hegemony, conflict, class and sustainability from an inter-disciplinary perspective. This type of 98

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inquiry allows an examination of the social implications of accounting practices that has been sidelined in the positivist approach. It enables people to be better informed of the deeper social and political implications of accounting practice, which is salient knowledge for people dealing with the crises in accounting and the integrity of its practitioners such as Enron, Worldcom, HIH and Lehman Brothers.

It should be noted that some accounting literature has examined aspects of accounting language or language used in relation to accounting. To a large extent, they are „textually oriented‟, analysing specific accounting texts such as textbooks (Davidson 2005, Ferguson et al. 2005); annual reports (Beattie et al. 2004, Abeysekera & Guthrie 2005); accounting standards issued by the FASB (Young 2003); and social and environmental reports (Freeman & Stagliano 2002, Livesey & Kearins 2002, Freeman & Jaggi 2005, Laine 2005, Tregidga & Milne 2006). In contrast to this thesis, these studies focus on specific accounting „texts‟, and elaborate less on explicit and systematic methods associated with methodical discourse analysis.

A number of studies within the accounting literature that have adopted CDA emerged mostly after the early 21st century (Gallhofer et al. 2001, Craig & Amernic 2004b, Llewellyn & Northcott 2005, Burchell & Cook 2006, Craig & Amernic 2006, Ezzamel et al. 2007, Ferguson 2007, Craig & Amernic 2008, Ferguson et al. 2009, Cortese et al. 2010, Seal 2010). These studies provide more concrete examples that demonstrate the rhetorical and ideological functions of accounting discourse than those advanced by earlier theorists. For instance, Ding and Graham‟s (2007, p. 560) paper showed “how accounting was used discursively to justify political and economic choices” in the reduction of state-owned stock in China; Craig and Amernic‟s (2006) paper explored how the vagaries of measurement and recognition in accounting were exploited to help sustain a self-fulfilling prophecy of success; Craig and Amernic‟s (2008) paper examined how two accounting performance benchmarks (the operating ratio and free cash flow) were deployed in discourses to help sustain a rhetoric of post-privatisation success67.

67 Section 4.3 provides more details about these studies. 99

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Along a similar line, this thesis studies a social event – the convergence of IFRS in China – through examining relevant discourses among accounting communities. A critical analysis of the discourse helps reveal stories that have been untold or sidelined regarding the implementation of IFRS in China. The uncovered political considerations and power relations associated with this event (e.g. the censorship of relevant news in public media or the timing of selling state-owned shares) provides a timely inquiry into the implications of neoliberal transformation in China‟s accounting change, capital market reform and, more broadly, the marketisation of the Chinese economy.

It should be noted that a full explanation of CDA is beyond the scope of this thesis. Instead, this chapter aims to present a brief discussion of CDA in terms of its relevance to the research topic as the methodological framework. More detailed explanations of CDA can be found elsewhere (Fairclough 1989, 1992, 1995, 2001, 2003, 2006).

4.2 Theorisation of Critical Discourse Analysis

Fairclough (1995) provided a useful definition that encapsulates most other definitions of CDA:

CDA is the study of often opaque relationships of causality and determination between (a) discursive practices, events and texts, and (b) wider social and cultural structures, relations and processes; to investigate how such practices, events and texts arise out of and are ideologically shaped by relations of power and struggles over power; and to explore how the opacity of these relationships between discourse and society is itself a factor securing power. (pp. 132-3)

Batstone (1995) elaborated with a definition of what proponents of CDA actually try to achieve:

Critical discourse analysts seek to reveal how texts are constructed so that particular (and potentially indoctrinating) perspectives can be expressed delicately and covertly; because they are covert, they are elusive of direct challenge, facilitating what Kress calls the „retreat into mystification and impersonality‟. (p. 57)

The above definitions give a preliminary introduction to CDA. A real understanding, however, requires much more depth and clarity. For instance, 100

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in what ways does CDA differ from other forms of discourse analysis, particularly in terms of the range of problems studied and the use of research methods? What are the rationales for these differences? What are the theories on which CDA rests upon? These questions are necessary to fully appreciate the significance of CDA within not only linguistics and language studies but also other social science disciplines, and its particular contribution to this thesis as a methodological framework. The following sections explore these questions.

4.2.1 Different Themes of Critical Discourse Analysis

The major difference between CDA and traditional forms of discourse analysis derives from the different concept of „discourse‟ that CDA centres upon. As recognised by some linguists (van Dijk 1985, Macdonell 1986, Thompson 1990), discourse is a general concept that can be defined differently based on different theoretical and disciplinary standpoints. For example, „discourse‟ can refer to spoken dialogue or written text or other symbolic forms such as visual images used in people‟s communication behaviour (Thompson 1990). „Discourse analysis‟ in this sense focuses on sentences or smaller grammatical units within the discourse itself. Alternatively, „discourse‟ can refer to different types of language used in different kinds of social situations (e.g. „newspaper discourse‟, „advertising discourse‟, „classroom discourse‟, „the discourse of medical consultations‟) (Fairclough 1992). Taking the latter view, the discourse upon which this thesis draws is specified as spoken and written text only.

This thesis emphasises a higher-level feature of „discourse‟ – the organisational feature with reference to Fairclough‟s (1992, p. 4) definition of discourse as “a multi-level social practice”. According to this concept, the linguistics part such as the text itself is just one dimension of „discourse‟ or „discourse analysis‟; a second level is referred to as the „discursive practice‟ dimension, which focuses on interactions between speakers and addressees, or between writers and readers, through the processes of text production and interpretation; the last dimension concerns social analysis, such as the institutional and organisational context of the discursive practice, and the constitutive and constructive effects of discourse on other relevant social practices. This multi- 101

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dimensional concept of discourse, according to Fairclough (1989), enables CDA to combine textual analysis with other modes of social analysis. This combination enables relationships between detailed properties of texts and wider social changes to be assessed in a systematic way. This is an important feature of CDA that fills a gap in traditional linguistic studies where language analysis is treated in very narrow, semantic terms without an adequate connection with wider social and cultural changes (Fairclough 1992). By showing “how discourse is shaped by relations of power and ideologies, and the constructive effects discourse has upon social identities, social relations and systems of knowledge and belief” (Fairclough 1992, p. 13), CDA helps spell out those relationships that are typically not transparent to the people involved. This explains the „critical‟ part of the phrase, which implies a disclosure of hidden connections and causes, and interventions such as providing resources for those who may be disadvantaged.

From this perspective, the „critical‟ approach in this thesis of analysing discourses in contemporary Chinese society contains also a different dimension of significance. People who are directly experiencing life in China (such as the author himself) deal with a world that is under different political control and level of media censorship than those in Western countries. Discrepancies between discourses and their corresponding practices are far wider than what one would experience in a relatively „free‟ society68.

4.2.2 The Philosophical Assumptions of Critical Discourse Analysis

CDA has strong rationales for its particular ways of theorising and analysing language. The following sections aim to specify those theoretical groundings from various perspectives: first, the ontological and epistemological claims it is based upon (i.e., its assumptions about what social life is, and how we come to know about it); and second, the social theories CDA incorporates.

68 The term „free‟ society is not intending to claim an absolute condition within those societies, but only to help draw a comparison here.

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4.2.2.1 Ontological Assumption – An Open System and a Network of Practices

The ontology of CDA can be described as non-realism69, which perceives an open and dynamic reality where any event is governed by simultaneously interactive relations amongst social participants (Fairclough 1995). This assumption is also built upon Bhaskar‟s (1986) idea that the world consists of various constituents, including physical, social, conceptual and linguistic, with generative „mechanisms‟ among them. The operation of the mechanisms is dynamic as one dimension is always mediated by the others, and vice versa, and no single mechanism has determinate effects on all events. This is a view that rejects the stabilised structures of reality claimed by realist ontology.

A major assumption underlying this ontological view is that social life consists of practices; this assumption is common among a considerable number of contemporary social theorists (Bhaskar 1986, Mouzelis 1990, Bourdieu & Wacquant 1992, Giddens 1993). „Practice‟ here means human‟s application of resources in either material or symbolic forms throughout social life, including the specialised domains of the economy, politics and culture in particular times and places (Mouzelis 1990). A particular practice is a particular type of activity that is materialised in a temporal location and time as a result of dialectic connections with different elements of life, within which humans‟ experiences, knowledge and ways of using language to communicate play a fundamental role (Fairclough 1995). According to this assumption, the practice‟s location and relations with other moments of life within the network of mechanisms, and the network itself, are constantly open to change.

This thesis grounds its research on the same ontology: the constituents of our social reality are not isolated from each other; rather they occur within a complex and dialectical network, within which every part is constructively interactive with fundamental understandings that are shaped by language and

69 Fairclough uses various terms to describe this ontological position, e.g. „critical realism‟ or „realist social ontology‟. However, the explanation of the idea shows that what he describes refers to a socially constructed reality, similar to that defined by Chua (1986). Therefore, this thesis uses the term „non-realism‟ to distinguish the concept from the „realism‟ ontology that positivist research assumes. 103

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its effects on human‟s communicative actions. The network and constituents are in a dynamic status, which makes it very difficult to accept that the complexity of the social world can be explained by the simplified, fixed and universally generalisable framework proposed by positivism. A fuller exploration of this, as the next section shows, draws upon another major philosophical issue – the epistemology of CDA.

4.2.2.2 Critical Epistemology: Critical Research and Social Practices

Based on its ontological assumptions, CDA takes an epistemological position that rejects the possibility of an ultimate and universally valid truth. This is a position that is grounded on critical social science, which believes that “the criteria for judging theories are temporal and context-bound”, and “truth is very much in the process of being hammered out and is grounded in social and historical practices” (Chua 1986a, p. 620). Knowledge needs to be evaluated within its dialectical interaction with other social moments in the course of the social practice under investigation, and the evaluation is embedded fundamentally with a communicative or discourse ethics, such as that proposed by Habermas (1984, cited in Chouliaraki and Fairclough 1999, p. 34): “needs (like the value of claims to truth) have to be democratically determined in open and equal dialogue”.

An important epistemological feature of CDA is that it acknowledges that the information, or knowledge, it produces is actively involved in the social practice it theorises, because it provides emancipator power that enables people to make observations and take actions (Fairclough 1995). The aim of CDA, according to Fairclough (1995), is to obtain a dialectical knowledge or understanding of human activities from which this kind of reflexive self- construction can occur. The significance of knowledge is evaluated in terms of the adequacy of its effects on understandings of the social practice in the process of emancipation (Chouliaraki & Fairclough 1999).

CDA also places a strong focus on the role of language, as Chouliaraki and Fairclough (1999) described: social science has a hermeneutic basis – in other words, it needs to ground itself in the symbolic practices of the world. CDA 104

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explicates the dialectical relations discussed above with an emphasis on the constitutive function of discourse in social practices. To do this, CDA steps outside of the text itself and connects the substance of the text to broader social actions. As argued by Chouliaraki and Fairclough (1999), the social world is both the pre-condition of social actions and at the same time the product of social actions, and every moment in this dialectic network is embedded with a power struggle to either maintain or change the social world. In light of this assumption, CDA gives a particular significance to traditional linguistic studies, in that “it is distinct in its capacity to identify structural relations through its analysis of stabilisation as an effect of power and a factor in reproducing relations of power” (Chouliaraki & Fairclough 1999, p. 32).

In accordance with this epistemological assumption, this thesis intends to seek neither an absolute „truth‟ claim regarding the convergence of IFRS in China, nor a finding that could be generalised universally in a positivist way. Instead, it offers a richer explanation or understanding of this event as being a „lived‟ or dynamic experience. It seeks the social actors‟ definition of the situation and analyses critically how this is woven into a wider social framework through the processes and structures offered by CDA. In the critical sense, a further value of the findings is to determine an intellectual ground for those who are engaged within this social practice to seek the changes they want, by clarifying obstacles and identifying dominance that would have been obscured otherwise.

4.2.3 The Theoretical Foundations of Critical Discourse Analysis

As has been illustrated by previous sections, CDA is able to provide insight into relations between discourses and wider social and cultural changes, due to its particular ontological and epistemological assumptions. There are, however, questions that need further explanation and justification; for instance, why does discourse contain the constitutive and constructive effects claimed by CDA? Why would CDA be able to achieve its „critical agenda‟ just by analysing discourse? More specifically, how does this thesis justify itself by using only discourses as data to explore the research questions? This section, therefore, aims to answer these questions by presenting a brief explanation of 105

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the social theories upon which CDA draws, and demonstrates how it has been built upon well-established theoretical foundations.

4.2.3.1 A Dialectical Theory of Discourse

The social importance of language has been raised by many social theorists (Foucault 1984, Habermas 1987, Bourdieu & Wacquant 1992, Harvey 1996). In CDA, the term „discourse‟ is defined as a multi-level social practice (Section 4.2.1). This definition is derived from Harvey‟s (1996) theory of discourse, which argues that discourse internalises in some sense everything in social practices, through its reflexive and transformative function. Given the power of discourse in obfuscating, hiding and misrepresenting other social moments, Harvey (1996) proposes a dialectical view of the social process in which discourse is one moment that internalises five others: power, social relations, material practices, beliefs/values/desires and institutions/rituals. Harvey‟s concept of this relation is important to CDA, as Fairclough (1995) suggested: for instance, if discourses are suspected to be „mere‟ or „empty‟ words, this can be theorised as an absence of internalisation – a separation between the ways in which people act and the ways in which they discursively represent their actions; in other words, the former fails to internalise the latter.

Fairclough (1989, 1992, 1995) also draws upon Foucault‟s earlier studies to explain this dialectical view of discourse. Foucault, according to Fairclough‟s interpretation, regarded discourse as actively constituting or constructing society on various dimensions: discourse constitutes the objects of knowledge, social subjects and forms of „self‟, social relationships and conceptual frameworks. Based on this preposition, discourse always draws upon and potentially transforms other contemporary and historically prior discourses, and any given type of discourse practice results from combinations of others, and is established by its relationship to others (Fairclough 1989).

This kind of understanding implies that discourse is a form of social practice located in a complex and socially interacting network (the ontological underpinning of CDA), rather than purely individual activity, or the fixed variable that positivism would perceive. This forms an important foundation 106

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that is crucial for theorising the particular focus of the investigation in this thesis: conducting research through analysing discourse. First, it supports that discourse is not only a one-way vehicle of representation, but also a system of activities in which social participants may act upon each other; discourse is a central point if the interconnections are to be examined. Second, it proposes a dialectical relationship between discourse and its underlying social structure: the latter is both a condition and an effect of the former. On the one hand, discourse is constrained by social structure in a fundamental way through various factors, such as social class, education, law, norms and conventions, with both a discursive and a non-discursive form. On the other hand, discourse contributes to the constitution of all these dimensions of social structure through its influence in shaping people‟s understanding. The constructive effects of discourse, according to Fairclough (1992, p. 64), are realised through the construction of “what are variously referred to as „social identities‟ and „subject positions‟ for social „subjects‟ and types of „self‟… [and] social relationships between people…[and] systems of knowledge and belief”.

Drawing upon these assumptions, this thesis emphasises the constitutive effects of discourse within the complex system of social practices. Because of the particular role that discourse plays, as theorised by Fairclough and others, the discourse through which the convergence of IFRS is mediated in China as the discursive moment of the social practice under investigation becomes central.

4.2.3.2 Reflexivity and Ideology

The previous section has explored the role of discourse and its implications in social practices. But there are still further questions to be clarified, such as: what makes discourse such an important instance of social practice? What mechanisms or rationales behind the functions does discursive practice generate into social and cultural change?

As discussed in Section 4.2.2.1, according to Chouliaraki and Fairclough (1999), any practice signifies a process in which particular people use 107

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particular resources within particular social relations of production to achieve particular social effects. To various degrees, all practices of social production involve physical resources, such as minerals, and symbolic resources, such as discourse (Collier 1994). An important dimension within all those productive process is, Fairclough (1992) emphasised, that all practices are reflexive, which means that constructions of a practice also constitute part of the practice itself. In CDA, as has been discussed previously, the constructions are framed fundamentally by discourse, and the constructive process forms a reflexive dimension of social production. In other words, people always generate representations of what they do, which is often reflected back to be incorporated into what they do.

Further, Fairclough (1995) explained that all practices have an irreducible discursive aspect: not only that all practices involve the use of language to some extent, but also in the sense that discursive constructions of practices are themselves parts of practices.

CDA connects this reflexive construction function to the notion of ideology given its particular interest in power relations. Fairclough (1989) indicated that ideology was built into various dimensions of the forms and meanings of discursive practices so that discourse, as one moment of social practice, was able to colonise others, depending on how power relations are embraced discursively into relations between discourse and practice. This position draws upon the notion of ideology that Thompson (1984) and Larrain (1979) proposed, which asserts that ideologies are social, and often discursive, constructions that aim to eliminate the contradictions, dilemmas and antagonisms of practices in the interests of various dominations. This is accomplished through a mechanism that Fairclough (1989) described as „colonisation‟ of people‟s lives by various social systems, such as power, money and institutions; this form of „colonisation‟ is partly constituted through the societal order of discourse:

A societal order of discourse is a particular structuring of constituent institutional orders of discourse, and given structuring may be de- structured in the course of social struggle. The social tendencies identified by Habermas can be seen as imposed in struggle by the dominant bloc, 108

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and as involving the de-structuring of previous societal orders of discourse. (Fairclough 1989, pp. 163-164)

Based upon these assumptions, Chouliaraki and Fairclough (1999, p. 27) described ideologies as “domination-related constructions of a practice which are determined by specifically discursive relations between that practice and other practices”. What CDA attempts to point out is that people may find it difficult to discover, or comprehend, the ideological dimensions of their own discursive practices, because ideologies are always built into conventions in a naturalised way (Fairclough 1992). This directs CDA to focus on social analysis that emphasises critical awareness of ideological processes in discourse so that people can become more aware of their own practice, and be more critical of the ideologically invested discourses to which they are subjected.

Further, CDA believes that all levels of discourse may be ideologically embedded; for example, word meanings (sometimes referred to as „content‟) and forms can all be ideologically invested because the meanings of discourses are closely intertwined with their forms (Fairclough 1992). Although word meanings are important, CDA nevertheless focuses more on other aspects of meaning, such as presuppositions, metaphors and coherence with other social practices. This approach enables CDA to work beyond the text itself to attend to other social dimensions. Section 4.3 gives detailed examples.

Given this connection between reflexivity and ideology, Fairclough (1992, 2001) reminded researchers that theoretical practices should also recognise their own conditions of possibility, including their own position within the network of practices and the possible ideological influences on other external relations. Chouliaraki and Fairclough (1999, p. 27) hold a similar position, suggesting that theoretical practices need to “unpick the relations which constitute social practices and so identify the mechanisms which produce antagonisms and struggles, also making explicit its own position in these struggles”. The author of this thesis, given the ideological effects of reflexive self-representations, has a particular „knowledge interest‟ in the social event under investigation. This exemplifies the problematic relations of domination

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and the means for surpassing them. The effects, however, of this „knowledge interest‟ are difficult to evaluate. The author acknowledges it and, as has been claimed previously, this thesis intends not to make an „absolute‟ statement regarding the convergence of IFRS or FVA in China. Instead, it aims to examine a different facet of this complicated event to enrich the current knowledge. As all the constituent factors within this social practice dialectically affect each other‟s constitutive and constructive aspects, it is difficult to make any absolute claims for truth.

4.3 Methods of Critical Discourse Analysis

The focus so far has been mainly upon the philosophical assumptions and theoretical groundings of CDA that rationalise its particular focus of discourse analysis in social-science inquiries. This section shifts to providing a systemic review of how CDA performs its analysis in details. The aim is to develop, based on the view of critical theories illustrated in previous sections, an analytical framework that can be adopted and further elaborated for the analysis of later chapters.

CDA has theorised the analysis of discourse in a way that engages more with the perspective of critical social science than other traditional theories of language. In the first place, language is viewed as a semiotic system with multi-layers (see Section 4.2.3.1): language connects meanings (the semantic layer) with their spoken and written expressions (the layer of phonology and graphology); then, both meanings and expressions interact with the extra- linguistic meanings inherent in social life (see Figure 4.1):

Meanings Spoken and written expressions →

Extra–linguistic meanings within social life.

Figure 4.1 Three-layers of language

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Given these relationships, a better understanding of language requires an investigation beyond the language itself. As has been discussed in the previous sections, the conception of language this thesis uses is, more specifically, Discourse; the conception of Discourse is viewed as a process rather than a product – the whole process of social interaction of producing the discourse (Figure 4.2):

TEXT

DISCURSIVE PRACTICE (production, distribution, consumption)

SOCIAL PRACTICE

Figure 4.2 Three-dimensional conception of discourse (Fairclough 1992, p. 73)

Based on this conception, a critical analysis of a particular discourse could be conducted by using this three-layered framework. It sets out from the discourse itself (the representation of the reality by „text‟ for instance); the next step is to observe the process of how that particular discourse (or text) is produced, then distributed and consumed; the last, but more critical, part of the analysis needs to inspect the articulation, or „instantiation‟, of that particular discourse among all other social practices beyond the moment of the „text‟. All of these procedures are socially constructed and require particular attention to the economic, political and institutional settings within which the discourse is generated.

This three-layered conception of discourse, according to Fairclough (1992, p. 72), is: …an attempt to bring together three analytical traditions: (1) the tradition of close textual and linguistic analysis within linguistics; (2) the macro- sociological tradition of analysing social practice in relation to social

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structures; (3) the interpretivist or micro-sociological tradition of setting social practice as something which people actively produce and make sense of on the basis of shared commonsense procedure.

By fulfilling these tasks, CDA offers a critical dimension that this thesis requires. In the first place, this thesis accepts the interpretivist claim that we must try to understand how members of social communities produce their „orderly‟ or „accountable‟ world (Fairclough 1992). This thesis, hence, focuses on an analysis of the socio-cognitive processes within discursive practice; more specifically, on an investigation of the broad social settings for the adoption of IFRS in China through an analysis of a discursive practice (for instance, the discourses associated with the implementation of FVA).

In a more critical sense, CDA provides further supports for the argument that the procedures that social members use while participating in this event are themselves heterogeneous and contradictory, and they are contested in struggles in a more discursive nature. Following Fairclough‟s (1992) argument, the discursive practice produces meanings and representations of this event that may be politically and ideologically empowered. Participants are often unaware of the ways in which their practices are shaped by social structures, relations of power and the nature of the social practice. At the same time, the meanings and representations of the practices have outcomes and effects involving the construction of the social structures, relations and struggles around them, of which, again, participants might not be fully aware. This bilateral connection needs a critical inspection so that the interacting interests and underlying power relations can be revealed. To achieve this, CDA deconstructs the discourse into a set of positions similar to the three- dimensional framework explained in this section. It offers a broad framework or model by which the discursive practice (e.g. the discussions of China‟s adoption of IFRS) can be analysed in terms of its engagement with those stakes that always go beyond producing meanings alone.

4.3.1 Discourse as Text

The first layer of the CDA framework focuses on the formal features of texts, such as vocabulary, grammar, cohesion and text structure. These can be 112

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viewed as ascending in scale: vocabulary deals mainly with individual words; grammar deals with words combined into clauses and sentences; cohesion deals with how clauses and sentences are linked together; and text structure deals with large-scale organisational properties of texts (Fairclough 2001). This layer of analysis follows closely with traditional linguistic analysis. With a slightly different emphasis, CDA maintains that the signs of a text are socially motivated; in other words, there are often good reasons why particular signifiers/forms are combined with particular signifiers/meanings (Fairclough 2001). At the vocabulary level, the analysis is interested in the politico- ideological significance of wordings – or, as Fairclough (1992, p. 76) described, “how word meanings come into contention with wider struggles and assesses the import of metaphors employed.” A mode of textual analysis of this is keyword analysis, which this thesis applies later:

Although two different discursive formations may have certain words or expressions in common, the relationships between these and other words and expressions will differ in the two cases, and so too will the meanings of these shared words or expressions, because it is their relationship to others that determines their meaning. (Fairclough 1992, p. 31)

Some examples of this kind of keyword analysis can be found in, for example, Williams (1976), Boje (1995) and Leitch and Davenport (2005). where researchers analysed the meanings ascribed to a word in context by examining the other words associated with it. Each keyword is drawn out and interpreted according to its use in relation to other words. The application of this approach in this thesis can be identified in Chapter Six: Reconsidering Fair Value Accounting in Neoliberalism and Chapter Seven: Contextualising Fair Value Accounting in China70.

At the level of grammar, Fairclough (1992, 1995, 2003) proposed that every clause was multi-functional, with a combination of ideational, interpersonal and textual meanings. The focus lies at the “choices that are made about the

70 For examples, Section 6.4 compares the meaning of the keyword „income‟ as it was discussed over different times; Section 7.2 explores the politico-ideological implications of the keyword „relevance‟; Section 7.3 reveals the competing discourses of „reliability‟ and its relationship with a corresponding key term „faithful representation‟.

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design and structure of clauses that have ideological import” (Fairclough 1992, p. 76). The level of cohesion concerns the links between clauses and complex sentences; the level of text structure is also described as the large-scale organisational properties of a text. An analysis of these two levels, according to Fairclough (1992), helps reveal the social and ideological „traces‟ within the discourse, because the cohesion or structure often vary among different types of discourse, with different assumptions about social relationships and identities.

These levels of analysis, however, are of very limited value to this thesis due to the fact that the majority of data is translated from Chinese to English. Due to English and Chinese having entirely different grammar and vocabulary, the translation would inevitably change the original structures of the „texts‟, which disenables the application of these analyses71. The translation, however, does not necessarily impair the value of CDA in this thesis. As stated above, CDA shifts away from traditional linguistic analysis that focuses on vocabularies, grammars and sentence structures to extra dimensions of analysis that connect the discourse with broader social contexts. Indeed, many social conflicts and ideological implications that this thesis aims to reveal can only be realised through those extra layers of analysis (layers 2 and 3 of the analytical framework of CDA). Fairclough (1995) has stated that different research questions and focuses influence how one does critical discourse analysis, in that the researcher emphasises differing aspects and dimensions of the analysis. The application of CDA in this thesis is also reflective of this proposition, and can be an example of how CDA contributes to social studies that cross bi-linguistic contexts.

4.3.2 Discourse as Discursive Practices

At the second layer of analysis, discourse is perceived as a process of discursive practices. As has been illustrated, CDA extends the limitation

71 However, for researchers who might be interested in this research method, Appendix 3 provides a suggested list of possible directions or areas that could be addressed when analysing a text. More details can be also found in Fairclough‟s (1989, 1992) work. 114

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(essentially just using a systemic grammar of English as a method in text analysis) into a theoretical dialogue over such issues as the relationship of semiotic to social change, and the nature of what CDA has called „semologic‟ – “the generative power of the semiotic, or its generative „mechanism‟ in the terms of critical realism” (Chouliaraki & Fairclough 1999, p. 139). This relation between the semiotic and the social are discussed in terms of the principles of „realisation‟ and „instantiation‟ proposed by some theorists in linguistics (Martin 1992, Halliday 1994, Lemke 1995).

First, the relationship can be viewed as a form of realisation: each dimension of discursive practices defines a potential, a set of possibilities – a meaning potential (semantics), a wording potential (lexicogrammar) and an expression potential. The first two are realised in terms of the expression potential (Halliday 1994, Lemke 1995). Chouliaraki and Fairclough (1999) extended this form of embedded realisation relationship by linking language to the social, or in other words, how the context of situation (the immediate, extra-linguistic, situational context of text) is realised in language:

Lexicogrammar is seen as functionally grounded, shaped by the social functions it serves, and in particular built around the intersection of the „macro-functions‟ of language – the ideational function (language in the construction and representation of experience in the world), the interpersonal function (language in the enactment of social relations and the construction of social identities), and the textual function (language in the specifically semiotic – textual – form of productive practice) (Chouliaraki & Fairclough 1999, p. 140).

Accordingly, the context of a situation can be understood in terms of its potential values for three variables, including the „field‟ (the activity which the discourse is a part of), the „tenor‟ (the social participants involved and the relations between them) and the „mode‟ (the part discourse plays in the activity) (Chouliaraki & Fairclough 1999). Connecting this back to the three- layered framework that CDA adopts (Figure 4.2), the „field‟ and the „tenor‟ are the places where the second layer of the analysis (Discursive Practice) could be conducted. By checking how the „tenor‟ (the social participants involved and the relations between them) articulates the reality discursively in the „field‟ (the activity which the discourse is a part of), it becomes clear how reality that is communicated or represented through discourses is produced, distributed and

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then consumed in the society. This provides a crucial foundation for researching a particular social event, given the inherent affinity between the „truth‟ and the discursive presentation of the social reality. In this thesis, the „field‟ would relate to the event – the convergence of IFRS or, more specifically, the implementation of FVA in China. The „tenor‟ would be those social participants involved and the relations between them: for instance, the identification of the authors of the academic journal articles in later chapters. The „mode‟ refers to the part that those discourses play in the „field‟ and its relations with other social practices. More discussions of this are presented in the discussion of the second principle – „Instantiation‟.

According to Fairclough (1995), if „Realisation‟ is about looking at the semiotic space in terms of its internal relationships, „Instantiation‟ is about the dialectical view of language as an open and dynamic system with a close relationship to its social environment. Text is a specifically semiotic form of social production, as has been discussed in Section 4.2.3.1; it participates in the social-construction process with a dialectical function as structured and structuring. On the one hand, texts act as instantiations of the system; on the other, they are positioned in specific and potentially new ways in the social world, which suggests that every instantiation directs to a possibility that the system could be opened up to new impetuses from its social environment (Chouliaraki & Fairclough 1999). Therefore, at this second layer of analysis, CDA seeks to reveal the construction of the meaning of discourses through analysing how the research topic has been constructed within multiple discursive spaces. This analysis is to reveal the processes of discourse production, distribution (how the discourse is articulated) and consumption (how the discourse is interpreted or perceived). More details of the application of this analysis are provided in Section 4.3.5.3.

4.3.3 Discourse as Social Practice

The third layer of the CDA framework perceives discourse explicitly as a social practice. This is a further „Instantiation‟ of the second layer. In a general sense, the claim that a text is an instance of a contextually correlated selection in a social practice points out a need to examine how the instance is located in 116

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the system, or how the instance is constructed to fit the system. A means to reveal this change, as proposed by Chouliaraki and Fairclough (1999), is to evaluate the semiotic difference within a social practice and the semiotic difference between social practices.

More specifically, the semiotic difference within a social practice is evaluated in terms of the category of „coding orientation‟, as described by Chouliaraki and Fairclough (1999, p. 142). Coding orientation concerns the differences in social membership, such as social class, gender or ethnic group, and how they are realised through particular „semantic styles‟, or „integrated fashions of speaking‟. The discourse itself reflects particular selections based on a wide range of otherwise unconnected features within the meaning potential, as indicated from any particular discursive choices made in signifying meanings.

The semiotic difference between social practices is evaluated with reference to other variables (practices) within the context of situation. According to this approach, the discourse moment of any social practice is constituted not only as a single articulation of elements, but as a spread of articulations of elements that are contestable in nature (Chouliaraki & Fairclough 1999). For example, social relations, such as class, gender or ethnicity, are constituted through discursive differences not only within particular practices but also across networks of practices. Referring to the discussion of ideology in this chapter, as the colonisation of the reflexive dimension of a social practice from other social practices, discourse, in Fairclough‟s (1992) term, is re- contextualised in the network of social practices. The relations between particular discourses and social positions, or in other words, the ideological effects of discourses, are established in the process of articulation within a practice and between practices involved in the social network.

Therefore, this layer of analysis focuses on practices to direct attention to links of internalisation or articulation among all the various moments in the social event. In this way it is possible to assess the work that the discourse moment does in each particular practice involved. In the context of this thesis, relevant discourses that are related to IFRS or FVA in China are viewed as a construction or representation of one social practice from a particular 117

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perspective within another social practice. Whether and how this discourse works ideologically can be determined by looking at how the discourse moment of a practice (the specific issues promoted in the particular article being analysed) articulates with other moments of that practice (other issues related to FVA and its practical influences) within the network of practices (all the constitutive elements of the Chinese socio-economic context in which FVA is being implemented, for instance).

4.3.4 The Application of CDA in Accounting Research

It should be noted that CDA is a complex and comprehensive approach compared to many other research methodologies used in the accounting discipline. The application of CDA could be difficult due to the ample room for interpretation of the abstract social ideas and concepts involved in the analytical framework. This is reflected in the extant accounting research that draws upon CDA.

Closer examination of the literature shows that only Gallhofer et al. (2001) have applied all three layers of analysis integrally. Other research has only focused on certain layers of the three-layered analysis that this chapter has illustrated. And for each layer of the analysis, as shown below, the research concerns very different aspects of discourses.

Craig and Amernic (2004a) studied the privatisation of Canadian National Railway (CN) through analysing the articles of Paul Tellier, CEO of CN, in the company‟s monthly internal newspaper. More specifically, Craig and Amernic (2004a, p. 45) investigated “the linguistic, rhetorical and ideology-creating roles of the „language of business‟, accounting, that were manifest in the prelude to the privatization of CN, 1992-1995”. Their research focused more on the first layer (textual analysis), only briefly touching on the third layer (the social and ideological context of the discourse). Through analysing the letters of the CEO sentence by sentence, Craig and Amernic (2004a, pp. 45-46) demonstrated that “accounting language appears to be integral to each stage” of the discourses, which helps structure the way managers make sense of

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their world, “whist at the same time obscuring any ensuing social dislocation and any underlying transfer of wealth.”

Craig and Amernic (2004b) adopted a similar approach, studying two examples of discourses that emerged in the Enron case. Their study provided examples of ideological influence of accounting discourse shown from the “inconsistencies, silences, irrationalities, and rhetorical tactics at play in the micro-discourse of the shareholders‟ letter and Berardino‟s Congressional testimony.” (Craig & Amernic 2004b, p. 835) It helped reveal, at a fundamental level, “an underlying commitment to views of companies, humans, and accounting, that very conceivably helped to influence the larger, mega- discourse” of “an elevation of the concept of the MARKET and of a ruthless, win-at-all-costs form of capitalism, to become the ultimate and appropriate arbiters of social decisions.” (Craig & Amernic 2004b, p. 835) Craig and Amernic (2004a, p. 45) reinforced the strength of CDA as they wrote:

The understanding obtained from such analysis will be regarded as partial, tentative, and thus subject to reinterpretation as our project unfolds over time. However, since “[d]iscursive practices may have major ideological effects ...(and)...the ideological loading of particular ways of using language and the relations of power which underlie them are often unclear to people” (Fairclough and Wodak, 1997, p. 258), a first, even small step to analysis, understanding, and consequently challenging such discourse, seems justified to us. This is especially so given that the words of CEOs, and corporate text in general, enjoy an often-exalted social status (Amernic and Craig, 2001; Boje, 2001).

Cortese et al. (2010) studied the influence of powerful players in the setting of IFRS 6, an international accounting standard specifically for the extractive industries. Their research focused on the third layer (social practice analysis) with special attention on the IASC/IASB‟s funding arrangements and due process. By identifying the key players, such as big international accounting firms and powerful multinational petroleum companies, and contextualising their public discourse into this social practice environment, their research demonstrated the bias and its immediate problems associated with the standards-setting procedures:

[The procedures] were not the objective, transparent, and representative measures they are claimed to be. Rather, the due process provided a forum 119

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within which powerful and self-interested constituents and constituent coalitions could contribute to and capture the standard setting process in order to secure favourable regulation. (Cortese et al. 2010, p. 85)

Llewellyn and Northcott (2005) criticised the National Reference Costing Exercise (NRCE) that the UK government introduced in 1998 to benchmark hospital costs. They stated explicitly that they used Fairclough‟s CDA as the methodology in their research, and included a paragraph briefly introducing CDA. However, they did not specify a detailed approach, or which dimension of CDA they applied. The research design showed that the study analysed the talk of the regulators, managers and clinicians who mobilised, negotiated and challenged the NRCE. The approach was to identify some general themes, such as the uniformity introduced by classification and the construction of commensurability, across all those discourses that were believed to help promote the „average‟ as the norm for hospitals to aspire to. From the description of Fairclough that this chapter has provided, Llewellyn and Northcott (2005)‟s approach falls largely into the second layer (discursive practice analysis) of CDA, where „intertextuality‟ is emphasised across different discursive spaces. A similar approach was adopted by Ezzamel et al. (2007) in their study of the influence of political ideology on accounting regulation in China. They analysed discourses circulated by government officials, accounting researchers and practitioners to identify the common themes that pointed to the same ideological underpinning. Like Llewellyn and Northcott (2005), they applied CDA in a general sense without deeply exploring the specific layers.

Seal‟s (2010) paper can be considered as another example of this kind of general application of CDA. Seal (2010) investigated the influence of management accounting concepts on practice. The investigation relied heavily on the theoretical assumption that discourse is not just „talk‟ but contains powerful constitutive effects in practice, which, in this case, “affects the way managers frame their reality, ruling in some ways of thinking and doing and ruling out others” (Seal 2010, p. 95). Through analysing relevant discourses, the research demonstrated again the ideological implication of accounting discourse in the process that:

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…some managerial action generates texts which become part of wider discourse. These discourses are legitimised by specialist institutional producers of managerial texts such as business schools and management consultants. Thus senior managers, business schools, management consultants and management gurus all contribute to the production of managerial discourse. (Seal 2010, pp. 107-8)

Such links showed “how power, self-interest and rhetoric can affect the acceptance or rejection of managerial theories” (Seal 2010, p. 108). The exploration was largely based on the second layer (discursive practice analysis) of CDA, where the production, distribution and consumption of discourses are concerned. Similar approaches (i.e., partial adoption of CDA) can be identified from some other examples (Burchell & Cook 2006, Ferguson et al. 2009, Nielsen & Madsen 2009, Gray 2010).

Within the accounting research, only Gallhofer et al. (2001) can be considered to comprehensively integrate all three dimensions of CDA. They conducted an analysis of the letters of submission of two business lobby groups regarding proposed takeover legislation in New Zealand. In the first layer (textual analysis), they illustrated how takeovers were presented positively by using terms such as „value creating‟ or „economic efficiency‟ in the discourses to influence people‟s understanding, making it:

…less than straight-forward to oppose the argument presented – few would immediately perceive „efficiency‟ in negative terms…the mobilisation of such general constructs helps to constitute and objectify them as social goal criteria of universal validity (Gallhofer et al. 2001, p. 133).

In the second layer (discursive practice analysis), Gallhofer et al. (2001) showed how the discourses under investigation connected themselves with that US mainstream finance research that was characterised by its positivistic and scientistic character, to demonstrate its “intellectual respectability and academic integrity” (Gallhofer et al. 2001, p. 138). Gallhofer at al. (2001) demonstrated the “broad consistency” of “mobilising of scientistic research in the NZBR text” (the discourse under investigation) so that “a more powerful discourse is constituted, transforming previous conventions” (Gallhofer et al. 2001, pp. 138-9). In the third layer (social practice analysis), they moved from exploring texts to examining the funding arrangement between the business

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sector and the policy-makers of New Zealand society, which they considered as part of the social relation between social actors. This practical aspect, outside of policy debates, “makes more visible the character of the hegemonic struggle, delineating different perspectives and strategies in the debate” (Gallhofer et al. 2001, p. 142).

To Ferguson (2007), however, Gallhofer et al. (2001)‟s article was problematic because it paid “insufficient attention to issues of production and reception as well as to the social and historical conditions in which they are embedded.” (Ferguson 2007, p. 918) Ferguson (2007) proposed an alternative framework adopted from Thompson (1984) that requires a shift in emphasis: “not only is the text or discursive event the focus of analysis – but also the institutions and structures surrounding their production and reception, and the understanding of individuals involved in their production and reception” (Ferguson 2007, p. 914). As discussed above, however, this is indeed what Fairclough has offered in his CDA framework, particularly the second layer (discursive practice analysis). Gallhofer et al. (2007, p. 936) replied to Ferguson (2007) pointing out the same understanding that “Thompson‟s tripartite approach and Fairclough‟s CDA are both broad frameworks for analysis that in principle cover the entirety of the communicative/discursive process of which texts are part.” They further argued that:

We do not, however, see the need to address in depth all the elements of such a broad framework in one analysis. In focusing on any specific part(s) of this framework, within the context of the more holistic approach, researchers may thus advance theoretical appreciation guided by their prevalent research interests. That Fairclough accepts this is evident from his own analysis. (Gallhofer et al. 2007, pp. 936-7)

They also discussed the difference between various types of discourses, such as between mass communication and the submission letter they studied, which brought about more difficulties in applying CDA and more competing interpretations of the research findings. In spite of the controversies, Gallhofer et al. (2007, p. 939) advocated at the end of their article defending Fairclough‟s CDA that:

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It is important to appreciate that Fairclough‟s explication of CDA reflects an emancipatory research interest. CDA is understood to be both a mode of research and a weapon in social struggle (Fairclough, 1993, p. 134; Gallhofer et al., 2001, p. 123)... Fairclough thus suggests that one can better intervene if one critically understands discourse (Fairclough, 1992, pp. 67, 90; Gallhofer et al., 2001, p. 123). It is precisely this concern with emancipatory change, evident in Fairclough‟s version of CDA, which makes this method so important and relevant for the analysis of accounting texts. Of course, methods may be improved and further developed as new theoretical insights are made and this has already happened in the case of CDA. What is important, however, is that CDA keep its radical orientation.

From the above examples, the research is extremely diverse, covering many foci and approaches in the implementation of CDA. There might be various reasons for this. Textual analysis normally requires much more space than other types of analysis, which often makes it difficult to present fully in one journal article. Further, those social issues involved in CDA are abstract and contain very different implications for different types of communication, particularly for the second and third layers of analysis. For instance, in the second layer (discursive practice analysis), the consumption (or reception) of public media messages would be very different to that of a private communication, or the submission letters that Gallhofer et al. (2001) examined. Also, for the third layer (social practice analysis), which social practices are appropriate for the investigation also largely depends on the nature of the research topics, which are always diversified. Another difficulty might be that for all layers of CDA, the thoroughness of the analysis is variable. The author(s) and the reader(s) might have very different judgements as to what extent the analysis can be regarded as adequate.

In spite of the issues, CDA is a still worthwhile area of study given its particular strengths in critical social research, and it certainly requires further development in its application to the accounting discipline. This thesis provides an excellent opportunity to explore this research methodology, which has been well established in social linguistic studies. It is advantageous to conduct it in a PhD thesis, so that the research may have enough room to explore the analytical framework fully. This also contributes to the current knowledge by offering a thorough example of how to implement CDA in researching an accounting issue.

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4.3.5 The Application of CDA in This Thesis This section clarifies the detailed method that has been adopted in this thesis, including the sources of the data and how it has been constructed within the CDA‟s analytical framework.

4.3.5.1 The Sources of Data

Similar to the approach of Ding and Graham (2007), the sources of data this thesis examines are archival and cover the following categories: 1) Academic literature by Chinese scholars published in Chinese academic journals72. 2) Official government announcements and regulations. 3) Chinese news media, including newspaper and internet. 4) Economic and accounting data related to Chinese capital markets. It is mainly from the websites of the Shanghai Stock Exchange (www.sse.com.cn); the Shenzhen Stock Exchange (www.szse.com.cn); and the Wind Info database73 (www.wind.com.cn). It should be noted that the majority of the data is taken from Chinese sources and translated by the author, with original Chinese texts in the footnotes. The following sections outline more details of how the data has been constructed within the CDA three-layered analytical framework for a quick reference.

4.3.5.2 The First Layer: Discourse as Text Due to the nature of translation, as explained in Section 4.3.1, a major aspect of this thesis‟s analysis relates to the choice of vocabulary (the keyword analysis)74:

72 This is based on the journal ranking list released by the Academic Degrees Committee of the State Council of China (available from http://spa.swufe.edu.cn/xszj/Article_Show.asp?ArticleID=1090). More details about this ranking list are provided in Chapter Seven.

73 Wind Info is a leading service provider of financial data, information and software in China. It serves more than 90 percent of financial enterprises and most of the financial research institutions and regulatory committees. Its data is frequently quoted by Chinese and English media, research reports and academic theses (see http://www.wind.com.cn/En/aboutus.html).

74 Some of the main questions and a number of sub-questions that could be used when analysing a text for this layer of analysis are provided in Appendix 3. 124

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1) The meaning of the keyword ‘Income’ over various timelines is compared in Section 6.4. 2) The politico-ideological implications of the key word ‘Relevance’ are explored in Section 7.2. 3) The competing discourses of ‘Reliability’ and its relationship with the corresponding key word ‘Faithful Representation’ are presented in Section 7.3. More rationales for the choice of these keywords75 and the implications for this thesis are discussed in the respective chapters.

4.3.5.3 The Second Layer: Discourse as Discursive Practices

This layer of analysis focuses on the processes of discourse production, distribution and consumption. The analysis reveals how the discourse fits in with the producers‟ and consumers‟ experience of the event. Chapter Five: The Discursive Construction of ‘Convergence’ aims to fulfil this layer of analysis.

More specifically, in analysing the production of texts, this thesis first identifies the following key participants (players) in this event: 1) International accounting standards-setting bodies, such as the IASB and FASB; 2) The Chinese government; 3) Chinese leading news outlets; and 4) Chinese accounting academics. This thesis then examines their discourses to find what they have spoken of the convergence of IFRS in China. By commenting on this event, these key players have produced some discourses (in either speeches or written texts) that projected some conceptual „realities‟ for the convergence of IFRS in China. By presenting these discourses themselves, the analysis helps reveal how this event has been constructed discursively. In other words, it determines the „realities‟ or understandings that the key players, such as the IASB and FASB

75 It is worth mentioning that the Chinese translation for many of the keywords, such as Relevance, Reliability and Fair Value, contain very similar connotations as those within English. 125

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or Chinese government, would like to establish through their discursive practices.

In analysing the distribution of the discourse, the focus of the analysis is the consistency among these discourses, or in other words, their intertextuality – the sense in which the text responds to previous texts. The analysis indicates that the various key players have presented similar comments, and that particular words have been consistently used across the various discursive spaces (the IASB and FASB, the Chinese government, official media and academia). The characteristics of the institution within which the media message is produced and the technologies employed in production are also considered. This layer of analysis explores the relatively stable networks along which texts move and undergo predictable transformations.

In analysing the consumption of the discourse, cognisance is given to the situation whereby it is not just the text that shapes interpretation, but also other contextual factors that interpreters bring to the interpretive process, such as the social identity of the speakers (the position of Sir David Tweedie in the IASB, for instance), the complexity of a distribution process (such as the distribution of news media in China) or the relationship between media and non-media institutions (for example, the media censorship in China).

By identifying some of the key players and what they have said about the event, and by examining how their discourses are circulated and the influence they have upon audiences‟ perception of the event, the analysis shows that the discourses created by those key players are the mainstream voices that have dominated the discussions within China. Furthermore, by showing how the text fits in with the producer‟s or consumer‟s experience of the event, the analysis provides some indications that influential stakeholders are actively constructing a particular meaning for the event under investigation. The approach identifies „traces‟ in the text that shed light on the wider elements of discourse practices and social practices. It points out the possibility of hidden agendas underlying the discursive construction, which also sets up a platform for the third layer of analysis. The details are presented in Chapter Five: The Discursive Construction of ‘Convergence’. 126

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4.3.5.4 The Third Layer: Discourse as Social Practice

This layer contrasts the meaning that has been constructed by discursive participants as revealed by the second layer of analysis, with what has occurred in other social practices (real-world experiences), to demonstrate its partialities in representing and rationalising the social event (the convergence for instance). The analysis reinforces how the public discourse is put forward by interested parties in order to influence a favourable outcome, and criticises its social consequences.

This layer makes the discourse analysis „critical‟ in the sense of enabling people to be more critical of the ideologically invested discourses, to which they are subjected in the event under investigation (e.g., the implementation of FVA). According to Fairclough (1989), this is a facet of hegemonic struggle that contributes in varying degrees to the reproduction or transformation that destabilises the constraints of existing social and power relations. A key power relation underlying the contemporary societies on which this thesis focuses is the dominance of neoliberal orthodoxy. This layer of CDA is conducted through an analysis of the social practices to which discourses refer in two stages, as articulated in Chapter Six: Reconsidering Fair Value Accounting in Neoliberalism and Chapter Seven: Contextualising Fair Value Accounting in China.

First, Chapter Six reveals the context or social structure as part of the social practice, within which the mainstream discourse is put forward. Analysis here is concerned with the socio-institutional aspects of discourse, considering how a part of a text is linked to other social situations (neoliberalism and financialisation) outside the text. This is important to CDA because it enables the relationship between discourse, power, dominance and social inequality to be discerned and illustrated. In doing so, Chapter Six positions a part of the mainstream discourses (the supporting arguments of FVA) within a neoliberal context to demonstrate the connection between FVA and its neoliberal underpinnings. The analysis points out a close relationship between the assumptions of FVA and their bias towards the neoliberal free-market ideology. This connection is also exemplified through the historical progress of 127

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FVA practices as implied in the discourses of standards-setting committees (the IASB and FASB). This layer of analysis challenges the presupposed benefits of FVA and the adoption of IFRS more broadly, by revealing this problematic working relationship that has been absent in the textual representations of the mainstream discourses.

Chapter Seven further contests the meaning of FVA and other aspects of the convergence of IFRS in China that have been articulated through the mainstream discourses (as shown in the first and second layer of analysis) with the „reality‟ that is manifested in real-world (social) practices. Identifying the possible gap or inconsistency between discourses and practices forms a critical part of the „Instantiation‟ that goes beyond the textual level. It scrutinises what has been represented through the verbal representations to see whether or not they are just „empty‟ words. The difference between the „form‟ and „content‟ of discourses highlights the importance of regarding discourse as a social practice that does not just serve as a simple reflector of some underlying reality, but helps create conditions that make reality of “situations, objects of knowledge, and the social identities of and relations between people and groups of people” (Fairclough & Wodak 1997, p. 258).

In doing so, Chapter Seven contextualises the discourse within real-world experiences (specifically, in this thesis, Chinese society). The analysis is framed around several key notions – relevance, reliability, uncertainty and volatility – through which FVA and, more broadly, the convergence of IFRS in China have been interpreted within the mainstream discourses76. Relevant social practices associated with these key areas are investigated and explained.

First, the justification of FVA being „relevant‟, as its proponents claimed, is presented within a discussion of the possible misconceptions of the role financial markets play in the macro-economy. Two assumptions about

76 The rationales of selecting these notions are further explained throughout Chapters Six and Seven.

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financial markets (that they have resource-allocation and mediative functions) are contrasted with some contextual aspects of Chinese capital markets.

Chapter Seven then illustrates some of the changes fostered by the IASB and FASB in defining key concepts of financial reporting with respect to the notion of „reliability‟. It also identifies some alternative discourses from Chinese sources including internet, newspapers and academic journals, that highlight the difficulties in implementing FVA and, more broadly, the IFRS in China. The discursive complexity of „reliability‟ shows that what has been constructed by the mainstream discussions is only one „narrative‟ amongst many others. The presentation of alternatives opens up the possibilities of meaning and challenges the discursive dominance that obscures the knowledge about the adoption of IFRS in China.

The final sections of Chapter Seven re-examine „uncertainty‟ and „volatility‟ by presenting more alternative discourses on the institutional context of Chinese capital markets and the Split Share Structure Reform (SSSR) that has emerged in the markets since 2005. The complexities and contradictions revealed by Chapter Seven 77 challenge the validity of those mainstream assertions about the role that the new accounting standards can play in the development of Chinese capital markets. What has been pushed forward is actually an image of a market that belies its underlying architecture. By positioning this into the discussion of neoliberalism, the analysis exemplifies the political nature of the „making‟ of a neoliberal market and how accounting can be the handmaiden of the neoliberalism during the process. More details about the rationales of the selection of these key notions and their related social practices are provided in Chapter Seven.

4.4 Summary

In accordance with relatively recent research methods that incorporate linguistic and critical social theories, this thesis adopts Fairclough‟s version of

77 Appendix 4 contains more details of the structure of Chapter Seven and further explains the logic of the analysis conducted in the third layer of the CDA framework. 129

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CDA as its methodological framework. This decision has been made on the basis of certain philosophical assumptions that echo those underpinnings that CDA adopts. Ontologically, this thesis assumes that the reality under investigation is an open and dynamic network of practices. The various dimensions and levels of practices are governed by diverse mechanisms, within which each moment of the social reality is „internalising‟ the others without being reducible to them (Fairclough 1992). The operation of these mechanisms is mediated through language or discourse, and instantiated into particular social practices, as the three-layered framework of CDA maintains. This system is complex and not predictable in any simple way as effects of mechanism, as realist ontology might argue. Accordingly, this thesis rejects the objective „truth claim‟ valued by positivist epistemology. This thesis emphasises relational systems that constitute relative permanence within practices, and aims to explicate how those systems are produced and transformed in social action. These philosophical assumptions orient this thesis to the analysis of communicative events, the structural conditions that make them possible and their structural effects.

The salient position of discourse that this thesis centres upon has been built upon social theories of language and ideology (Fairclough 1989, Harvey 1996). Discourse or language use has been theorised as a multi-level social practice that constitutes and constructs society in various dimensions. In Fairclough‟s view, there is a dialectical relation between discourse and social structure: the latter is both a condition for, and an effect of, the former. Therefore, “discursive interaction is an active, reflexive, interpretative and collaborative process of representing the world, while simultaneously negotiating social relations with others and one‟s own identity” (Chouliaraki & Fairclough 1999, p. 46). The theorisation of ideology has also been influential in discussions about CDA. It is believed that ideologies are invested into any discursive practice, because meanings are produced through interpretations of texts, and texts are open to diverse interpretations that may also differ under various ideological influences (Fairclough 1989). Within this view, the concept of ideology is tied to relations within social networks of practices, and particularly the relations between discursive practices.

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Therefore, discursive elements of practices are as real as other physical elements in that they have effects upon and within practices. However, those discursive representations can be „mere‟ words, even „empty‟ words, and changes in discourse that appear to constitute changes in social practices can be highly uncertain. Moreover, all these can be ideologically embedded to various extents. The only way to discover this relationship is to connect the discourse back to other moments of social practice, to scrutinise the rhetorical and ideological dimensions that CDA proposes. In this thesis, those discourses that support the IFRS convergence or the implementation of FVA in China are more like choices of words or expressions rather than a „true and fair‟ representation of the reality. Much more important information could be revealed when attention is drawn to those assumptions and motivations behind that particular selection process. From this perspective, a critical analysis that attends to other moments of that practice can make a strong contribution through exposing the controversies and/or hidden gaps between the „form‟ and „content‟ of discourses. This approach also makes a pedagogical contribution in that it provides a full but rare application of the CDA framework, which allows detailed analysis of discourse to be productively incorporated into extant accounting research.

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5 Chapter Five: The Discursive Construction of ‘Convergence’

As discussed in Chapter Four: Methodology, this thesis centres on discursive interactions that have been articulated within a particular social event – the convergence of IFRS in China. Spoken and written discourses are the centre upon which a deeper analysis can be conducted. Based on the three-layered CDA framework (see Section 4.3), the analysis starts from the text; then connects it with the process of how the text is produced, distributed and consumed; the third step is to reveal the instantiation of the text among all other possible social settings within which it is embedded.

This chapter focuses on the second layer of inspection. The approach is to show how discourses have presented this event, and how these discourses have been articulated. The purpose of the analysis is to reveal what deeper assumptions and/or agendas have been constructed and implicitly accepted through the discursive descriptions that influence rational understanding of the convergence of accounting standards. This process can expose the reality of this event, which has been mediated through the texts, languages and cultural artefacts, for further re-examination. The re-examination, in turn, sets out a necessary basis for the elaboration of later chapters.

An important step of analysing the production of discourses is to identify the key players and what they have said with regard to the convergence of IFRS in China. Four key players have been targeted due to their close associations of this event:

1) The IASB and FASB, as the key organisations involved in standardising accounting standards on an international basis through the promotion of the IFRS; 2) The Chinese government as the direct authority that made the decision of adopting IFRS in China; 3) Chinese leading news outlets as the major channel through which the public was informed of this event in China;

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4) Chinese accounting academics as the group of people with the perceived knowledge to comment on this accounting issue at the professional level78.

Among the discourses the dominant voice was supportive of the convergence, which the four groups of key players, as well as many outside of China, have regarded as one of the most significant changes in China‟s accounting profession. Official voices emanating from the international accounting standards-setting body and high-ranking government officials were consistent with each other, supporting the harmonisation process in China. This chapter explicates the effect of this consistency and examines the complexities of how the discourses were distributed and interpreted within the tightly censored Chinese media sector. The contextual factors presented demonstrate how this positive image of the convergence that those key players constructed discursively has been the mainstream voice within China itself. The analysis suggests also agendas that have been sidelined within this discursive practice, which will be further evaluated in Chapter Six: Reconsidering Fair Value Accounting in Neoliberalism and Chapter Seven: Contextualising Fair Value Accounting in China.

This chapter begins with a consideration of international perspectives on harmonisation. It then explores the prevailing international view in the Chinese context, including comments and opinions from government officers, the official media institution, and Chinese accounting academics, to demonstrate the process whereby a discourse has been produced, distributed and consumed in a particularly limited way.

78 Some of the discourses from accounting practitioners, including major accounting firms working in China, are briefly covered in this chapter as well, but their influences on the production of discourses are insignificant, given that the exposure of their voices is limited to the four main categories of sources. Section 5.2 offers further understanding with an explanation of the Chinese institutional context of the media sector. 133

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5.1 International View of the Convergence

Commenting on China‟s progress, the IASB chairman Sir David Tweedie said that: I am impressed by China‟s commitment to adopting internationally accepted approaches to accounting, and the CASC‟s progress in the space of one year is remarkable. I am confident that China‟s convergence effort will pay enormous dividends for the growth and development of China‟s capital markets in the years ahead. (Tweedie 2005, p. 3)

Tweedie claimed that China‟s decision was an “important step for the development of the Chinese economy and its place in the world‟s increasingly integrated capital markets” (Wild, Damian 2006, n. p.). In a speech on 15 February 2006 at a ceremony in Beijing, the Chinese Ministry of Finance announced the adoption of the new Chinese accounting-standards system, and made the following statement to support the decision to adopt IFRS in China:

The benefits of these accounting reforms for China are clear. The new Chinese standards that incorporate accounting principles familiar to investors worldwide will encourage investor confidence in China‟s capital markets and financial reporting and will be an additional spur for investment from both domestic and foreign sources of capital. For Chinese companies that are increasingly playing a global role, the acceptance of the new standards should also reduce the cost of complying with the accounting regimes of the different jurisdictions in which they operate. As both the Ministry of Finance and the IASB have acknowledged, convergence is a process. The intention is that a company applying Chinese accounting standards should produce financial statements that are the same as those of a company that applies IFRSs. I believe that is a realistic and desirable goal in the light of the progress that has been made. (Tweedie 2006, n. p.)

A press release from the IASB showed same support, stating that “the IASB representatives applauded and expressed admiration for the enormous progress China has already made toward convergence with IFRSs.” (International Accounting Standards Board 2005a, n. p.) In a joint statement of the Secretary-General of the China Accounting Standards Committee (CASC) and the Chairman of the IASB, both parties agreed that “establishing and improving a single set of high-quality global accounting standards is the

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logical consequence of the trend of economic globalisation. It is a goal to which the IASB as well as national accounting standard setters of all jurisdictions in the world should continue to make sustained efforts”. (International Accounting Standards Board 2005b, n. p.)

Another major global standards-setting body – the International Auditing and Assurance Standards Board (IAASB) – expressed similar opinions on the convergence. IAASB Chairman Mr. John Kellas, IAASB Deputy Chairman Mrs. Dennis Esdon and IAASB Technical Director Mr. James Sylph, in a joint statement with Chinese Auditing Standards Board, agreed that:

Establishing and improving a single set of high-quality global auditing standards is a logical response to the trend of economic globalization, which plays a key role in reducing the risk of decision-making by investors for efficient capital allocation, as well as in promoting economic development and maintaining financial stability all over the world (quoted in Kellas & Wang 2005, n. p.).

They noted that:

The IAASB applauds and expresses admiration for the enormous progress that China is making towards international convergence. Such great progress and efforts serve as a model for developing countries and countries with economies in transition. (Kellas & Wang 2005, n. p.)

Mr. Ian Ball, Chief executive of the International Federation of Accountants (IFA), delivered a speech in a conference organised by the Chinese Institute of Certified Public Accountants (CICPA) on 15 February 2006 to explain the benefits of the convergence of IFRS in China:

There are numerous benefits to the actions you are taking today  Investors will have better information for decision-making.  Companies too, will have improved management information for decision making.  In addition, Chinese companies are likely to have better access to capital, particularly from foreign sources; the cost of capital may be reduced as well.  Your country will have increased access to international capital markets.  There will also be greater credibility and improved economic prospects for the accountancy profession.

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 Lastly, your country can further enhance its competitiveness, which, in turn, can lead to greater prosperity for all citizens… (Ball 2006, p. 2).

These discourses seek to represent the convergence of national accounting standards with international as a „logical‟ and „beneficial‟ action. They also agree with the theories that have driven the establishment of international accounting standards in the Western societies. In particular, they echo the argument that the implementation of IFRS would enhance the transparency and comparability of general-purpose financial statements across international boundaries; the consistent financial information would facilitate the movement of funds in global capital markets (Gaffikin 2008). However, Accountancy Age79 reported that “Sir David Tweedie had spent much of the last year (2005) shuttling between Beijing and London and so speaks with some authority on the issue” (Wild, Damia 2006); in other words, the level of discursive consistency in these discourses is suspicious, and can be interpreted as a result of complex collaborations and decisions not to mention other opinions, thus avoiding the need to engage with the complex inter- relationships that denote contemporary life, especially in such a massive social event like this.

From the perspective of CDA, this aspect refers to a socio-cognitive dimension of text production and interpretation. Since the way in which a discourse is constructed can have a substantial influence on how the discourse is interpreted, it is necessary to consider how the discourse is shaped by its mapping of the other social structures and resources that are drawn upon in producing and interpreting meanings (Fairclough 1989). As has been explained in Chapter Four, this dimension of analysis focuses on identifying key players (discursive participants), what they have said of the event, and more importantly, the intertextuality – the sense in which the text responds to previous texts. This section has examined one particular group of the discursive participants – the high-profile figures from international accounting standards-setting bodies and how they have influenced the perception of the

79 Accountancy Age (see www.accountancyage.com) is published in the UK by Incisive Media, a global business media company that operates across the main areas of financial services, with leading brands in the financial, legal, accountancy, real estate and IT sectors. 136

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convergence of standards with the discourses provided. The next section shifts the focus to illustrate this discursive practice within the mainstream media outlets in China itself to show this intertextuality.

5.2 The Chinese Institutional Context – Media Control

Before the discussion goes into the details of public discourses in China, a significant institutional factor – media censorship – needs to be understood, because the way media information is constrained in China is fundamentally different to „free speech80‟ in the West. The control over mass media restricts the coverage of events, which has the capacity to influence the audience and its broader expectations. A revelation of this kind of political and ideological hegemony is one of the major concerns of CDA, as discussed in Chapter Four: it is not just the text that shapes interpretation, but also other contextual factors that interpreters invariably bring into the interpretation, such as the social identity of the speakers, the complexity of a distribution process and the relationship between media and non-media institutions. Within China‟s socio- political settings, media censorship represents the relatively „stable‟ networks along which texts move, while undergoing predictable transformations; understanding it is critical to help decode how the text fits in with the producer‟s or consumer‟s experience in China.

5.2.1 Party Monitoring of News Content

China represents a typical example in which a government has devoted vast resources to creating sophisticated measures to control public media. The control is achieved, as described by Esarey (2006, p. 3), “through a complex combination of party monitoring of news content, legal restrictions on journalists, and financial incentives for self-censorship.”

In China there are no Chinese-language news media that are both widely accessible to the public and independent of the CCP. The party maintains

80 As mentioned above, this term is not used to mean that the media is necessarily completely free in the West; it is rather a convenient expression for the sake of comparison. 137

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almost complete control over the nation‟s 358 television stations and 2,119 newspapers – the primary media available to more than one billion Chinese citizens (Esarey 2006, Zhu 2009). It is highly difficult for the public to obtain information from other sources, as uncensored satellite television is illegal; foreign radio broadcasts are carefully monitored and are always scrambled if they are deemed as politically unfriendly; and publications with content critical of the regime are prohibited (Esarey 2006).

Although the internet implies the possibility of increased media freedom, its operation has been heavily constrained in China, as a result of high-tech devices developed to censor and monitor internet usage (Wacker 2003, Tuinstra 2009). In the mainland, the internet is closely monitored by the state, with access to politically „incorrect‟ sites blocked. Although many users are able to find ways to access blocked sites by using proxies or anti-blocking software, the state‟s control has not been undermined in any substantial manner. For instance, it is commonly known that some popular websites, such as Facebook, Youtube and CNN, are not accessible within mainland China. In many ways, the new technology has actually helped the authority tighten its censorship of the media, rather than liberating the information exchange. The Ministry of Public Security (MPS) has developed the biggest firewall system in the world, the „Golden Shield Project‟ (Huang et al. 2009). The project is a massive, ubiquitous architecture of surveillance with an ultimate aim to “integrate a gigantic online database with an all-encompassing surveillance network – incorporating speech and face recognition, closed- circuit television, smart cards, credit records, and Internet surveillance technologies” (Walton 2001, p. 5).

There are an enormous number of cases of censorship. Esarey (2006, p. 2) provided examples; for instance:

When U.S. President George W. Bush visited Kyoto, Japan, in November 2005 and lectured China about the need to improve religious and political freedoms, his comments went unreported in the Chinese media. There was no live news coverage at the press conference following Bush‟s meeting with Chinese President Hu, Jintao in Beijing; subsequent Chinese news coverage of the Bush visit was restricted to carefully censored wire reports, reprinted verbatim in official media. 138

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A report from the US Congressional-Executive Commission on China (CECC), indicated that the censorship of news that could challenge the official ideology of the ruling CCP was indeed a standard practice in China. The report also said: In March 2003, the spread of the Severe Acute Respiratory Syndrome (SARS) in China went largely unreported until the disease reached dozens of countries and the central government was forced to admit the severity of the epidemic…. For hours after the September 11 attacks, Chinese media were barred from covering the story while Beijing debated its response to the tragedy. (Congressional-Executive Commission on China 2005, n. p.)

Given this context, it is important that the public discussions surrounding strategic financial, economic and accounting policy changes – including the event of the adoption of IFRS in China this thesis investigates – are understood as meditated and constrained in China.

5.2.2 Legal Restrictions and Self-censorship of the Media Industry

According to the 1982 Constitution, citizens of the PRC have “freedom of speech, publishing, assembly and the right to establish organisations, movement and protest.” (The Constitution of the People's Republic of China 1982, Article 35) These freedoms are, however, circumscribed by other articles in the Constitution (1982, Article 51; 53; 54); for examples, citizens of the PRC “cannot, in the exercise of their freedoms, harm the collective interests of the nation, society, or the freedoms enjoyed by other citizens” (Article 51); all citizens must “protect state secrets, cherish public assets…respect public order and social morals” (Article 53); and citizens have the duty to protect the “security, honour and interests of the motherland and that to do otherwise is prohibited” (Article 54). In practice, it is often understood that these rules are open to substantial „judgements‟, because any information could be classified as a „state secret‟ by enforcement agencies if it is deemed to have harmed state interests or state security (Yue 2003).

Research on China‟s media censorship (Wacker 2003, Yue 2003, Esarey 2006) has referred to a number of administrative regulations that guide the media operations: under the Protection of National Secrets Law promulgated in May

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1989, many issues including military affairs, projects for economic and social development, technological development, criminal investigations by national security agencies, or other subjects determined by state institutions are „secret‟ in nature (Protection of National Secrets Law 1989, Articles 8 and 20). Similar restrictions are imposed by the Regulation on the Protection of Secrets for News and Publication of June 1992. Journalists are required to consult with the relative government agencies and gain permission prior to publication when in doubt about the status of information sources. The price of non- compliance with party content requirements can be enormous. Esarey (2006, p. 8) reported:

On 27 April 2005, Shi Tao, a journalist with Contemporary Business News in Hunan Province, was sentenced to 10 years in prison for violating state secrets laws, after emailing a one-page document to the New York-based website Democracy Forum, in which he outlined party propaganda requirements for suppressing information on the 15th anniversary of the Tiananmen crackdown. The information leading to Shi‟s conviction was provided by Yahoo Holdings Ltd. in Hong Kong (Shi Tao sent the fateful message via his Yahoo email account).

Besides the legal restrictions, there is an administrative mechanism in the appointments of key personnel in the media industry to ensure that media comply with CCP‟s requirements. All managers of national media, such as the Chinese Central Television (CCTV), People’s Daily or Xinhua News Agency, are directly appointed by the Organisation Department 81 and the Publicity Department of the CCP Central Committee; at the provincial level and below, the Central Organisation Department appoints provincial party secretaries and deputy provincial heads to oversee the selection of the managers of media organisations (Tuinstra 2009). Zhu (2009) wrote that media managers are responsible for ensuring that the news content the organisation produced strictly follows the requirements outlined in Propaganda Circulars 82 (PCs); otherwise they are removed from position; media professionals, such as editors

81 The organisation department of the CCP Central Committee is responsible for staffing positions within the CCP.

82 Propaganda Circulars contain specific instructions on what is acceptable news content, and how to report certain news. The PCs are prepared by the Central Publicity Department and distributed on a regular basis to all levels of media organisations. (Zhu 2009) 140

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or journalists, are monitored through a national registration system organised by the Publicity Department of the CCP Central Committee and are evaluated by their loyalty to the party.

An important feature of this administration system, according to Zhu (2009), is to create a working environment that encourages self-censorship through providing bonuses and career prospects to those who produce politically „correct‟ media content. For example, at Southern Weekend – a popular weekly newspaper published in Guangdong province – the monthly base salary for journalists in 2003 was US$340, which was approximately the same amount as the average farmer‟s annual income in the same year (according to the calculation of Kahn 2005). If a report is viewed as too controversial, the journalist will likely receive no payment or lose performance bonuses, which can amount to more than half of their salary, and journalists whose work is frequently censored will find themselves quickly out of pocket (Zhu 2009).

An understanding of this kind of media control by the government in China provides a necessary context to ensure a fuller understanding of the discussion and analysis in latter sections and chapters of this thesis. It should be noted, furthermore, that an awareness of this is embedded in the author‟s consciousness, which itself forms part of the context of this thesis. This kind of „knowledge interest‟, as discussed in Chapter Four, should be acknowledged, given this thesis‟s broad theoretical position (critical social inquiry).

5.3 Government View of the Convergence

With an awareness of the institutional context of the Chinese media sector, the remaining part of this chapter provides some detailed examples of the discourses on the convergence of IFRS in China. It shows how the key players have spoken of this event (the production of the discourses) and how the discourses have been distributed and consumed within the society. As demonstrated through the consistencies among the various discourses, this chapter reveals that a particular conceptual „reality‟ of this event has been

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constructed through the discourses produced by the key players, and they have indeed influenced the audiences within China.

As shown in Section 5.1, the discourse as circulated by high-ranking people in the IASB or IAASB offers a particular view of the convergence as essential to China‟s ongoing economic survival. The reality created by these representations, however, is one-sided: those people had not talked about any potential problems or difficulties with this event. Their approach needs to be re-examined carefully, given the scale of the event, because the narrowness helps fracture the possibility of any benevolent effect from the adoption of globalising accounting regulations. This effect is strengthened, as this section outlines, when the views of the key figures in the international reporting community are echoed by the Chinese government. Given the greater power of the central authority, it is understood that these opinions have an enormous impact on the way that convergence has been understood in China.

Jin Renqing, Minister of Finance (MOF), China, commented regarding the release of the new CAS:

The release and implementation of the two standards systems will facilitate the implementation of people-centred scientific approach to development, help improve market economic system83 and further expand opening-up, representing an important contribution on the part of fiscal and accounting work to economic and social development. (International Accounting Standards Board 2006c, n. p.)

In this statement, Jin Renqing, as one of the top official figures in China‟s economic-political system, appraised the convergence in a very positive tone, speaking of significant connections and contributions to the nation‟s broad economic and social development, within which the „market economic system‟ was implicitly emphasised.

83 Hereafter in this section, the line is drawn by the author to highlight the key sentences for the convenience of later analysis. 142

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The view was promoted by other influential politicians within China. For example, Lou Jiwei, the Vice-Minister of MOF and the CASC 84 Chairman, pointed out in an official media release that:

The newly released accounting standards system emphasises the new philosophy of providing decision-useful accounting information to investors and the public. In converging with international practice, this system, the first complete and integrated system in China, provides useful experience for improving International Financial Reporting Standards (IFRSs), and represents a new step forward and breakthrough in building China‟s Accounting Standards for Business Enterprises. The newly released system reflects the requirement for convergence with the international auditing standards, meets the need of certified public accountants for practicing under the new situation, highlights the purpose of the profession to safeguard public interests, makes the auditing standards more reader- friendly and easier to apply, and represents a historic breakthrough85. (Lou 2006, n. p.)

In this quote, Lou described the philosophy of providing decision-useful accounting information to investors and the public as „new‟. It implied that this kind of understanding of accounting which has prevailed in the West86 did not necessarily occur to Chinese accounting professionals before the convergence, and this change represented “a new step forward and breakthrough” in China‟s accounting standards-setting; this could be taken to imply that Western economic values were superior and formed a „requirement‟ with which China needed to comply.

84 The CASC consists of 22 members including government officials, practitioners from accounting firms, accounting academics and representatives from various industrial sectors. The members are solely appointed by the MOF (see CASC website: http://www.casc.gov.cn/wyhjs/200611/t20061121_491096.htm).

85 Original Chinese text: “强化了为投资者和社会公众提供决策有用会计信息的新理念，实现了与国际惯例的趋同，首次构建了比较完整的有机统一体系，并为改进国际财务报告准则提供了有益借鉴，实现了我国企业会计准则建设新的跨越和突破”.

86 For example, AICPA (1970) defined accounting as “The process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information” (Accounting Principles Board, Statement No. 4, ‘Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises’, American Institute of Certified Public Accountants, New York, 1970, para. 40). 143

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The Vice-Minister of the MOF, Wang Jun (2007, p. 4) argued in one of his papers, which was published in Accounting Research (a prominent Chinese accounting journal) that:

In a market economy system, using a different reporting system would provide misleading information and impact the exchange of capitals. We therefore need to develop a set of standards which is harmonised with IFRS as IFRS is a high-quality standard which has been adopted globally. The convergence will help both domestic and overseas investors understand the accounting information reported by our listed companies.

In the article, Wang (2007) further argued that the newly issued CAS meets the demand to develop a market economy in China from three aspects: (1) improving the performance of listed companies; (2) supporting the „open-up‟ policy; and (3) maintaining the market economy and protecting pubic interests. Wang‟s statement assumed the benefits of a market-economy system and the globalisation of accounting standards, upon which the adoption of the international standards went unchallenged as a necessary step to achieve those benefits.

This view was revoiced by the Secretary-General of CICPA, Chen, Yugui (2006) in a press conference on the release of application guide for the new CAS:

The new accounting/auditing standards play a very important role in the development of China‟s socialist market economy in the following aspects: they conform to the trend of global convergence in auditing standards; they improve the quality of accounting information and coordinates an effective allocation of economic resources; they better safeguard the market order and protects public interest; they enhance the level of „opening-up‟ of the Chinese economy87. (Chen 2006, n. p.)

The Deputy Auditor-General of the Chinese National Audit Office, Dong, Dasheng, (2006) recognised as well the new CAS as part of the essential economic infrastructure in achieving the benefits of a market economic system. This is evident in his speech delivered in the release ceremony of the new CAS on 15 February, 2006:

87 Original Chinese text: “这套准则体系，适应了我国社会主义市场经济发展要求，顺应了审计准则国际趋同大势，对于提高会计信息质量和引导资源有效配置，维护资本市场秩序和保护社会公众利益，提高对外开放水平和完善社会主义市场经济体制，都具有十分重要的作用”.

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A sound accounting/auditing standards system forms a significant part of the infrastructure in China‟s socialist market economic system…this indicates that our country has basically set up an accounting/auditing standards system in lines with the international accounting/auditing standards. We believe that the new accounting/auditing standards will play an important role in the development of China‟s socialist market economy88. (Dong 2006, n. p.)

The Deputy Chairman of the Chinese Securities Regulatory Commission (CSRC), Fan, Fuchun (2006) spoke on 30 November 2006 in a meeting with CEOs and directors of Chinese listed companies, who noted the significance of the new CAS with a particular reference to the need for developing Chinese capital markets:

Firstly, the promulgation and implementation of the new accounting standards coincides with the share market reform…In the second place, it effectively meets the needs of innovation in the security market…In the third place, it meets the need for high-quality financial accounting information in the security market…. It has a direct influence on listed companies‟ corporate governance; it helps those companies improve the accounting system and financial management, which further improve the company‟s decision-making, internal control as well as the corresponding aspects in performance appraisal, etc. For accounting firms and other service agencies, the promulgation of the new accounting standards, on the one hand, offers new business opportunities; on the other hand it creates a new need for improving the internal control system due to the greater business risks that might occur during the process of introducing the new rules. In addition, the implementation of the new standards will update investors‟ investing knowledge89. (Fan 2006, n. p.)

Along a similar line, China Banking Regulatory Commission appraised on the new CAS in one of its administration notices that:

The New Accounting Standards reflect the demands of China‟s market- oriented economic development; regulate the accounting recognition,

88 Original Chinese text: “建立健全企业会计准则和审计准则体系，是完善我国社会主义市场经济体制一项十分重要的基础性工程…这标志着我国已基本构建起既符合我国社会主义市场经济体制和具体国情要求又与国际会计、审计准则充分趋同的准则体。我们相信，新会计、审计准则体系的发布与实施，对于提高我国会计、审计质量，促进我国社会主义市场经济的健康发展，必将发挥重要的积极作用”.

89 Original Chinese text: “建立健全企业会计准则和审计准则体系，是完善我国社会主义市场经济体制一项十分重要的基础性工程…这标志着我国已基本构建起既符合我国社会主义市场经济体制和具体国情要求又与国际会计、审计准则充分趋同的准则体。我们相信，新会计、审计准则体系的发布与实施，对于提高我国会计、审计质量，促进我国社会主义市场经济的健康发展，必将发挥重要的积极作用”. 145

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measurement and reporting acts of enterprises in a more all-round and systematic way, and start to converge with international accounting standards. At present, the accounting systems practiced by banking financial institutions are much differential, and different accounting processes are adopted by different types of institutions for handling a same business or by institutions of the same type, which damages the comparability and utility of accounting information and is adverse to analyse and evaluate risk status and financial results as well as conduct various kinds of banking supervisory work. All entities shall unify the thoughts, accurately recognise the inevitability and urgency to implement the New Accounting Standards, improve the consciousness of implementing the New Accounting Standards, make preparations and arrangements in advance so as to ensure the smooth transition of the accounting standards for banking industry. (China Banking Regulatory Commission 2007, n. p.)

5.4 Some Analyses on the Government Discourses

As above, having outlined some narratives that the government has articulated regarding the convergence of China‟s accounting standards with IFRS, this section explores some common grounds upon which these discourses have been positioned. These underlying assumptions are important because they play a fundamental role in structuring how complex phenomena are written about or spoken of, which influences action and have the capacity to change, mould and redefine the phenomena. Also an exploration of the assumptions helps open up the debate within which those discourses can be problematised and re-examined.

Within these official discourses, the major assumption that Chinese government has incorporated is the technical role that accounting plays in facilitating China‟s socio-economic development. As in JinRenqing (Minister of Finance)‟s comment that the new CAS “representing an important contribution on the part of fiscal and accounting work to economic and social development90”; or in Chen, Yugui (Secretary-General of CICPA)‟s that it “play a very important role in the development of China‟s socialist market economy”; or in Dong, Dasheng (Deputy Auditor-General of National Audit Office)‟s that it

90 The sentences that are underlined in this section (Section 5.4) are directly quoted from the previous section (Section 5.3). They are therefore not referenced here for ease of reading. 146

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is “a significant part of the infrastructure in China‟s socialist market economic system”.

More specifically, this accounting technology (as exemplified through the promotion of the new Chinese accounting standards) has been attributed as one of the fundamental infrastructures that the government utilises to facilitate China‟s on-going economic reform. As has been identified in this chapter, the following aspects of this economic reform are being assisted by the new CAS:

1. The establishment of a market-oriented economic system: for instance, the new CAS “improve market economic system” by Jin Renqing (Minister of Finance); or they “reflect the demands of China‟s market- oriented economic development” by China Banking Regulatory Commission. 2. The expansion of „opening-up‟ policy (participation into world markets): for instance, the new CAS “expand opening-up” by Jin Renqing (Minister of Finance); or they are “supporting the “open-up” policy” by Wang, Jun (the Vice-Minister of the MOF); or they “enhances the level of „opening-up‟ of Chinese economy” by Chen, Yugui (the Secretary- General of CICPA). 3. The convergence of national standards with international ones. For instance, the new CAS “reflects the requirement for convergence with the international auditing standards” by Lou, Jiwei (the Vice-Minister of MOF & CASC Chairman); or it “conforms to the trend of global convergence” by Chen, Yugui (the Secretary-General of CICPA). 4. The preference of financial capital and the need to strengthen the development of capital markets. For instance, without the convergence it “would provide misleading information and impact the exchange of capitals” by Wang, Jun (the Vice-Minister of the MOF); or the convergence meets “the needs of innovation in the security market” by Fan, Fuchun (the Deputy Chairman of the Chinese Securities Regulatory Commission).

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Within this discussion of accounting and economic development, the notion of „market economy‟ is seen to be an essential part of the reform process. As discussed in Chapter Three, all these emphases, such as the „opening up‟ of domestic markets or more active participation in global capital markets, are indicative of China‟s preference for a reform agenda that aligns with neoliberal assumptions. These discourses, therefore, have manifested in the fact that the government has been working on instituting such a „free market‟. Neoliberal capitalism requires active management and strong state intervention, and, as implied within these government discourses, accounting technologies can be a significant part of this process.

5.5 Media’s View of the Convergence

This section shifts the focus from the government to other social institutions. Support for accounting convergence from high-ranking government officers has been quoted by various sources including television, radio, various literature and the internet. In order to shed further light, the internet is chosen as the data source for this analysis: online versions of major media are the same as their „paper‟ versions; the internet offers powerful searching and sorting functions; and the materials can be accessed easily from outside of China without compromising the information content that this thesis requires. As a result, this thesis identifies the website www.news.cn (its English version has a domain name of its own: chinaview.cn) as the main site of references. It is the online news service of Xinhua News Agency – the official press agency of the government of the PRC and the largest PRC source of information and press conferences. Xinhua is an institution of the State Council of China and reports directly to the Communist Party of China's Public Information Department91; Xinhua‟s opinion represents the authoritative voice in mainland China, as other media will normally follow it to ensure they are „politically correct‟.

91 This can also be seen from its English version website: http://news.xinhuanet.com/english/2007-08/31/content_6637522.htm.

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The following section lists all the news items that could be identified from Xinhua‟s website between 2006 and 200792 that directly addressed the new CAS93. No specific content was screened out during this process. The purpose was to not only look for items that supported the view of this thesis, but also try to include everything that related to CAS from those news to show the small number of statements opposed to the new CAS.

It should be noted that the major analysis undertaken in this section is to highlight the theme by underlining key sentences. This is considered adequate at this stage of analysis because the purpose of this section is to demonstrate the consistencies between the media‟s views and the government‟s toward the convergence. The sentences themselves have spoken clearly enough of the general themes without further explanation. As outlined94, all the news items except the first articulate certain advantages of the new CAS and describe the convergence as a positive step that improves China‟s economic development:

SHANGHAI, Feb 15, 2006 (Chu 2007, n. p.) -- The new accounting standards will be implemented by listed companies next year. There might be major changes in the profit reported by listed companies to which investors need to pay more attention…among those changes that have been introduced into the new standards the use of fair value accounting has been a highlight spot.

HONG KONG, May 12, 2006 (Mo 2006, n. p.) -- a joint statement regarding the convergence of accounting standards, signed by Liu Yuting, Director- General of Administrative Office of China Accounting Standards Committee, and Winnie Cheung, Chief Executive and Registrar of Hong Kong Institute of Certified Public Accountants (CPAs), shows that the convergence may boost the confidence of international investors on mainland accountants' financial sheets… Paul Chan, President of the Hong Kong Institute of CPAs, said the move by both sides would help more mainland enterprises to raise funds in the Hong Kong stocks and lift international investors' confidence on accountants from the Chinese mainland and Hong Kong…. “It is an urgent need for the Chinese

92 2006 was when the government announced the decision of adopting IFRS, and 2007 was the year when the new CAS was implemented. Therefore most of the news that covered the CAS only emerged within 2006 and 2007.

93 The author searched the website with the key word „the new accounting standard‟. The web links of the news items are shown in the reference list of this thesis.

94 The following are the English versions of the news items as translated and provided by the Xinhua News Agency website. 149

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mainland to converge its accounting standards with the rest of the world to respond to the globalization of capital markets,” said Vice Minister of Finance Wang Jun, also Secretary-General of China Accounting Standards Committee, after the joint statement's signing ceremony…. “The convergence would also greatly reduce unnecessary trouble in the future,” Wang said.

BEIJING, June 23, 2006 (Luan 2006, n. p.) -- China will introduce new accounting and auditing standards that are similar in many ways to global ones in listed firms as of Jan 01 next year, officials with securities regulatory commission said on Friday. The introduction of the standards, as Wang Jun, vice-minister of finance said recently, represents an important step China has made in global convergence of accounting standards. The implementation of the standards will improve the quality of the information disclosed by listed firms, which will improve the international credibility of the Chinese capital market.

BEIJING, June 2 (Li 2006a, n. p.) -- China's listed companies will adopt international accounting standards next year and improve their information disclosure in an effort to clean financial markets and attract more investors, an official at the China Securities Regulatory Commission said yesterday, the Associated Press reported.

BEIJING, June 3 (Li 2006b, n. p.) -- More Chinese financial officials and accountants will participate in exchange programmes with the International Federation of Accountants (IFAC) to speed up the country's convergence with international accounting standards, a top IFAC official said. The exchanges will facilitate faster change within China's accounting businesses and will eventually benefit the global economy, according to Graham Ward, IFAC president.... That will help strengthen accounting businesses in China, build confidence in their financial reporting model and increase the credibility of their financial information prepared in both domestic and overseas markets, said Ward. However, apart from scale and standards, they are facing other challenges that are shared by the accounting profession worldwide, such as governance, internal control and ethics and integrity, said Ward.

BEIJING, Nov. 7, 2006 (Nie 2006, n. p.) -- China's Ministry of Finance has issued guidelines for applying new accounting standards at domestic enterprises, said an official with the ministry on Tuesday…The new accounting standard system aims to improve the competitiveness of Chinese enterprises by demanding more transparent and valuable fiscal reports, said Vice Minister of Finance Wang Jun at a training class for accountants. More transparent fiscal report will allow investors and the public better know the true financial picture of companies and in turn help enterprises raise funds, said Ha Jiming, an economist with the China International Capital Corporation Limited.

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BEIJING, Dec. 22, 2006 (Zhu 2006, n. p.) -- Twenty-four of China's state- owned enterprises will implement new company accounting standards from 2007, said a senior official with the State-owned Assets and Administration Commission (SAAC) on Friday…. The Ministry of Finance issued the new standards in February. Experts said they marked the establishment of accounting and auditing standards in line with China's economic development and the international standards.

BEIJING, Dec. 27, 2006 (Han 2006, n. p.) -- The new accounting and auditing standards will be implemented as of January 01, 2007. Professionals say that is an important step towards internationalisation of Chinese accounting standards. Liu Yuting, Director-General of Administrative Office of China Accounting Standards Committee, said that “the new CAS harmonises with China‟s socialist market economy and converges with IFRS. Its implementation will further improve the quality of information of listed companies and attract more foreign investment into China and promote domestic enterprises to „go abroad‟”.... The head of finance department of SinoPetro said to the reporter that the new CAS would greatly reduce the workload and costs of disclosure of accounting information and remove the obstacles for enterprises‟ overseas financing; it would further promote China‟s economic development and enhance China‟s importance in global capital market.

BEIJING, July 12, 2007 (Gao 2007, n. p.) -- China's central-level State- Owned Enterprises (SOEs) and large to mid-scale companies will all adopt China's new accounting standards that comply with the International Financial Reporting Standards (IFRS) by the end of 2009…. “There is a clear momentum toward accepting the IFRS as the common financial reporting language throughout the world, and companies from more and more countries including China are benefiting from the trend,” said David Tweedie, chairman of the International Accounting Standards Board (IASB)… “The benefits of these accounting reforms for China are clear,” said Tweedie, “The new Chinese standards that incorporate accounting principles familiar to investors worldwide will encourage investor confidence in China's capital market and financial reporting, and will be an additional spur for investment from both domestic and foreign sources of capital.” He added that for Chinese companies that are playing an increasingly global role, the acceptance of the new standards should also reduce the cost of complying with the accounting regimes of different jurisdictions in which they operate.

July 04, 2007 (Wang, Y. 2007, n. p.) -- At the same time, an accounting standard accepted by both the mainland and Hong Kong should be adopted. The uniform principle will help estimate the trade taxes and, more importantly, prevent trade conflicts. Generally Accepted Accounting Principles (GAAP) and International Accounting Standards (IAS) are two sets of accounting standards accepted around the world. The shortcomings in GAAP, which is generally in practice in North America, have been

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disclosed through a series of business scandals since 2001. IAS will hopefully become a global standard for accounting.

BEIJING, June 13, 2007 (Song 2007, n. p.) -- The European Commission (EC) is to approve a set of Chinese accounting standards (CAS) in line with those used in EU nations by the end of 2008, a senior EC official has said. China adopted new CAS for all listed companies and auditing standards for accounting firms in January, marking substantial progress in convergence with the IFRS and the international standards on auditing. In talks with Chinese vice -Minister of Finance Wang Jun, whose department oversees accounting affairs, on Monday, McCreevy stressed the EC's strong support for convergence between the IFRS and the CAS. He welcomed China's progress in developing accounting standards and contributing to international convergence, and encouraged China to continue the convergence process. McCreevy and Wang agreed that consistent application of accounting standards needed proper enforcement systems and education and training.

BRUSSELS, July 12, 2007 (Lin 2007, n. p.) -- The European Commission on Thursday praised China's progress towards accounting standards convergence. China's new Accounting Standards for Business Enterprises (ASBE) is a positive step, said the commission in a report to the European Parliament and the European Securities Committee. China will become the fourth country, after the United States, Japan and Canada, to have accounting standards equivalent to those in the EU.

As mentioned above, the significance of presenting the media view in this section is twofold: to provide evidence of the dominant view of this event in the most authoritative Chinese media outlet, and to demonstrate the similarity between the assertions made by the Chinese government and the media about the benefits of the convergence, such as boosting investors‟ confidence, attracting more investors or facilitating the globalisation of capital markets. To some extent, this reinforces the dominant effect of the strict media control in China. The discursive consistency demonstrates the intertextuality that the second layer of the analytical framework of CDA emphasises. This analysis identifies, according to Fairclough (1989, p. 80), “a set of „traces‟ of the production process or a set of „cues‟ for the interpretation process that forms part of the „socio-cognitive‟ dimensions of text production and interpretation within the interplay of discourse participants”. This section has shown a kind of collaboration between these key players (international standards-setting bodies, Chinese government and media) that effaces the complexity and multiplicity of the event under investigation. This dimension of analysis is

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further illustrated in the next section, which examines a significant discursive space – accounting academia. The implications, possibilities and problems of this „collaboration‟ are further challenged in later chapters, where the third layer of the analytical framework is applied.

5.6 Academic View of the Convergence and Fair Value Accounting

The previous sections have demonstrated the position of the Chinese government and central official news agency regarding the convergence of IFRS in China. They were consistent with each other, and expressed exclusively positive opinions on the convergence and the CAS. Compared to these discourses, academics‟ comments were much deeper in terms of the questions addressed and the economic or accounting theories used. Among them, however, the mainstream voice remained supportive towards the convergence and the CAS.

The difference between government agents and academics is characterised by a different focus in their discourses. Besides those macro-level issues highlighted by the government and media, academics also discussed one major issue – FVA. This discussion had been absent in other areas, as it requires particular knowledge of, and expertise in, accounting. The following sections, therefore, start from a summary of what has been discussed by leading Chinese accounting academics regarding the convergence and FVA in the new CAS.

The data is drawn from a particular Chinese accounting academic journal, Accounting Research, an accounting journal published by the Accounting Society of China (ASC)95. It should be noted that Accounting Research is a peer-reviewed academic journal, but it is not transparent in terms of how the ASC forms its editorial board. Given the fact that the ASC is founded and supervised by the Ministry Of Finance, it is difficult to exclude the possibility

95 The Accounting Society of China is founded and recognised by the MOF as the only national association representing the accounting profession in China.

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of influence from the government96. In spite of this, Accounting Research is the only accounting journal in the top academic journal ranking lists released by the Academic Degrees Committee of the State Council (ADCSC) 97 . Articles published in that journal normally are considered to be of high quality, and are the most influential among the Chinese accounting community, including academics and practitioners. The opinions expressed by this journal, therefore, can be seen as the most authoritative and influential guide among Chinese accounting academics.

In the context of CDA, this journal forms a vital discursive space, from which the influential academic discourses regarding the convergence and FVA can be examined. This forms the foundation for the second layer of analysis (see Section 4.3) to reveal how the topic is discursively produced, distributed and consumed within the academic community.

5.6.1 The New Chinese Accounting Standards

Accounting Research is published monthly, with about 15 articles in each issue. Since March 2006 (the announcement of the convergence) to July 201098, there have been 11 articles that directly address the convergence of IFRS or the new CAS. What is worthy of mentioning here is that all the articles were supportive of the convergence.

96 A good indication of this is that the current (2011) chair of the editorial board – Jin, Lianshu – has been the head of the Central Discipline Inspection Commission of CCP and the chief CCP member in the Ministry of Finance since October 1994 (金莲淑, 1994 年 10 月至现在任中纪委驻财政部纪检组长、财政部党组成员, accessed 26 March 2011, available from; http://www.asc.net.cn/Pages/ManuScript/P_PeriodicalEditorialBoard.aspx and http://baike.baidu.com/view/488531.htm).

97 This ranking list is recognised as the most authoritative among the major universities in China (accessed 26 March 2011, available from: http://spa.swufe.edu.cn/xszj/Article_Show.asp?ArticleID=1090).

98 In contrast to the media which stopped covering news regarding the convergence event after 2007, July 2010 is the latest date that relevant discourses can be found in this journal up to the end of 2010. Therefore the period chosen for examination is from March 2006 (the announcement of the decision to adopt the IFRS) to July 2010.

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On March 2006 (one month after the announcement of the convergence), Ge, Jiashu – an accounting professor from Xiamen University99 – published an article titled as “A Standard of the Result of Innovation and Convergence” in this journal. The article discussed the „new Basic Standard‟, which was the first chapter of the newly issued CAS. Ge (2006, p. 6) believed that “accounting is the international language, the globalisation of the accounting standard is the path that accounting should undergo100.” The article viewed the new CAS as: …a combination of innovation and convergence of IFRS and a milestone of the development of Chinese accounting standard setting…the new Basic Standard implies several accounting presumptions and clarifies the objectives of financial reports and the requirements of qualified accounting information. It is a significant progress towards to the IFRS101. (Ge 2006, p. 4)

Ge (2006) believed that accounting standards were a very important institutional arrangement for a government to prevent possible socialist market failure. With regard to accounting measurement, the principle indicated that the measurement should be based on a cost model; the other methods such as replacement costs, net realisable value and fair value, were also allowed if that value could be obtained and measured reliably102.

In the same issue of that journal, Liu and Zhang (2006, p. 7) analysed some concerns from the public on the new CAS and concluded that “the appropriate use of fair value will prevent profits being manipulated, debt restructuring will not be abused, and it will be more difficult to adjust profit through impairment

99 Xiamen University is generally recognised as one of the top universities in China. It is ranked as the 11th in China by Shanghai Jiaotong University, among which six subjects reach A++ level (Economics and Management, Law, Chemistry, Journalism, Music, Communication and Mathematics) (accessed 26 March 2011, available from http://www.arwu.org/).

100 Original Chinese text: “会计是国际通用语言，趋同是大势所趋”.

101 Original Chinese text: “是创新与趋同的结合，是我国会计发展史上一个新的重要的历程碑 …新会计准则暗含着若干会计基本假设，明确了财务报告的目标和会计信息质量要求…在国际会计惯例趋同方面前进了重要的一步”.

102 The old CAS allows only the historical cost model for accounting measurement.

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of assets 103 .” An implication of this was that the possible problems with implementing FVA would be minimal.

Referring to the benefits of the convergence, Zhou and Zhang (2006, p. 6) wrote:

The new accounting standards will reduce the costs of financial reporting for domestic and foreign investment and financing… the implementation of new accounting standards, from the long-term perspective, benefits capital market development and provides better information of business value evaluation for the investors, creditors, employees and other stakeholders.… Coupled with a series of reforms on capital markets, finance and state-owned enterprise in many fields simultaneously, it helps enterprises, especially state-owned enterprises, to maintain a more rational capital structure104.

Wang (2007, p.4) outlined the significance of the new CAS:

First, the promulgation of Accounting Standards for Business Enterprises is to benefit the listed companies and promote capital market development. Listed companies are the cornerstone of capital market development. With better performance of listed companies the investment value of the capital markets will be enhanced. As of November 27, 2006, the total number of listed companies in Shanghai and Shenzhen stock exchanges in China is more than 1400, with the total market value exceeding 7 trillion RMB, equivalent to one third of the 2006 GDP forecast. Since the listed companies have become the backbone driving the economic reform and industry growth, we should further provide them sound services including the development of high-quality accounting standards....

Second, the release of Accounting Standards for Business Enterprises is to improve the market economic system and enhance the level of „opening up‟ policy.... If the accounting standards of various countries or regions are quite different, it will greatly increase the costs for both the enterprises and investors….

103 Original Chinese text: “本文分析后认为公允价值的适度运用不会成为利润操纵的工具、债务重组不会被滥用、减值准备调节利润空间越来越小”.

104 Original Chinese text: “降低了财务报表编制和会计信息理解与应用的成本、降低国内外投融资成本„ 新会计准则实施, 长期利好于资本市场发展和投资者、债权人、员工等利益相关者对企业价值的评价, 加之资本市场改革、金融改革、国有企业改革等多个领域改革的同步深入, 企业尤其是国有企业的资本结构将趋于合理”.

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Third, the implementation of Accounting Standards for Business Enterprises is to maintain the economic order and protect public interests....

New guidelines have significantly improved the old standards to enable a more transparent and effective market environment for investors and the public105.

Similar comments were provided by Liu (2007, p. 2):

The new Chinese Accounting Standards System is a result of combining experiences from both the domestic accounting experience and the development of the International Financial Reporting Standards, which has been widely recognised by the international community.... Except for some minor differences, it has substantially converged with the IFRS and laid a solid foundation for harmonising our national accounting standards with that of major economies in the world106.

Fu (2007) considered the 1993 accounting standards, the 2001 Accounting Standards for Business Enterprises and the 2006 new CAS to be milestones of Chinese enterprise accounting reform, which was closely related to the nation‟s economic reform:

It enables our country's accounting practice more to be in line with the development of market economy. It helps maintain the economic order for the market economic system and protect the public interest and improve social harmony; the convergence with International Financial Reporting Standards is a further symbol of the internationalisation of Chinese accounting practices. As such, the 2006 Accounting Standards for

105 Original Chinese text: “其意义择要有三: 第一, 企业会计准则体系的发布实施, 是提高上市公司质量、促进资本市场发展的需要。上市公司是资本市场发展的基石。提高上市公司质量, 是提高资本市场投资价值的源泉, 。截至2006年11月27日, 我国沪深两市上市公司总数已超过 1400家, 总市值突破7万亿元, 相当于2006年预期GDP的1 /3左右。上市公司已成为推动企业改革、带动行业成长的中坚力量, 我们应该为上市公司的进一步发展服好务, 包括制定一套高质量的会计标准。„ 第二, 企业会计准则体系的发布实施, 是完善市场经济体制、提高对外开放水平的需要。„ 如果各个国家或地区会计准则差异较大, 无形之中就大大增加了企业的准则转换成本, 实质上是增加了企业的上市成本, 也增加了投资者的成本, 这对谁都是不利的„ 第三, 企业会计准则体系的发布实施, 是维护市场经济秩序和社会公众利益的需要。„ 新准则对现行的财务报告披露要求进行了全面梳理和显著改进, 创建了较为完整的财务报告体系, 对会计信息披露时间、空间、范围、内容等的全面系统规定, 将大大提高企业会计信息透明度, 有效维护投资者和社会公众的知情权, 推动建立公开、公平、公正的市场经济秩序”.

106 Original Chinese text: “中国企业会计准则体系是总结我国会计改革经验、借鉴国际财务报告准则的结果, 既符合中国经济发展的实际需要, 又得到国际社会的广泛认同。„ 除了极个别问题尚存一定差异以外, 准则体系已实现了与国际财务报告准则的实质性趋同, 为实现与世界主要经济体的会计准则等效奠定了坚实的基础”.

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Business Enterprises can be viewed as a milestone in China‟s accounting reform107. (Fu 2007, pp. 23-24)

Luan (2008) discussed the financial nature of the new accounting standards system:

…as reflected through its recognition criterion, measurement technique and some of its reporting contents that focus on the „cash flow‟ aspect of companies‟ performance108.

He believed that the financial (cash flow) aspect was the most significant indicator of a firm‟s performance. From this respect, the new CAS signified great progress, as it responded to the development of the financial market.

Liu, Yuting (2007), Director-General of the Administrative Office of the China Accounting Standards Committee, provided a detailed introduction to the new CAS and gave a very positive appraisal. With his co-authors (Liu et al. 2008), he published a study in Accounting Research concluding that the new CAS had been smoothly implemented by Chinese listed companies in the 2007 financial year.

There were three empirical studies on the effect of the new CAS. Zhang and Zhang (2008, p. 39) examined the implementation of the new CAS in the consolidated financial statements, and concluded that:

The implementation of the new accounting standards significantly improves the value relevance of the information on minority equity because it can explain most of the value relevance improvement of the entire net equity….

107 Original Chinese text: “使我国的企业会计更加符合市场经济的需要, 对于维护身材经济秩序, 完善市场经济体制, 保障社会公众利益, 促进社会和谐具有重要意义; 实现了与国际财务报告准则的实质趋同, 是我国会计进一步走向世界的标志。2006 年准则作为我国企业会计改革进程中具有里程碑意义的成果”.

108 Original Chinese text: “本文以现代市场经济为背景, 以新会计准则体系为依据, 阐述了财务管理“现金化”的本质, 论述了新会计准则体系在规范重心、确认标准、计量技术、报告内容等方面的管理性质, 从环境变化和会计自身变革等角度分析了其必然性, 论述了会计准则融入财务理念的理论价值和实践价值”.

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Our results suggest that the implementation of the new accounting standards improves the informative contents of consolidated financial statements109.

Lu and Zhang (2009, p. 20) discovered that “the implementation of the new accounting standards from 1 January 2007 in China has potentially enlarged the difference between the earnings reported in consolidated report and the parent company‟s report110”. Their research examined the consequence of this change and confirmed that the difference significantly improved the relevance of accounting information for investors, compared to the old accounting standards.

Xiao et al. (2009) provided an empirical study on the effect of Asset Exchange (AE) on financial numbers under the new CAS. It argued that “the motivation to manipulate profit using related-party AE has been eased…the implementation of the new accounting standard in 2007 improved the value relevance of AE111.” (Xiao et al. 2009, p. 38)

As evident from the above, all the articles published in this journal hold the same supportive view on the convergence of IFRS in China from various aspects. It has often been speculated that “it is traditional in China for academics to support government positions” (Ding & Graham 2007, p. 563); this section presents an indication of this kind of support, where alternative views are largely absent in this top accounting journal.

109 Original Chinese text: “本文发现, 新会计准下, 少数股东权益的价值相关性显著提高, 且显著高于净资产其他组成部分的价值相关性提高程度; 少数股东损益信息含量显著增加, 且增加量显著高于盈余的其他组成部分带来的信息增加量。本文的经验证据支持了新会计准则中合并财务报表的实体理论, 研究结论说明, 新会计准则的实施使得合并财务报表具有更多信息含量”.

110 Original Chinese text: “我国自 2007 年 1 月 1 日起实施的新会计准则, 扩大了合并报表净利润与母公司报表净利润之间的差异。本文研究新旧准则下该差异相对于合并报表净利润的增量信息含量的变化。实证结果显示, 上述差异在旧准则下并没有为母公司投资者的股票定价决策带来额外的信息; 而在新准则下, 该差异的决策相关性显著提高, 并能提供合并报表净利润之外的增量信息含量。这就意味着,合并报表净利润中已包括但母公司报表净利润中未包括的子公司已实现而未分配盈余, 能够在合并报表净利润基础上提供增量信息含量”.

111 Original Chinese text: “利用关联方资产置换改善公司盈利水平的动机得到一定缓解...2007 年重新引入公允价值计量属性的准则实施显著提升了公司资产置换价值相关性”. 159

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5.6.2 Supporters of Fair Value Accounting

In terms of FVA – the focus of this thesis as explained earlier – 15 articles were identified in Accounting Research during the period 2006–2010, within which 10 were supportive of FVA, two were against it and three maintained a neutral position. This section provides a review of the supporters, and the following section discusses the others.

Lu (2006) evaluated the implementation of FVA in Western countries and suggested that “because of its high degree of relevance, fair value accounting is likely to replace historical cost accounting, and become the measurement basis of assets and liabilities in the 21st century.112” (Lu 2006, p. 81)

Wang (2006, p. 31) regarded the adoption of FVA as the “most noticeable aspect” of the new CAS. He believed that:

The application of fair value measurement not only hastens the substantive step for the international convergence of accounting standards but also symbolizes the development of our market economy. It has the profound significance for the accounting standards to fully display the function of infrastructure in the capital market113.

Ge and Xu (2006) discussed three measurement attributes of assets and liabilities: market price, historical cost and selling (exit) price. They claimed that the “market price is the fundamental measurement attribute of all those investigated...the study of fair value is of high significance to the improvement of financial reporting measurement114.” (Ge & Xu 2006, p. 14)

112 Original Chinese text: “总的来看, 公允价值由于其高度的相关性, 已受到各界的高度关注, 公允价值会计极有可能成为21世纪资产和负债的计量基础”.

113 Original Chinese text: “我国新会计准则在诸多方面实现了突破, 其中公允价值计量属性的运用可谓是最为引人注目的方面。本文认为, 公允价值计量属性的运用, 既是我国会计准则在国际趋同中迈出的实质性步伐, 也标志着我国市场经济日趋成熟, 这对充分发挥会计准则在资本市场中基础设施作用具有深远意义”.

114 Original Chinese text: “市场价格是所有计量属性的基本概念„ 公允价值计量的研究，对于财务会计模式的改进与改革将具有深远的意义”. 160

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Liu and Zhang (2006) argued that FVA would not become a new way for earnings management, despite the general public‟s increasing concerns. They claimed the reasons were: 1) the use of fair value measurement was prevalent in many other Western countries, together with very strong theoretical supports, and the fact that FVA provided more relevant information for users than other measurement methods; and (2) the market environment in China, which they asserted was mature enough to implement the „fair value‟ principle for listed companies. They believed that the fundamentals for a well- functioning market economy were well-established in contemporary China. For instance, since 2003 the Chinese government had imposed a series of new regulations to strengthen the market-oriented economic system in areas including: more rigid corporate governance in listed companies; more disclosure requirement of financial reporting; enforcement of the sanction of relevant corporate regulations; and the self-regulation of professional accounting bodies. The results of these measurements, according to Liu and Zhang (2006), were that the internal control of listed companies had been improved; investors‟ analytical skills were enhanced and the capital markets had become more efficient. All these guaranteed a mature environment for the implementation of FVA in contemporary China.

In suggesting reasons for the implementation of FVA, Xia and Shao (2007, p. 24) wrote that:

The fact that historical cost accounting is inadaptable to a volatile business environment is the reason [of using FVA], and the objective that the financial reporting of an entity should provide useful information for decision-making has created a suitable environment for the practice of FVA115.

Along a similar line, Wang and Hu (2007, p. 10) described the significance of adopting FVA:

115 Original Chinese text: “认为历史成本会计对不稳定的经营环境的不适应性, 是公允价值会计实践的根本诱因; 决策有用观的财务报告目标, 为公允价值会计实践创造了适宜的环境”.

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Fair value contains a comprehensive attribute that is embedded in both current market value and present value; the information it provides is not only relevant, but also reasonably reliable116.

Jiang and Zhang (2007, p. 20) claimed that “a large body of empirical evidence shows that conservative accounting and aggressive accounting both mislead investors; therefore, incorporating fair value accounting into accounting standards will benefit the development of capital markets117”. Wang concluded that: “there is no doubt that the promotion and application of the fair value accounting leads to the prosperity and development of the Chinese market118.” (Wang, H. 2007, p. 12)

The journal translated an English paper written by Barth (2006)119 in 2007. This article held a very clear position in supporting the use of FVA: “The purpose of this paper is to explain why the question is how, not if, today‟s financial statements should include estimates of the future.” (Barth 2006, p. 271) This was in response to Barth‟s contention that “many who oppose the use of fair value measurements in financial statements do so because they believe using fair value measurements introduces expectations of the future into today‟s financial statements.” (Barth 2006, p. 271) According to this article, “with few exceptions, such as cash in the entity‟s domestic currency, amounts in today‟s financial statements all reflect estimates of the future…thus, the question is not whether today‟s financial statements should incorporate estimates of the future. The question is how they should do so.” (Barth 2006, p. 273) Further, FVA is supported in this article with reference to the need for estimation:

116Original Chinese text: “公允价值是由“现行市价”和“现值”两种计量属性发展而来的一种具有 “复合”性质的计量属性; 公允价值会计信息不仅相关, 而且具备合理的可靠性”.

117 Original Chinese text: “大量实证研究结果表明稳健会计方法和激进会计方法同样给股权投资者理解会计信息造成障碍, 因此在会计准则中适当引入公允价值计量方法是有益于资本市场发展的”.

118Original Chinese text: “毫无疑问, 公允价值的推广应用对中国市场的理性繁荣和发展大有裨益”.

119 Mary E. Barth is a Professor at Stanford University and a member of the International Accounting Standards Board. The article was published in Accounting Horizons, vol.20, no.3, 2006. 162

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…the use of such estimates is increasing. This increase results primarily from standard-setters‟ attempts to achieve the objective of financial reporting, which is to provide information useful to financial statement users in making economic decisions. Asset and liability measures that reflect current economic conditions and up-to-date expectations of the future should result in more useful information for making these decisions. (Barth 2006, p. 283)

Ge (2007, p. 3) was also in favour of FVA:

After analysing the characteristics, the merits and the necessary conditions as well as the limitations due to the estimation in fair value measurement, this paper concludes that fair value measurements represent the trend of the development in financial accounting. If applied broadly, financial accounting might be able to reflect an entity‟s value, or its approximation120.

5.6.3 Alternative Views of Fair Value Accounting

As mentioned, two articles were against the implementation of FVA in China. Luo (2006) challenged the implementation of FVA in the banking industry in China due to the difficulties of obtaining a „fair‟ value under the market conditions in China at the time. The paper warned that:

Many conceptual issues and practical difficulties related to fair value measurement have not been resolved completely, its implementation will exert a significant impact on the bank industry and the whole financial system121. (Luo 2006, p. 12)

Li (2008) introduced the definition of fair value and the hierarchy of fair value measurement as stipulated in SFAS 157 Fair Value Measurement, issued by the FASB in September 2006. The paper raised some potential issues for the implementation of FVA in China, including the fact that China was still in a

120Original Chinese text: “文章认为, 公允价值计量乃是财务会计发展的大势所趋; 如果公允价值得以全面应用, 则财务会计将有可能反映企业的价值(或其近似值)”.

121 Original Chinese text: “在公允价值计量是大势所趋的背景下, 本文从理论上分析了公允价值计量对银行业以及金融稳定性的影响与冲击, 并结合我国金融工具会计准则的颁布与实施, 探讨了公允价值计量对我国银行业的预期影响。本文的分析表明, 公允价值计量所涉及的重要概念以及许多实际重大问题还没有得以完全解决, 并且它的实施确实会对银行业乃至整个金融体系产生重大影响和冲击”.

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transition period toward a market economy. More specifically, Li (2008, p. 22) wrote: The calculation of fair value involves many subjective judgments, which would undermine the reliability of the information provided. Because of this lack of reliability, it is difficult to say that financial statements can be „relevant‟ to users; in fact, they could even be misleading. Especially in emerging markets like China, a considerable number of assets or liabilities lack active markets upon which a reliable market price can be quoted. In addition, there are other factors that affect the reliability of fair value measurement, such as the fact that many professional assets appraisers and certified public accountants have inadequate knowledge of FV measurement; the corporate governance of many firms seriously needs improvement; and „earnings management‟ is still common practice among listed firms122.

The other three articles were neutral towards the adoption of FVA. Lu et al. (2007) presented a theoretical discussion on FVA without referring to any practical issues, writing that “fair value accounting is placed in an uncertain economic environment and it is a point estimation of intrinsic value; therefore, the information about fair value is incomplete123.” The article emphasised the importance of disclosing a range of values rather than a price at a particular point in time.

Liu and Sun (2008) investigated the implementation of FVA in a particular area – the initial recognition of employee termination indemnity. They suggested some difficulties in applying FVA, writing that “within the weak property-protecting system in contemporary China, research on fair value accounting should be focused on the enforcing mechanism124.” (Liu & Sun 2008, p. 4)

122 Original Chinese text: “这一级次所获得的公允价值可能会带有很多的主观判断, 因而有可能与“公允价值”能够提供更相关信息的初衷相去甚远。在缺乏可靠性的情况下, 很难说对于财务报表使用者的经济决策存在“相关性”, 甚至可能会产生误导。特别是在类似中国这样兼具新兴市场经济和转型经济特征的国家, 由于相当一些资产或负债项目还不存在活跃市场; 需要依靠交易对手提供的报价来完成公允价值计量, 而交易对手报价往往并不及时和准确, 资产评估师、注册会计师等专业人士的素质尚待提高, 一些企业的治理结构还不完善, 利润操纵、“盈余管理” 的动机和倾向仍然一定程度地存在, 这些因素都会对公允价值的可靠计量产生一定的影响”.

123 Original Chinese text: “公允价值实际上不是‘价值’，而是价格，是对价值的点的估计”.

124 Original Chinese text: “在当前中国产权法律保护尚待完善的环境中，公允价值研究的重点因在其执行机制”. 164

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Sun and Du (2008, p. 29) raised a similar concern about the regulatory environment in China and its influences on the use of FVA, urging that “in order to guarantee the decision usefulness of fair value information, we need an effective regulatory arrangement125.”

There were few contrasting or negative viewpoints in the mainstream discourses. One of these few, Luo‟s (2006) article, focused narrowly on the banking industry; Li‟s (2008) criticism was rather general; and the remaining alternative views did not take firm stands.

5.6.4 Financial Crisis and Fair Value Accounting

Given that the process of convergence occurred before the GFC (2007-2011), it is also important to consider the impact this event had on discourses of convergence and FVA in China.

Since 2009, there have been 10 articles in total discussing the relationship between FVA and the financial crisis. Some of these (Huang 2009, Liu, S. 2009, Yu 2009) acknowledged the debates about FVA occurring in the Western countries during the crisis (more details of the discussion in the West are provided in Chapter Six). However, the theme of the discussion was not to blame FVA; for example, Liu (2009, p. 8) wrote that FVA “was not the cause of the crisis. The core issue is to improve the evaluation of fair value (i.e. the pricing or quotation system)126”. The focus of the discussion was how to solve the problems caused by FVA through “improving the regulatory environment, providing more operational guidelines and promoting asset appraisal for

125 Original Chinese text: “本文运用两个博弈模型, 说明了保障公允价值信息的决策有用性必须依赖于有效的管制安排”.

126 Original Chinese text: “美国金融危机爆发之初, 公允价值会计被指责为具有经济顺周期性。我们认为, 这不是问题的关键,公允价值的形成过程(即定价机制或报价系统) 才是完善公允价值相关准则的核心问题”.

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financial reporting purposes127” (Pan 2009, p. 3). Similar suggestions were provided by Liu (2009), Chen and Lu (2009), Zhi and Tong (2010) .

According to these researchers, it‟s important to maintain FVA because of the problems of traditional accounting measurement models, such as historical cost accounting (HCA):

The historical cost measurement model provides more reliable and objective information that can be verified, but the knowledge economy and information age brought new pressures among which the lack of relevance is the biggest challenge to the historical cost accounting128. (Zhou & Liu 2009, p. 15)

Zhang and Wu (2010) defended FVA by suggesting the problems that can arise from not using it:

Suspending the use of fair value measurement and converting to historical cost measurement with more emphasises on accounting conservatism will only lead to a reversal of accounting practices, resulting in inconsistencies and increase uncertainty for investors129. (Zhang & Wu 2010, p. 34)

Some researchers offered recommendations to improve the practice of FVA, such as Wang et al. (2009), who proposed an information framework to enhance cooperation between accounting standards-setting bodies and the regulatory bodies of capital markets:

…through this framework, the participants of the market will know some information, not only including estimates of the current financial condition, estimates of risk profiles, and the uncertainty of measures from the micro- perspective, but also including the relativity of risk, the

127Original Chinese text: “本文认为, 应当通过完善相关规范制度、提供必要的操作指南、推动财务报告目的资产评估业务的发展来解决现实中存在的问题”.

128Original Chinese text: “历史成本计量模式具有较强的可靠性、客观性和可验证性, 但是知识经济和信息时代的到来使得历史成本适用的环境不断发生改变, 缺乏相关性是其面临的最大挑战”.

129Original Chinese text: “暂停公允价值计量属性的使用, 全面转为历史成本计量属性, 并辅之以广泛的会计稳健性, 只会导致会计实务的逆转, 导致不一致和增加投资者的不确定性”.

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probability of risk contagion, and the systematic risk from the macro- perspective130. (Wang et al. 2009, p. 24)

Along a similar line, Xu (2009) proposed that financial institutions including banks could create a „dynamic provision‟ whenever they sense possible swings in asset values. Xu (2009, p. 14) believed that this measure “can not only improve fair value accounting but also lessen financial pro-cyclicality131.”

5.7 Conclusion

In summary, this chapter comprises the second layer of the CDA framework, which focuses on the production, distribution and consumption of discourses. In doing so, this chapter first explores a broad international view on the convergence of accounting standards by high-ranking people from international accounting and auditing-standard setting bodies; it then goes into the specific Chinese context, in which the central government‟s view of the convergence is examined, as well as views that have emerged from high-profile accounting academics.

As articulated in Chapter Four, discourse contributes to the construction of what are variously referred to as „social identities‟ and „subject positions‟ for social „subjects‟ (Fairclough 1992). The discourses provided by this chapter exemplify how the convergence and FVA in China have been represented discursively, and how these discourses have been circulated in mainstream media outlets and prestigious journals by the leading officials, central media agency and influential academics within the society. By having the political power and influence, these people have constructed a favourable „reality‟ for this event. The consistency among the „mainstream discourses‟132 reflects also the „relational function‟ of social discourses in social event (see Fairclough

130Original Chinese text: “通过该框架, 市场参与者, 不仅能从微观层面上获得企业有关财务状况的估计、风险轮廓的估计和计量的不确定性等信息, 而且还能从宏观层面上获得风险的相关性、风险传染的可能性及其系统风险等方面的信息”.

131Original Chinese text: “本文从动态减值准备的角度分析了银行等金融机构的公允价值计量优化, 认为动态减值准备有助于提升信息透明度和减缓顺周期效应”.

132 The discourses presented in this chapter are labelled as „mainstream discourses‟ hereafter for easy reference. 167

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1995), or in other words, how social relationships between discourse participants are enacted and negotiated in the convergence of IFRS in China.

The „reality‟ construction and „relational‟ functions contribute considerably to the construction of systems of knowledge and belief (see Chapter Four), which can be very powerful in constituting or promoting political agendas. In line with the theoretical framework this thesis adopts, this chapter suggests a close connection between accounting changes and China‟s broader neoliberal projects. The „mainstream discourses‟ articulated among high-ranking politicians have explicitly regarded accounting as an important technology, which is being used by the government to facilitate the particular socio- economic infrastructure that China wants to establish. The features of that particular structure, such as the market economic system, the opening up of domestic markets to overseas capital or the full participation into a freer global capital market, have signified China‟s adherence to the neoliberal ideology and the penetration of global financialisation. Given the destructive effects of neoliberal movements on human societies, as shown in Chapter Three, the benefits proclaimed by the „mainstream discourses‟ for this neoliberal project in the accounting discipline, and more specifically in China, requires a careful evaluation.

As the application of CDA suggests (see Chapter Four), the constitutive effects of discourse work, in conjunction with those of other social practices, can be used to explore the complex nature of social interaction in this convergence event. The application of the third layer of the CDA framework – the „instantiation‟ of the discourses among other social settings within which this event is embedded – is the task of the rest of this thesis.

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6 Chapter Six – Reconsidering Fair Value Accounting in Neoliberalism

This chapter aims to fulfil the first stage of the third layer of the CDA framework (analysis of discourse as social practice). Analysis here is concerned with the social practices associated with the discourse; the first stage of this analysis focuses on the socio-institutional context that not only constitutes a prominent part of the social practices but also frames other relevant social activities. The findings will make the discourse analysis „critical‟ in the sense of enabling people to be more aware of the ideologically invested nature of discourses to which they are subjected in this event. This thesis examines these discourses within a broad socio-institutional context of neoliberalism and its influences on the financialisation process. This chapter, therefore, explores the relationship between the neoliberal context and this accounting event to discover its ideological dimension and the potential controversies underlying the discursive construction presented in Chapter Five.

More specifically, this chapter focuses on FVA, as a major technical issue in the implementation of IFRS, as an example of how accounting has been part of a systematic effort of neoliberalisation (see Chapter Three), and what social implications this contains. Because FVA represents a vital technical component of IFRS and, more specifically, of China‟s new accounting standards (see Section 5.2.5), this approach provides a strong focus so that the very broad research topic can be reflected and evaluated. The analysis aims to reveal the conflicting and questionable meanings constructed within notions of FVA, and how those narrowly constructed discourses help to create a limited belief system compatible with neoliberal free-market ideology. The potential problems of this neoliberal shift in accounting are further exemplified by placing the argument in the Chinese context.

This chapter centres on discourses of various discursive participants, such as the accounting standards-setting bodies, accounting theorists and researchers, during the development of FVA. Through identifying what

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changes that have occurred in the way that FVA has been written about within various discursive spaces, this investigation points to a perspective that is lacking in existing debates on FVA, and, more broadly, the globalisation of IFRS. The findings suggest that FVA is an accounting method that is heavily invested with neoliberal values, as represented through the significant faith that FVA places in free-market fundamentalism and the technical features that align FVA with the interests of financial capital in the contemporary neoliberal economy. By exposing a „manipulation‟ of discourse in terms of its „free-market‟ effectiveness, the analysis is able to demonstrate the deeper consciousness that Chinese society has ascribed to those textual representations, and what implications it has in legitimising certain activities. A similar approach has been adopted by a number of accounting researchers, such as Ezzamel et al. (2007) where accounting discourses are examined with reference to a broader ideological context, to demonstrate the constitutive effects of socialist and capitalist ideologies on Chinese accounting and vice versa (more details are presented in Section 4.3.4).

6.1 Fair Value Accounting: A Belief in the Market Mechanism

According to the ontological assumption of this thesis, social processes are open and dynamic and are always mediated, and indeed „constructed‟, through discourses using specific conceptions ascribed by societies. Therefore, it is essential to revisit the discussion of FVA and the underlying conception that has been operating throughout these discussions, both implicitly and explicitly. The investigation begins with the discourses of accounting standards-setting bodies, such as the IASB and FASB, during the promotion of fair-value-based measurement methods. This is an important dimension of the discussion because of the authoritative role of these committees in developing and mandating FVA in the standards. As CDA suggests (Fairclough 1992), it is necessary to look at the language used by the key players during the discursive construction of a social event, and the „strategic‟ uses of language (such as what has been mentioned and what has been ignored, what has been stressed and what has been sidelined, and so forth), because “the contrast between them is often a socially motivated one” (Fairclough 1992, p.

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75). Also, a critical investigation into this discursive space is essential to reveal what assumptions and rationales that have been presented to centralise the knowledge of FVA, what factors have been marginalised in the discussion and what possible influence this has had on sustaining a particular ideological agenda.

The fair-value approach the IASB adopts in its standards requires a substantial portion of a reporting entity‟s assets and liabilities to be listed in the balance sheet. Financial instruments, such as derivatives or other types of financial arrangements held for trading, tangible and intangible assets acquired in a business combination, investment properties, share-based payment liabilities, provisions, biological assets and so on are measured at „fair value‟, and the changes in the „fair value‟ of those assets and liabilities are recognised and flow through the income statement or equity section of the balance sheet (Ernst & Young 2005, King 2006, Zack 2009). In contrast to the previous reporting model, which was based on HCA, the current standards require that those assets and liabilities are reported on the balance sheet at prices that would be concluded at (current) market transactions at the measurement date; and the increases or decreases in the real or hypothesised market prices are recognised as part of the profits or losses in income statements.

The language that global accounting standards-setting bodies have used to describe the key notions of FVA has reflected some of the underlying assumptions that align with the neoliberal theory. „Fair value‟ is defined by the IASB (2006a, p. 8) in its current (2009) framework as: “the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm‟s length transaction”. The IASB published in June 2009 an Exposure Draft for Fair Value Measurement in which it proposed to change the definition of „fair value‟ to:

…the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (International Accounting Standards Board 2009a, p. 4).

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This proposed definition is identical with the one in the current FASB Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (Financial Accounting Standards Board 2008, p. 6). To some extent, the consistency reflects the US influence over the IASB, as seen by the IASB‟s statement that “it has followed closely with the FASB to develop the standards of fair value measurement” (International Accounting Standards Board 2009a, p. 1).

A closer look of these definitions reveals a strong preference towards the market mechanism. The „fair‟ value, according to the description, is a price that could be concluded between market participants, but does not include other considerations such as the replacement costs proposed by some earlier theorists (e.g. Edwards and Bell 1961). The connection here is straightforward: the „fair‟ price is the one determined by the market. This is also evident in the IASB (2006a)‟s discussion paper published in November 2006, which prescribed the interpretation of fair value within the FASB standards as being a current-market sale price, ignoring transaction costs and free of entity- specific assumptions.

This connection between FVA and its market fundamentals, however, has not been well articulated in the accounting literature. Amongst the large body of literature this thesis has reviewed, only Whittington‟s (2008, p. 139) study made this explicit:

The Fair Value View assumes that markets are relatively perfect and complete and that, in such a setting, financial reports should meet the needs of passive investors and creditors by reporting fair values derived from current market prices.

This relationship is so deeply embedded that it is rarely spoken about, and thus becomes difficult to critique.

This connection, according to CDA, becomes even clearer through examining the „realisation‟ (see Section 4.3.2) of the meaning conveyed from one layer of the social discourses to the others. Because of the embedded realisation relationship that links language to the social construct, as explained in

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Chapter Three, the investigation of the idea of „market‟ in the analysis of this FVA discourse is multi-layered. In other words, the idea that the belief in the market mechanism is implicated in the wording of the FVA discourses can be further explicated by looking at a different layer of the connection; that is, how a broader idea of efficient markets has been realised in the expression of FVA discourses.

A fundamental supposition of FVA is to refer to the market price as a „correct‟ value to be quoted in accounting statements, because the arm‟s-length market transaction ensures that all necessary information has been taken into account when people „rationally‟ value assets or liabilities before entering into a transaction (McSweeney 2009). In a broader sense, as discussed in Chapter Three, the market as a whole presents an ideal platform where individual miscalculations or misinformed decision-making is balanced by aggregate buying and selling by all market participants (the „invisible hand‟). The result of this kind of aggregation or self-correction mechanism, provided there is no external „interference‟, ensures that the market uses economic resources efficiently and leads to an equilibrium status that benefits everyone in the society (Smith 1961, Friedman 2002). Such theories are used to argue that the „equilibrium‟ or the magic power of the market transforms the selfish private interest into social optima (Palma 2009), a story that has been reiterated by proponents of neoliberalism.

There is clearly a strong connection between FVA and those classical economic theories (Smith 1961, Hayek 1973) that argue for the „invisible hand‟ of the market and its ultimate benefits to public welfare (see Section 3.2.1). This belief has effectively re-shaped theories and research in accounting and finance. The most famous example is probably the efficient market hypothesis (EMH). As described by McSweeney (2009, p. 845), “a scholarly identity, indeed almost paradigmatic status” has been built upon the EMH attempt to understand and predict the share market through various evaluation models. The fundamental assumption underlying this „paradigmatic‟ approach is a belief that a financial market, if it is efficient, processes all necessary information effectively and thus discovers correct values for assets or liabilities through price signals (Fama 1965, Allen 1981, Benston 1989, Malkiel 1990, 173

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Citanna & Villanacci 2000, McSweeney 2009). In spite of the research and practice of the past several decades, the financial market remains largely unpredictable and the assumed market efficiency has always been confronted with contradicting evidence (Ball & Bartov 1996, Campbell & Limmack 1997, Arthur 2000, Shiller 2000, Pettengill 2003, Garfinkel & Sokobin 2006).

At the theoretical level, financial markets have some inherent features that cause the malfunction of the „mark-to-market‟ price signal. McSweeney (2009) explained this with reference to the difference between financial assets and conventional consumption goods: the expectation of future benefits and/or sacrifices of financial assets and liabilities forms the essential part of the market valuation, whilst the immediate utilities received often determine the value of conventional consumption goods. The inherent uncertainty and volatility of financial markets, as discussed in Chapter Three, seriously complicate this kind of expectation, which forms the foundation of the valuing of financial assets and liabilities.

Another feature of the mainstream financial models and evaluation techniques is an assumption of the rationality of market participants (Fama 1965). The problem is, as Keynes (1936, p. 149) states, that “our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible”. Investors have to rely on significant assumptions and estimations in forecasting the future of the financial markets, and their decisions are hardly made with the complete information that would be necessary for them to be „rational‟. There has been substantial and lasting evidence of irrational analysis and actions made by market participants (Keim & Stambaugh 1984, Campbell & Limmack 1997, Arthur 2000, Shiller 2000, Pettengill 2003, Garfinkel & Sokobin 2006, for instance). These problems are largely derived from the inherent uncertainty of financial markets, and any kind of neglect of this uncertainty, according to Soros (2003, p. 3), is “absurd”. In the context of FVA, all these problematic assumptions and inherent features of financial markets contest the theory that the expectations of market participants (market prices in this case) correctly signify the „true‟ and „fair‟ values of financial assets and liabilities.

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6.2 The Progress of Fair Value Accounting: A Neoliberalised Value

To further substantiate the neoliberal underpinnings of FVA, this section provides a review of the progress of FVA in accounting standards released by the IASB and FASB. From the perspective of CDA, these standards present a particular discourse constructed by these key players during the development of FVA, which, in itself, is a discursive construct. The development of fair- value-based standards forms part of the discursive change in relation to its broader social and cultural change. Also, because of the embedded relationships linking discourses to social events, these „texts‟ (accounting standards) function as a particular intersection that is, retrospectively, indicative of the “socio-cognitive dimension” (Fairclough 1992, p. 80) that discourse participants have brought with them in the text processing and internalised in the text itself. By identifying these „traces‟ – the „socio-cognition‟ saturated with neoliberal ideology – in the discourses, this section helps reflect the penetration of neoliberalism into the standards-setting process, and more particularly the fair-value-based accounting standards.

The term fair value emerged in the development of accounting for business combinations and goodwill, and was only referenced with respect to financial instruments since 1977. Early reference to the term fair value in the context of accounting standards-setting dates back to as early as 1953 in the US with the issuance of Accounting Research Bulletin 43 – Restatement and Revision of Accounting Research Bulletins (Fishman et al. 2007). According to Fishman et al. (2007)‟s study, some early accounting pronouncements addressing fair value include Accounting Principles Board (APB) Opinions 29 – Accounting for Non-monetary Transactions, issued in 1973, and FASB 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, issued in 1977. But the term was not often mentioned until the emergence of financial instruments and the need to measure them. This was revealed by the Exposure Draft of the FASB (2004): in 1986 the FASB added a project to its agenda on financial instruments and off-balance-sheet financing, which ultimately led to the 1991 issuance of Statements of Financial Accounting Standards (SFAS) 107,

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Disclosures about Fair Value for Financial Instruments and the issuance in 1998 of Financial Accounting Standards 133, Accounting for Derivative Instruments and Hedging Activities (Financial Accounting Standards Board 2004). Also identified from the June 2004 FASB Exposure Draft, Proposed Statement of Accounting Standards – Fair Value Measurements (paragraph C4), the FASB started to devise a definition and usage for a fair-value standard primarily in the context of reporting for financial instruments.

Another major reason suggested by Fishman et al. (2007) for the emerging demand for FVA was the shift of the US economy toward service-oriented and information-oriented businesses during the 1980s, which, as this thesis proposes, are a result or manifestation of the broad process of neoliberalism and financialisation (Harvey 2005, Bryan & Rafferty 2006, Gamble 2006, Robison 2006). As Robison (2006, p. 13) noted, “the expanding energy, finance and technology sectors were to become major beneficiaries and central pillars within the neo-liberal camp”. While the focus of business operations was shifted from productive activities to the heavily finance-oriented service sector, there were compelling demands for an accounting measurement system like FVA. One example that Kotz (2009) provided was that the shares of many firms began trading at increasingly higher multiples of „book value‟ when a series of large asset bubbles133 occurred during the economic expansions of the neoliberal era.

Further commenting on the „asset bubbles‟, Kotz (2009, p. 308) argued, “once an asset bubble begins, its continued growth requires a financial system that will readily lend money to feed the bubble, which the deregulated, short-time- horizon financial sector of the neoliberal era proved ready to do.” This echoes the findings of other studies on neoliberalism (e. g. Harvey 2005, Vasudevan 2009). As illustrated in Chapter Three, while the working class has been restrained by the stagnation or decline in real wages, wealth growth has been particularly concentrated at the very top across many societies. The financialisation process presents an ideal outlet for those funds because of the quick returns and flexible exit, compared to investing in traditional production

133 „Asset bubbles‟ are the inflated growth in wealth from commercial real estate, housing, raw materials and share markets since the 1980s (Kotz 2009). 176

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sectors. This has been pushed further by the rapid progress of financial innovations, such as mortgage lending, securitisation and derivatives. Along the way, human societies have been experiencing the increasing collapse of such „asset bubbles‟ and subsequent bailouts from public funds, such as those during the 2007-2011 GFC.

This changing business environment creates inevitable difficulties for accounting in terms of how to measure those „intangible‟ values, such as intellectual property, research and development, trademarks, and, more importantly, the increased value of the financial „bubbles‟. The lack of adequate guidance on this has also brought about practical difficulties in financial reporting. For example, Fishman et al. (2007) demonstrated that there were many cases of scandals in the technology sector in the mid- to late 1990s, when the firms manipulated the valuation and write-offs of large amounts of in-process research and development for business combinations, due to the lack of clear guidance on how to measure this intangible value.

These contextual changes have placed pressures on accounting as a discipline. In the US for instance, the SEC has expressed its opinion to the American Institute of Certified Public Accountants (AICPA) on developing detailed, broad-based guidance on valuation models and methodologies to measure fair value in financial reporting since the late 1990s (Day 2000). A brief review of the development of accounting standards since then can shed further light on this influence. In 2000 the FASB issued FASB Concepts Statement No. 7, Using Cash Information and Present Value in Accounting Measurements, which, according to the FASB (2000, para. 2), was the result of a project it had added to its agenda in 1988 to consider present-value issues in accounting measurements. Referring to increased merger and acquisition activity as a principal reason, the FASB undertook a new project in 1996 related to accounting for business combinations, which resulted in the issuance in 2001 of SFAS 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. Both of these statements provide more specific guidance on fair value than did previous standards. Similar examples are Statement of Auditing Standards 101, Auditing Fair Value Measurements and Disclosures issued in 2003 and the Valuation Resource Group formed in 177

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the same year to provide a standing resource to the FASB on fair value measurement issues (June 23, 2004 FASB Exposure Draft, Proposed Statement of Accounting Standards – Fair Value Measurements, paragraph C13).

In its June 23, 2004 Exposure Draft on measuring fair value, the FASB indicated that its long-term agenda was to “establish a framework that clarifies measurement of fair value in a manner that can be consistently applied to all assets and liabilities” (June 23, 2004 FASB Exposure Draft, Proposed Statement of Accounting Standards – Fair Value Measurements, paragraph C4 and C11). Claiming to incorporate FVA into the measurement of all assets and liabilities, this discourse certainly informs the ambitious agenda and strong determination that this dominant standards-setting body devoted to the development of fair-value-based accounting standards.

In terms of the framework of IFRS, the IASB has expressed explicitly that it has worked closely with the FASB to develop the standards of fair-value measurement (International Accounting Standards Board 2009b). The IASB issued an Exposure Draft of Fair Value Measurement in June 2009; this document, as acknowledged by the IASB (2009a, n. p.), “is largely consistent with the FASB Statement of Financial Accounting Standards No. 157, Fair Value Measurements, including related guidance published by the FASB”. Given the jurisdictional coverage of IFRS and the determination of the IASB and FASB, it could be anticipated that more comprehensive applications of fair-value measurement in accounts other than financial assets and liabilities will be implemented in the foreseeable future.

The changing narratives manifested through these fair-value-based accounting standards and the issues they cover have reflected a close connection to neoliberal ideas of macro-economic activity. Given this connection, it is suggested that these particular types of „committee discourses‟ have the capacity to highlight agendas in line with the interests of neoliberals. The revelation of this connection, as the third CDA layer indicates, helps illustrate the ideologically invested dimension of the textual representation of FVA. If neoliberalism is an ideological commitment to a particular form of political and 178

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economic organisation, accounting, through the example of FVA, has appeared to be a benign enabler of this ideological commitment through these technical pronouncements. However, when facilitating the kind of capitalism that neoliberals prefer, what has been left behind is the acknowledgement of the public-interest purpose accounting bears and its wider social consequences.

To further explicate this expression potential of FVA discourses, the next section investigates a different layer of discussion – income realisation as a fundamental (and more technical) accounting issue – that has formed an essential part of the theoretical foundation for the adoption of FVA.

6.3 Neoliberalised Income Realisation

This section analyses some key discourses of the IASB and FASB regarding income realisation. The topic of income does not address FVA directly; however, it involves vital narratives that form a crucial foundation for the evaluation of FVA. In reading and contextualising these key discourses, this section reveals the links between FVA and this fundamental issue and other basic accounting concepts, such as the balance sheet and income statement. This section also suggests what broad ideology has framed this relationship and what sorts of social realities may be constituted by such a framing.

6.3.1 Balance Sheet vs. Income Statement

In a study of the FASB‟s approach to FVA, King (2006, p. 53) noted that:

The FASB has continually stated that it is looking to a balance sheet perspective in making its determinations and that ultimately all assets should be shown at Fair Value.

Although King (2006) has not explained the relationship between FVA and the FASB‟s balance-sheet approach further, this discourse really points to a vital dimension that has not been explored as part of the discussion of FVA: the disruptive effect of FVA on income realisation due to the balance-sheet approach adopted by the committees.

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In its Discussion Memorandum on definitions of elements of financial statements and their measurement, the FASB described assets and liabilities as “the most fundamental elements whose precise definitions control the definitions of the other elements” (quoted in Storey & Storey 1998, p. 79). The implication of this is that the FASB used assets and liabilities as the most fundamental definitions in defining all other elements; for instance, „equity‟ is assets minus liabilities, „income‟ (including revenues, expenses, gains, and losses) is inflows, outflows, or other increases and decreases in assets and liabilities. Further, according to Johnson (2004), accounting standards-setting bodies around the world that have developed conceptual frameworks – those in Australia, Canada, New Zealand and the United Kingdom, as well as the IASB – have all based their frameworks on the asset and liability view. Ernst & Young (2005, p. 1) have concurred that the IASB‟s focus is “on assets and liabilities as the primary elements of financial statements”, and more specifically:

The fact that the IASB‟s new and improved standards are based, to a greater extent than any national accounting standards, on an accounting model that focuses clearly on the primacy of asset/liability recognition and measurement. This approach is based on the principle that a reporting entity should recognise in its balance sheet all those items (and only those items) that are considered to be assets and liabilities, and that income and expenses are determined by reference to increases and decreases in assets and liabilities. (Ernst & Young 2005, p. 1)

This is an important issue in the discussion of FVA because it points to its significant impact when a financial reporting system is based on the primacy of the balance sheet. Given the relationship between balance-sheet accounts and other elements of financial statements, any changes in the way assets are measured would inevitably lead to changes in the other elements of financial statements, among which the impact on the income statement is perhaps the most controversial.

First, those unrealised gains/profits/incomes derived from the change of FV have to be reported in the income statement combined with others realised from real (operating) business activities. Under the current system, balance sheets and income statements are tied together by using the double-entry

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bookkeeping technique. Taking a simplified example to illustrate this: a company sells a product for $1,000 with a cost of $800; the transaction is recorded by the following two journal entries: 1) to record the cash received by Dr. Cash $1,000 Cr. Sales Revenue $1,000; 2) to record the cost of goods sold (assuming a perpetual inventory system) by Dr. Costs of Goods Sold $800 Cr. Inventory $800; The debit of „Cash $1,000‟ and credit of „Inventory $800‟ will be reported in the balance sheet, with a net increase in value of assets by $200. The credit of „Sales Revenue $1,000‟ and debit of „Costs of Goods Sold $800‟ will be reported in the income statement, resulting in a net profit of $200, which will be transferred into the account „Retained Earnings‟ and be included under the „Equity‟ section of the balance sheet. Based on the accounting equation, i.e. Assets – Liabilities = Equity, net assets equal equity. In this case, net asset ($200) equals equity ($200) and hence a balance is obtained. Accordingly, if the fair-value-based balance sheet recognised the value changes of assets and liabilities resulting from fluctuations in market prices, the same amounts of changes have to be recognised in the income statement as part of the profits/losses. Under FVA, those value changes (unrealised profits/losses) are mixed with all other realised profits and/or losses derived from „real‟ business operations134 in the income statement. As the next section shows, this is a change that has been highly controversial within accounting literature.

6.3.2 Income: Measure of Performance or Enhancement of Wealth?

According to some contemporary debates, income can be divided into two mutually exclusive concepts: 1) income as a measure of performance of an enterprise and its management; 2) or income as an enhancement of the wealth of investors (Storey & Storey 1998, Hoed 2003, Newberry 2003, Loftus & Stevenson 2009). According to the first concept, income measures the performance of the firm as presented through the economic benefits arising

134 „Real‟ refers to traditional production and trading activities. 181

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from normal business activities, particularly the recurring use of non-current capital. Income is therefore calculated through matching expenses with revenues, and the expenses mainly include the cost of maintaining the capital, but not the changes in the value of the capital. This concept of income prefers the use of cost-based entry values for assets, such as historical cost or replacement cost, to make it easier for cost allocation when matching expenses to determine income (Newberry 2003). In contrast, the enhancement- of-wealth concept of income focuses on increases in the investors‟ wealth, which are reflected through the monetary difference between the amount invested and the amount subsequently distributed or available for distribution to the investors. As the valuation is important, this concept uses realisable values (more fair-value orientated) for all assets and liabilities, and therefore matching costs with revenues becomes irrelevant (Newberry 2003).

For a long time, the accounting profession has not adopted the enhancement- of-wealth concept of income and the current-value measurement it advocates. In the traditional model of accounting and financial reporting, income was determined based on matching revenues and expenses arising from normal business operations; assets were stated at historical cost and depreciated over time down to salvage value, and gains were not recognised until they were realised (this is discussed further in Section 6.4.1). The wealth-enhancement concept of income had not been the mainstream practice within accounting frameworks until the recent moves of both the IASB and FASB to require the statement of comprehensive income on the basis of changes in the value of assets and liabilities. This is an important change that favours FVA over the traditional historical-cost-based accounting methods, because FVA is considered to provide more updated information of financial position, and hence satisfies the new definition of income (see the next section). The shift, this thesis argues, has been heavily shaped by neoliberal ideology and is one of its many practical manifestations in the accounting discipline.

6.3.3 The Statement of ‘Comprehensive Income’

In its Proposals to revise presentation of financial statements, the IASB stipulated a basic premise for reporting comprehensive income: 182

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…because all items of income and expenses share the characteristic that they are „non-owner movements in equity‟, they should always be presented separately from „owner movements in equity‟. (International Accounting Standards Board 2006b, n. p.)

This was a fundamental change: entities no longer had the option of presenting the separate components of recognised income and expense in a statement of changes in equity. Instead, these components should be provided in the statement of recognised income and expense (or in other words, the comprehensive income), and the total amount should be transferred to the statement of changes in equity. As a result, the statement of recognised income and expense required under the IAS 1 effectively combined the traditional content of the income statement (the gains arisen from matching expenses with revenues) and the statement of recognised income and expense (or comprehensive income135). The IASB (2006b, n. p.) explained:

Non-owner changes in net assets (the Statement of Earnings and Comprehensive Income) should be presented in a single statement with a total for non-owner changes in net assets (often referred to as „comprehensive income‟) and a required subtotal called „net income‟ or „profit or loss‟.

With a clear objective to report the „comprehensive income‟ in the statement, keeping the „net income‟ derived from major business operations in a subtotal, the IASB is fostering a model embedded in the enhancement-of-wealth concept of comprehensive income. This was also acknowledged by the IASB:

The board is exploring an approach that focuses on changes in assets and liabilities and is not over-ridden by tests based on notions of an earnings process (International Accounting Standards Board 2002, n. p.).

In supporting this, as mentioned in Section 6.2, the IASB has proceeded down the same path as the FASB in handling the issue of income realisation. Both organisations have stipulated a report of comprehensive income into the

135 The major items comprising comprehensive income under the IFRS are: profit for the period (net income); current period movement in the asset revaluation reserve; current period adjustments recognised directly in equity for the changes in the fair value of available-for-sale investments; current period movements in cash-flow hedges deferred in equity; and current period movement in the foreign currency reserve (Loftus and Stevenson 2009).

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reporting framework. In July 2001, the IASB added a project, Reporting Comprehensive Income (Performance Reporting)136, into its agenda as part of the convergence project with the FASB. According to the IASB (2009c, n. p.):

This project addresses broadly the issues related to the display and presentation in the financial statements of all recognised changes in assets and liabilities from transactions or other events except those related to transactions with owners as owners (sometimes called comprehensive income).

These changes reveal a fundamental shift that the committees are fostering in defining the concept of income. It should be noted that this shift is not self- evident, and the rationales of the change are not self-revealing within these public discourses. As Fairclough (1992, p. 102) suggested, however, “texts are inherently intertextual, constituted by elements of other texts…[further], texts can transform prior texts and restructure existing conventions (genres, discourses) to generate new ones.” Therefore, the conjunctures of the discourses with the changing patterns of underlying ideological relations can be exposed through a cross-referencing and comparison of earlier discussion provided by the same discourse participant – the committees.

Some early discourses, as shown below, exemplify that the different opinions of income have bothered accounting professionals since the early 20th century. For instance, in A Tentative Statement of Accounting Principles Underlying Corporate Financial Statements issued by American Accounting Association (1936), the „all-inclusive income‟ or „clean surplus‟ theory was supported as stipulated in Principle No. 8 (American Accounting Association 1936, p. 189):

An income statement for a period should include all revenues, expenses, gains, and losses properly recognized during the period regardless of whether or not they are the results of operations in that period.

During the early 20th century, this was supported by the Securities and Exchange Committee (SEC) but disputed by the Committee on Accounting Procedure (CAP), which favoured the current-operating-performance theory of income, which “excluded from net income extraordinary and nonrecurring

136 The project was renamed Financial Statement Presentation in November 2004 after the IASB started to work with the FASB on this issue. 184

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gains and losses to avoid distorting the net income for the period” (Storey & Storey 1998, p. 27). The CAP and SEC tried to work out a number of compromises but each effort proved unsatisfactory to one or both parties (Storey & Storey 1998).

However, this appeared not to be a dilemma to the FASB at the time. The endorsement of the performance concept of income was implied in an important document circulated by the standards-setting body – An Introduction to Corporate Accounting Standards – in which Paton and Littleton (1940, p. 67) proposed that:

The fundamental problem of accounting, therefore, is the division of the stream of costs incurred between the present and the future in the process of measuring periodic income. The technical instruments used in reporting this division are the income statement and the balance sheet…. The income statement reports the assignment [of costs] to the current period; the balance sheet exhibits the costs incurred which are reasonably applicable to the years to come.

They further described the periodic income determination process as the “matching of costs and revenues” (Paton & Littleton 1940, p. 67). The traditional accounting standards and practices that emphasised the matching principle align with this performance concept of income: through matching relevant expenses with revenues generated from operating activities, the income measures firms‟ real operating performance. According to Paton and Little (1940), this approach helps users better understand the firm‟s performance over the past period, and can inform expectations of its future performance.

As illustrated previously, the current move of the IASB and FASB towards reporting „comprehensive income‟ in financial statements implies that accounting standard-setters have changed to adopt the enhancement-of- wealth concept of income. Along with the agenda, there were accompanying discussions circulated by these organisations. In June 1997, the FASB released the Conceptual Framework (CF), which started to promote comprehensive income, defining it as:

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…the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners (Financial Accounting Standards Board 1997, Concepts Statement 3, para. 56).

This definition does not mention the traditional idea of income (matching expenses with revenue); instead, income is attributed to the value changes of net assets137. This is significant to the discussion of FVA because the change in the conception of income creates a context that prefers FVA over the traditional HCA. Before FVA started to play a far-reaching role in current accounting practices, HCA was the primary measurement basis in accounting practices. Theoretically, HCA presents information based on the cost of acquiring assets and the expiration of those costs; this type of accounting measurement was considered to be relevant to investors and creditors only in the past (as in Paton and Little‟s work, discussed above). Proponents of FVA believe HCA is inadequate to provide more relevant financial information and improve companies‟ transparency to stakeholders in the contemporary business environment (Mard et al. 2007). In favour of FVA, this argument corresponds to the shift of the notion of income. If the income statement is meant to report changes in wealth, FVA is more significant as it does provide updated information about the values of a company‟s financial position.

From the perspective of creditors and investors, this change is indeed crucial in the contemporary business environment, as Mard et al. (2007) described. This connection can be better understood with reference back to the discussions in Chapter Three of the socio-economic changes that occurred in the neoliberal era. The expansion of neoliberal policies has witnessed massive transformations in the world economy, such as widespread deregulation, privatisation, free trade, shrinking government responsibilities, cuts to top tax rates and the globalisation of goods and capital markets in the name of „market freedom‟ (Harvey 2005, Palley 2005, Kotz 2009). Some of these trends

137 According to the CF, changes in equity – investments by owners, distributions to owners, revenues, expenses, gains, losses and comprehensive income – are all defined in terms of changes in assets and liabilities (that is, as inflows, outflows or other increases or decreases in assets or liabilities). Thus, defining assets and liabilities is fundamental in the framework because all other definitions flow from them. 186

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are not new, but they have taken on new meaning and accelerated to an extent not previously experienced in capitalist economies (Robinson 2006).

The most significant emerging feature, as argued, is the growth of finance: the size of the financial sector is rising exponentially in comparison to the proportion of the traditional trading and production sectors (Bryan & Rafferty 2006). Share market capitalisation as a percent of GDP rose from its long-term average of about 50 percent to 185 percent in 1999 in the US; and the ratio of the profits of financial corporations to those of non-financial corporations rose from about 15 percent in the early 1950s to almost 50 percent in 2001 (Crotty 2005, p. 85). At the global level, according to the BIS, the amounts outstanding of over-the-counter derivative contracts have jumped from US$92 to US$683 (7.5 times), or from 2.4 to 11 times the size of global output in 2007 (Bank for International Settlements 2007b)138.

The dominance of finance over the macro-economy has been well recognised within the political-economy literature (Epstein 2005). Some, such as Dumenil and Levy (2005, p. 17), take a definite stand:

Most, if not all, analysts on the left now agree that „neoliberalism‟ is the ideological expression of the reassertion of the power of finance…. [Moreover,] although the return of finance to hegemony was accomplished in close connection with the internationalization of capital and the globalization of markets…it is finance that dictates its forms and contents in the new stage of internationalization….

There have been increasing concerns about this rising trend of financialisation and its immediate political effects on the macro-economy (Crotty 2005, Epstein 2005, Palley 2005, Bryan & Rafferty 2006, Dore 2008, Bryan et al. 2009, Palma 2009, Treeck 2009). On the one hand, the proliferation of complex financial instruments and derivatives has led to a decoupling between the real (traditional production) and financial sectors, which prompted, according to Palma (2009, p. 852), “the crowding out of the non-financial tradable sector (both exports and import-competing sectors) by the excessive growth of the financial sector.” Research (Crotty 2005, Epstein 2005,

138 More details and statistics are provided in Section 3.2.5. 187

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International Financial Services 2008, Treeck 2009) has demonstrated that many firms have decided to abandon the real sector and moved into financial operations to increase profits.

This shift contributes suspicious benefits for the macro-economy due to the nature of those financial transactions. As described by Boogle and Sullivan (2009, p. 22), “any system whose revenue depends upon persuading investors to trade actively is, by definition, going to focus on short-term speculation”. This is also evidenced by the massive speculation that banks and other financial institutions have been undertaking during the neoliberal era. Fitch Ratings (2007) reported that 58 percent of banks that buy and sell credit derivatives acknowledged that „trading‟, or gambling, is their „dominant‟ motivation for operating in financial markets. Eric Dinallo, the insurance superintendent for New York State, said that 80 percent of the estimated $62 trillion in credit default swaps outstanding in 2008 were speculative (New York Times 2009).

Along a similar line, Crotty (2009) pointed out that the rising leverage that was facilitated by the easy money policies and deregulation of capital markets has provided huge liquidity for financial institutions during the neoliberal era; those funds that might have been spent on supporting traditional production sectors were directed to financial markets for speculative financial investments. This shift, as Palley (2007, p. 6) pointed out: “uses valuable economic resources but produces nothing”.

On the other hand, the process of financialisation on capitalist economic relations leads to the penetration of the financial speculation and fluctuation caused by the volatility of financial markets into real production sectors. Because the inherent nature of financial markets, as Keynes (1936) argued, leads to speculation, herding and instability, the macro-economy becomes less stable when more sectors are involved with this type of transaction. The level of penetration deepened with the emergence of financial instruments. Taking one of the popular commercial papers – the security issued by various organisations, for example – Bryan et al (2009, p. 465) wrote:

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…for with securitization the fixity of capital in certain physical forms is made fluid… securitization and financial derivatives mean that the capital embodied in fixed or illiquid assets (like machines or mortgages) can be transformed into a fluid, competitively-driven capital.

Using this financial innovation, nothing is „fixed‟; everything can be converted into certain type of „financial derivatives‟ and exchanged immediately through the global financial markets. Palma (2009, p. 834), in a study of the „financial deepening‟ from 2002 to 2007, gives an example: “unfortunately, the IMF does not report data on Iceland. According to a senior IMF official, what one has to understand is that „Iceland is now no longer a country. It is a hedge fund‟”.

The globalisation of capital markets enhances the complexity of the networks that link markets together, and, at the same time, their immense fragility: “complexity adds to the danger that any one part of the hyper-financial system can bring down the whole” (Financial Times 2008). Exactly this overriding effect of the globalisation of financial markets and the damages inflicted by the huge volatility of the financial sector to the global macro-economy have been clearly demonstrated during the 2007-2011 GFC.

When the broad economic system is structurally saturated by highly mobilised financial flows, a financial reporting system built upon historical cost measurement becomes undesirable to satisfy the needs of „users‟, who don‟t want to miss out „timely‟ opportunities for short selling in „freed‟ and highly fluctuating markets. Because it caters to the interests of financial capital, the requirement for statements of „comprehensive income‟ is heavily shaped by the increasingly global embrace of neoliberalism and financialisation.

By November 2009, the IASB and FASB made a clearer statement for their position or preference on the issue of income. Regarding the issue of realised and unrealised income/profit, they commented:

Profits should not be based on a notion of realisation. The Board noted that realisation means something different in different countries. In Europe and Asia realisation refers to net profit available for distribution. However, in the United States realisation refers to capital maintenance. A critical issue in Europe would be whether 'mark to market' gains are distributable. The Board noted that distributable profits are not an 189

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accounting issue but a legal issue of countries concerned. The focus of the standard should be to provide greater transparency and useful information to the investors. Transitional provisions will include disclosures (particularly narrative) as well as possibly dual reporting. (Deloitte 2009, n. p.)

This text is a typical discourse that reinforces the interest of „shareholders‟ – another manifestation of neoliberal values. As highlighted in the texts, the „shareholders‟ value‟139 is privileged, which corresponds to the ascendancy of „shareholder value‟ as a prevailing mode of corporate governance in the contemporary business environment (this is discussed further in Section 6.4.2).

This can be seen as another result of the kinds of neoliberal transformations discussed and the presence of free-market fundamentalism. The influence of this neoliberal notion of „shareholder value‟ on corporate governance can be understood with reference to Lazonick and O‟Sullivan (2000, p. 15), who wrote:

Trained, as virtually all American economists are, to believe that the market is always superior to organizations in the efficient allocation of resources, these economists were ideologically predisposed against corporate – that is, managerial – control over the allocation of resources and returns in the economy.

It is therefore better to let the market coordinate corporate control. The underlying theory is that since financial markets always value corporations correctly, the most effective form of corporate governance is to focus on the activities of corporations that maximise financial values, such as share price, return on equity, discounted present value, etc. (McSweeney 2009). The current version of this kind of market discipline has functioned in a way that companies that perform poorly are subject to a take-over mechanism. An immediate effect of this arrangement is to align management interest with that of those investors, or in other words, the owners of capital. This is also manifested through the changes of managerial behaviours, from pursuing long-term growth and innovation to the short-term liquidity for distribution to shareholders (Crotty 2005, Coles et al. 2006, Boogle & Sullivan 2009). For

139 Section 3.2.5.4 explains the term „shareholders‟ value‟ in more detail. 190

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instance, Kotz (2009, p. 307) described:

The appointment of CEOs from the outside encouraged a short-run view, since now CEOs became focused on getting a few years of impressive stock market performance to facilitate moving to a higher paying job at another institution.

Under the circumstances, investors are explicitly defined as the targeted user of accounting information, which (referring back to the previous discussion of income realisation) undermines the performance concept of income. This is another example of the disciplinary power of Wall Street over the real sectors in the take-over mechanism (buying and selling of companies share-holdings).

Within the IASB‟s discourse, there is also an implicit preference for capital markets and „financialisation‟ processes 140 . Referring to some financial research on Wall Street (e.g. Bradshaw & Sloan 2002, Levitt 2002), Newberry (2003) indicated that preparers‟ discretion given by the standards on comprehensive income have seriously compromised financial reporting. More specifically, in reporting comprehensive income, preparers have ample room to decide what sub-components of the income will be visible:

These sub-components, often referred to by preparers as „pro forma‟ figures, and which have become known as a „Street‟ measure of earnings because of Wall Street analysts‟ acceptance of those figures, have gradually excluded an increasing number of items, mostly expenses. The expenses excluded may consist of major expenses such as restructuring costs and even marketing costs that, it is argued, are non-recurring. Expenses have also been chiselled out of an older measure of performance idea of earnings which reported earnings before interest and tax (EBIT) on the basis that the expenses excluded were irrelevant to performance evaluation. (Newberry 2003, p. 330)

The relevance of the traditional idea that income is tied with firms‟ real operating performance has been sidelined in the current discourses identified in this section. Instead, they have concerned the concept of „comprehensive income‟, in which value changes become the major focus. If accounting is to provide information for users to make economic decisions (American Institute of Certified Public Accountants 1971), the selection of what to report – and

140 Section 3.2.5.3 contains more details about the „financialisation‟ process. 191

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what not – has implicitly reflected the characteristics and needs of the „users‟. According to this logic, „real‟ operating performance does not matter any longer to „users‟ of financial reports (at least the standards-setting bodies believe so, as reflected through their discourses). What prevails is changes in the value of „wealth‟, which, within the neoliberal context in which accounting operates, largely represents interests of powerful and highly mobilised financial capital. Because they are oriented towards the short-term and they fluctuate frequently, it becomes essential that accounting – the language of business (Bloomfield 2008) to be devised in a way that accounts for this neoliberal transformation.

6.4 Discursive Mediations among Competing Academics

The previous sections have revealed some of the influences of neoliberalism on the process of developing and presenting FVA, associated with the issue of income realisation. However, the narrowness and potential bias of the embedding ideas behind the conceptual shift of the keyword „income‟ are neither self-revealing nor self-evident within the standards-setting committees‟ discourses. In order to reveal this bias, this section contests the ideas within other academic debates as another dimension of discursive space. This analysis also forms an important part of the first layer of the CDA framework (discourse as text), highlighting the use of specific words and their implications in the communication process (see Section 4.3.1). The contradictions and multiplicities, as CDA proposes, help expose the fixation of meaning when certain values have been „naturalised‟ as self-evident (Fairclough 1995). This is illustrated through the narrowly defined and presented notions of „comprehensive income‟ and „users of accounting information‟ that have been circulated within the committees‟ discourses.

6.4.1 The Competing Ideas of ‘Income’: Historical Debates

This section focuses on the historical debates about the fundamental issue of income measurement. The complexities raised within the competing academic discourses demonstrate that the underlying idea of „comprehensive income‟

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that underscores FVA is not „natural‟ or „self-evident‟; rather, it has historically been highly contested. This retrospective review also illustrates the shifting focus of defining income in accounting, providing a discursive framework to explicate the underlying neoliberal influence.

Income realisation and income measurement have been the central issues for the modern accounting profession. Chatfield, in A History of the Accounting Thought (1977), writes that in the pre-double entry period, accounting was mainly concerned with resources rather than profits, with a narrow focus on keeping accounts for stewards to control their own assets. There was no clear distinction between income and capital. During Pacioli‟s time (15th–16th century) 141 , income calculation become the major bookkeeping problem; income determination by matching cost and revenue remained the central feature of double-entry bookkeeping for a long time. The 19th century saw a continued concentration on income recognition, and it was commonly acknowledged that profit equalled the net increase in assets during a period. There were also concerns about profit calculation for dividend, measuring management efficiency, predicting future operation results, taxation and complying with government regulatory policies. (Chatfield 1977)

During the early 20th century business income was still a core issue debated among accounting theorists, such as Dicksee (1921), Paton (1922), Hatfield (1927), Canning (1929), Gilman (1939) and Edwards and Bell (1961). Either a stewardship perspective or predictability argument requires recording the results of economic activities to indicate or predict the success or failure of a business activity. These early theorists asserted that information of a financial nature, such as the measurement of cost and profit, was the most dominant and distinct concern of accounting. The financial aspects of organisations that could be quantified into monetary numbers were highlighted, and those that could not be quantified in this way were ignored. Accounting has been defined as a „measurement‟ where numbers are assigned to quantities of something

141 Luca Pacioli (1446-1517) is known as the first person to systematically describe the method of double-entry bookkeeping in his book Everything about Arithmetic, Geometry, and Proportions in 1494.

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deemed important. The nature of the discussion, however, has been much clearer than it had been before the 20th century in two, precisely opposite, directions.

A group of theorists advocated an economic concept of income recognising increases in asset values when they accrue, but not when they are realised through sale. This concept of income allows some portion of profit be earned during each phase of the company‟s operating cycle. One influential pioneering work was Paton (1922)‟s Accounting Theory – With Special Reference to the Corporate Enterprise. Paton adopted a managerial viewpoint of accounting information and hence emphasised the importance of the balance sheet, de- privileging the income statement. He was concerned with changes in the value of the measuring unit and their effect on capital maintenance, and wanted to ensure that inflation and maintained capital were accounted for at an appropriate level to continue operating, which was an appealing idea given the escalating effect of inflation at the time.

The objective of capital maintenance was reinforced by Alexander (1950), who asserted the importance of measuring the capitalised value of the enterprise and changes therein. Along a similar line, Moonitz (1961) advocated the treatment of measuring the changes in enterprise wealth, using the present value of future cash flows. Some have recognised that investors‟ desires to predict cash flows have led many decision-usefulness theorists to a cash-flow orientation (Staubus 1961). Because cash returns to investors or shareholders depend on the firm‟s present cash balance and its cash flow potentials, when reliable evidence of future cash flows is available it should be used in the measurement of an asset or a liability (Staubus 1961, Revsine 1973).

Chambers (1966) also argued for asset measurement on the basis of current cash equivalents (realisable values) and emphasised that equities needed to be measured on a similar basis for the sake of consistency and comparability. Also, “a capital maintenance adjustment needs to be made at the end of a period to reflect changes in general purchasing power of money” (Chambers 1966, p.103).

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A similar preference towards capital maintenance was also found in the work of Edwards and Bell (1961), who proposed a theory of current value accounting (CVA) that differed from historical cost. They believed that financial statements should reflect the changes in current replacement costs, and that using current replacement costs of assets results in a better measure of profit than the use of historic cost (Edwards & Bell 1961). The CVA is considered to have a capital maintenance objective because a firm‟s capital is measured as the sum of the current (replacement) cost of its assets less its liabilities; profit is earned only after the firm‟s physical capital has been maintained intact. An implication of such treatment is that the entity and owner or shareholders‟ interests are better „monitored‟ by looking at accounting costs and determining profits.

One common point that may be discerned is that users of financial statements and financial information seek current price information in making economic decisions. The users are explicitly referred to as owners of capital or shareholders, with unquestioned significance attached. The aim has been to aid shareholders in decisions concerning their income, wealth and even utility. These early theorists are likely to align with those contemporary supporters of FVA for their emphasis on the „current value‟ of financial position and the shareholders‟ perspective.

This concept of business income faced substantial resistance from many other accounting theorists at the time. Dicksee (1921) believed that long-term assets were recorded at historical costs, and that income was recognised only when assets were sold. He adhered to historical cost measurement, claiming that other methods of asset valuation, such as liquidation price (the current selling price), were inappropriate for accounting and tax purposes due to the indefinite life of corporations. Hatfield (1927) also argued that profits existed only when the increase in wealth was realised, rather than as assets appreciated in value. Canning (1929) held a similar position, suggesting that income is realised when the receipt of money within a year has become highly probable and the amount is known or can be accurately estimated. Similarly, Gilman (1939) made it clear that income should not be realised until cash or some extremely liquid asset has actually been received. 195

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The recognition of these early debates (discourses) challenges the prevailing „texts‟ that suggested a favoured status for FVA. The issues of reporting a more current value than the historical cost of assets/liabilities, and hence the conformations to economic concepts of income realisation that FVA advocates, are not new challenges. They are long-held concerns, subject to ongoing debates.

6.4.2 The Narrow Idea of the ‘User’: Empirical Research

Another major bias lies in the notion of the „users‟ of accounting information, a notion that has been narrowly constructed within academic discourses. Within this discursive space, empirical research deserves special attention, given its dominance in accounting theory and practice since the 1970s (Gaffikin 2008). By revisiting the empirical research associated with FVA, the findings of this section are twofold. First, they demonstrate the incoherence of reporting „comprehensive income‟ on the basis of value changes of assets and liabilities. Second, they expose a particular notion of „users‟ that has operated throughout these discussions. From the point of view of discourse, this represents the limited way in which „users‟ have come to be signified in financial reporting. Reading this through the lens of neoliberalism and financialisation, the failure to represent „difference‟ and the multiplicity involved in interpretations of „users‟ have real capacity to obscure or highlight knowledge according to patterns of dominance and power (in this case, the neoliberal ideology), rather than any claims to „reality‟ and/or „truth‟.

It has been recognised in the literature that since the 1970s, studies of how markets respond to accounting information have retreated from theoretical or normative work into empirical studies using a positivist research approach to test the usefulness of accounting disclosure (Watts 2003, Gaffikin 2008, Whittington 2008). It should be noted that the „markets‟ referred to here are exclusively share markets, and „usefulness‟ is considered from the perspective of investors – the owners of financial capital – as this section demonstrates later. As this thesis has argued, the rising dominance of finance and the reconfiguration of the power relation of shareholders are the striking features

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of the neoliberal economy. In this sense, mainstream accounting research has been central to this trend.

More specifically, most of the empirical findings that are related to capital- market research focus on whether net income or comprehensive income has more value relevance as reflected in its usefulness in predicting share returns. For example, Norton and Porter (1982) indicated that current period movement in the foreign currency translation reserve was unlikely to be relevant to forecasting earnings or estimating the intrinsic value of the firm, due to the uncertainty of the timing and amount of realisation of accumulated translation adjustments. Their study suggested that the inclusion of foreign currency translation adjustments in comprehensive income was questionable; this was supported by evidence presented in O‟Hanlon and Pope (1999), Cahan et al. (2003) and McCoy (2009). If the intrinsic value of the firm is sidelined by the comprehensive income, it is questionable that this accounting information is useful to shareholders, who tend to invest from a long-term perspective. Instead, it is more likely of value to speculators, who care little for „real‟ business performance but more about the short-term opportunity arising from fluctuations in financial instruments. This is consistent, as Dodd (2005) illustrated, with the inherent risk-taking behaviours in financial markets, which create incentives for risk management through the use of collaterals, default swaps, hedging and many other activities. The majority of these activities seek profit from short-term speculation, rather than investing in real production over a longer period of time. This concern also reinforces the argument that embracing the statement of comprehensive income aligns itself with the interest of financial speculators over the „traditional‟ users, who demand more-traditional income numbers to understand the longer-term earning from the firm‟s common business activities.

The disruptive effect of comprehensive income is another concern raised within the discussion. Campbell et al. (1999) examined the 1997 financial statements of 73 US companies that had adopted Statement of Financial Accounting Standards (SFAS) No. 130 and found that other comprehensive income has on average a material and positive impact on net income. The concern was, according to Campbell et al. (1999), that if comprehensive 197

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income was substantially higher than net income, the prominence of net income as the principle measure of a company's performance would be reduced, which could cause confusion among some financial statement users about true earnings. Jordan and Clark (2002) expanded the study to include 100 firms for 1998 and reached a similar conclusion.

McCoy et al. (2009) collected data from the Fortune 500 that showed that items of other comprehensive income can be volatile and its impact increased from a 1.9 percent of net income in 1999 to 30.9 percent of net income in 2001 142 . It was of concern that the disclosure of comprehensive income created an additional performance measure that has been proven to be more volatile than net income (McCoy et al. 2009). This has the potential to confuse users, which was also a point raised by Hirst (2006). Given the current popularity of embracing comprehensive income, it is important to ask why this accounting method is more popular when it may actually undermine an important function of accounting income, as those studies have demonstrated.

Connecting this question back to its broader socio-economic context, this thesis argues that the broader influence from the neoliberalised economic environment cannot be underestimated, and the working relationship between this accounting change and its implication on macro-economy needs to be critically evaluated.

First, there is a tremendous risk, in terms of the stability of investment funds, to the traditional „real‟ production sectors under the influence of the neoliberalised „free movement of capital‟. For the success of finance, referring to Dumenil and Levy (2005), investment of funds or capital should remain reversible: after having invested in a particular field, they should always be

142 King (2006, p. 58) offered an explanation of this kind of phenomenon: “values change fairly quickly, and small percentage changes in asset values will necessarily be a much larger percentage change of earnings. If a company has an 8% pre-tax margin on annual sales of $100 million, it would be reporting $2 million ($8 million/4) each quarter. If it had a similar $100 million of assets that went down 1% in the quarter, which is not at all unlikely in many markets, then quarterly earnings would be cut in half (the $2 million profits minus $1 million value change). Similarly, a 1% increase in asset value would increase quarterly earnings by 50%, which would make the next quarter hard to beat from operations alone.” 198

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able to be withdrawn rapidly at any time and at minimum cost. As Dumenil and Levy (2005, p. 40) noted, “the stock exchange is the most conspicuous element, but all monetary and financial markets are at issue” in terms of containing this tendency to push an institutional setting for such mobility. From this perspective, it is clear that the necessary lasting investment that is required in traditional production sectors and this „absolute freedom‟ of movement demanded by finance are fundamentally irreconcilable. The instability and fluctuation created by such free movements of finance would considerably jeopardise growth and employment on a much broader level within the macro-economy. The result of the overabundance of finance, as Palma (2009, p. 844) warned,

…was to transform it [macro-economy] into an emasculated, „sub-prime‟ economic system that not only lost most of its capacities to develop the productive forces of society, but also became particularly prone to accumulating ever increasing financial fragilities.

It is of significance that the ongoing consequences of this new institutional setting created by finance are not hidden, and are well understood by the public. As shown through the current GFC (2007-2011), wide-ranging financial liberalisation has hugely increased the probability of the self- destructive trend of the capitalist system that theorists such as Karl Marx long ago advanced. The focus that has been tightened with the „comprehensive income‟ coincides with the interests of a neoliberal business model when it is infiltrated with highly mobilised financial flows. Because financial trading values short-term profits offered by speculative investment instead of real production and trading, it becomes understandable that the comprehensive income outweighs the „real‟ income in spite of the controversies.

The technical benefit of promoting this comprehensive income is not necessarily supported by empirical findings. For instance, Barth and Clinch (1998) exhibited mixed results using Australian data in terms of the usefulness of reporting comprehensive income: revaluations that were recognised in income, but not those recognised directly in equity (many of these are classified as items in comprehensive income), were associated with share returns for non-financial firms; while for the mining and finance

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industries, revaluations that were recognised directly in equity, but not those reported in income, were associated with share returns. The finding showed that the inclusion of a value change in income has no value relevance for the mining and finance industries. Dhaliwal et al. (1999) examined the associations between various measures of comprehensive income and share returns using US data. They found no evidence that comprehensive income was more strongly associated with returns or market value, or better predicted future cash flows or income, than net income. They also “raise questions about the appropriateness of items included in SFAS 130 comprehensive income as well as the need for mandating uniform comprehensive income disclosures for all industries” (Dhaliwal et al. 1999, p. 43). Using a sample of listed New Zealand firms, Cahan et al. (2003) examined data from 48 New Zealand firms over the period 1993-1997, focusing on two items: fixed asset revaluations and foreign currency translation adjustments. They suggested no evidence of an increase in the incremental value relevance of the comprehensive income items over net income.

McCoy et al. (2009) provided evidence that some items of the comprehensive income (those that resulted in the recognition of unrealised gains or losses on available-for-sale investments) were value-relevant to share returns. But McCoy et al. (2009) acknowledged that they did not find strong evidence that many other items of comprehensive income, including amounts pertaining to cash-flow hedges deferred in equity and the subsequent transfers of deferred hedges from equity to profit and loss, amounts deferred in equity in relation to defined benefit plans and amounts recognised directly in equity for investments accounted for using the equity method were associated with stock returns. These items, which are included in comprehensive income, are subjected to considerable „professional judgements‟, as Loftus and Stevenson (2009, p. 22) criticised:

The difference between profit and comprehensive income, referred to as „dirty surplus‟, is dependent upon the accounting treatment of valuation adjustments, such as asset revaluations and changes in the fair value of certain financial instruments, are not value relevant and merely create noise in the measurement of comprehensive income.

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From the above, the practice of reporting „comprehensive income‟ on the basis of value changes of assets and liabilities is indeed controversial. It is not founded on well-established normative theorising, nor can its benefits be supported by the empirical evidence reviewed in this section. The IASB and FASB‟s endorsement of this method, again, raises questions about the reasons why they support this model and whose interests are going to be satisfied and promoted with this decision. Under the new accounting framework and standards, income is no longer a signal of production and operating performance, but the capital invested and the amount subsequently distributed or available for immediate distribution to investors – in other words, the owners of capital. This is a design, this thesis argues, that is useful, pragmatic and „instrumental‟ in sustaining unlimited financially driven capitalism and its underlying neoliberal values.

6.4.3 Resistance to ‘Comprehensive Income’

In a narrower sense, there has been resistance among academics to the approach of „comprehensive income‟, without reference to this broad neoliberal context. The resistance has been illustrated throughout the discourses of some accounting academics. Barth and Landsman (1995) believed that if the income statement revealed only the period-to-period change in value that resulted from FVA, the income measurement became redundant. Ronen (2008, p. 184) held the same opinion, writing that if “earnings are the by-product of the fair value measures, they are uninformative about future earnings and about value”. Whittington (2008, pp. 153-154), too, expressed his concerns:

Opponents of the IASB‟s preferred single comprehensive incomes statement, many of whom are preparers of accounts, are afraid that comprehensive income, possibly based substantially on fair value measurement, will become the central figure for performance evaluation. They regard fair values and comprehensive income as volatile measures that mask operating profit, which they would regard as a better indicator of the entity‟s underlying potential for generating future cash flows.

Hoed (2003, p. 117) highlighted the problem of comprehensive income on reflecting the firm‟s „real‟ performance capacity:

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If every company were to report solely on the basis of fair value, the people reading their financial reports would no longer see what is really at play in the company. Nor would they see the trends, since there would be too many factors playing a role that have nothing to do with the company‟s operation.

King (2006)‟s research exemplified some of the impacts of this concern by examining the conflicts between corporate executives and security analysts. King (2006, p.58) argued that:

Much of the opposition to FV reporting by executives derives directly from their understanding of the impact of value changes on reported earnings…. Financial executives, who take enough grief from analysts as it is, feel that earnings fluctuations from temporary value changes will simply distort longer-term operating results. Executives want security analysts to focus on operating results over more than one quarter, but the analysts respond that you have to make next quarter‟s numbers in order to get to the long run. Both sides are correct, which is why financial managers dread having a new complexity thrown at them in terms of changes in FV disrupting actual or real operating results.

There are similar arguments within the Chinese literature, even though little discussion of this has been identified. Chen and Li (2006) were aware of the issue of income realisation in the adoption of FVA. They theorised that:

Under the fair value measurement, the change of net assets does not equal to the net profits in the income statement, because many accounts such as some of the holding gains/losses, foreign currency exchange, and related party transaction are not recognised in the income statement. But if they are all included, then the principle of recognising only realised gains/losses is breached. (Chen & Li 2006, p. 26)

As implied in this quote, Chen and Li (2006) have attempted to defend the traditional income realisation principle that only realised gains or losses are reported in the income statement.

Given all the concerns raised by researchers mentioned above, fair-value- based „comprehensive income‟ does not really make sense when it is considered only in light of its technical rationales. However, its bias towards the „users‟ – in other words, the shareholders – is evident. Reading it through the lens of neoliberalism, this thesis suggests that this accounting technique has evolved in response to the changing pressures from neoliberal

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financialisation. Because the „users‟ – the shareholders, or owners of financial capital – seek no information about „real‟ production except that reflecting quick investing opportunities and short-term speculations, FVA outweighs other measurement methods as it provides information suitable for this financially driven business model.

From this perspective, FVA is viewed as a technical tool to support neoliberal ideology in its systematic efforts to promote the interest of financial capital. According to Harvey (2007), neoliberalism presents a successful process within which capital has regained its power and control through various means, including new forms of legitimisation at the ideological level and sophisticated ways of dispossession at a technical sense. If Keynesianism was to prevent the disruptive effects of crisis-ridden capitalism, according to Wood (1999), neoliberalism is to return power and control to their „rightful owners‟ – capital. In the process, financialisation has been a major technology of power for neoliberals, with “its ability to transform the state into a major facilitator of the ever-increasing rent-seeking practices of oligopolistic capital.” (Palma 2009, p. 833) More specifically:

What some capitalists, politicians and intellectual networks thought best for capitalist development was that capital should regain the upper hand via an economic environment that was permanently unstable and highly insecure for the majority of the population and the state. That is, one that could have the necessary debilitating effect both on workers and the state. In this kind of environment a highly mobile and malleable factor of production (especially finance capital) would have an unrivalled power to thrive. (Palma 2009, p. 845)

This kind of policy deliberation is not an uncommon one. As Sir Allan Budd, a leading economist and a founding member of the Bank of England‟s Monetary Policy Committee, commented that:

The Thatcher government never believed for a moment that was the correct way to bring down inflation. They did however see that this would be a very good way to raise unemployment. And raising unemployment was an extremely desirable way of reducing the strength of the working classes.... What was engineered – in Marxist terms – was a crisis of capitalism which re-created the reserve army of labour, and has allowed the capitalists to make high profits ever since. (quoted in Eaton 2010, n. p.)

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This aligns closely with what occurred during the history of neoliberal movements beginning in the 1980s as illustrated by Harvey (2005), among many others this thesis has identified. It is suggested by a number of political economy studies that when the capitalist elites encountered setbacks during the Keynesian era, what they urgently needed was a crisis – or a sense of crisis – so that they could constitute a new platform to overcome the constraints. Palma (2009, pp. 845-846) described this as:

…the reintroduction of risk and the spiralling of uncertainty right into the soul of what were by then rather too self-assured „welfarised‟ institutions and populations. So what was needed was a return to an environment in which the state had to live permanently under the logic of a state of emergency; and a return to precarious jobs, higher levels of unemployment, highly-constrained unions, increasingly porous safety- nets, insufficient and insecure pensions and so on – and, of course, high levels of persecutory personal debt could also be of great help. The bottom line was thus the question of how to reconstruct an economic and institutional scenario in which everybody knew that capital could pull the plug whenever it wanted to.

Along with other neoliberal policies, such as shrinking supports for workers from the government, the rising power of finance and its penetration into other sectors has contributed to enabling a system that ensures maximum „freedom‟ for capital whilst exposing workers and small business to far-reaching competitive struggles with minimum protections.

What underpins these artefacts of neoliberalisation is the “conventional wisdom” (Greenspan 2009, p. 11) of the free market, which has been successfully reproduced through neoliberal discourse. That is, the market mechanism has a magic invisible power that efficiently uses economic resources and distributes outcomes. This consensus has been so successfully established within societies that social and political policies are formulated in a way compatible with it. Market failures are interpreted as contingent events that can be fixed by the market‟s self-correction mechanism, instead being an innate feature of capital, as Karl Marx would argue. This is evidenced through the discourses spoken by policy-makers. For instance, commenting on the 2007 GFC, Nouriel Roubini, Secretary of the Treasury in the Obama administration, said that the GFC:

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…is just a crisis of confidence – an animal-spirit-driven, self-fulfilling recession – that has led to a collapse of liquidity (as counterparties don't trust one another) and of aggregate demand (as concerned households and firms cut consumption and investment in ways that can turn a regular business-cycle recession into a near-depression) (Roubini 2009, n. p.).

The fundamental assumption, according to Greenspan (2009, p. 11), was “that the enlightened self-interest of owners and managers of financial institutions would lead them to maintain a sufficient buffer against insolvency by actively monitoring their firms‟ capital and risk positions.”

According to these proponents of market freedom, financial crises occur only when external forces interfere with the market mechanism. The „efficient capital market theory‟ strengthens this understanding by arguing that there cannot be an endogenous gap between market prices and fundamentals because prices at all times reflect all available information if they are left alone (Fama 1965). The potential influence of this assumption on policy-making is evident. Lawrence H. Summers, the Director of the White House‟s National Economic Council, wrote “the efficient markets view that stock prices will always reflect fundamental values…. The logic of efficient markets is compelling.” (cited in Summers & Summers 1989, p. 264) This understanding has been fundamentally shaping the way that „value‟ is perceived and measured in accounting, as this chapter has investigated.

In this context, discourses of „fair value‟ play a role in legitimising the neoliberal financialisation process. Embedded with the beliefs of „arms-length transactions‟ or „efficient market‟ ideology, the markets correctly price the value of „metaphysical‟ assets, such as rising intangible assets during the neoliberal economies. The fluctuations or failures in capital markets due to the disproportionate growth of finance that this chapter has stressed were not economic „bubbles‟ but simply markets fulfilling their job (Palma 2009). Being firmly entrenched with this market fundamentalism, the FVA discourse has excluded the damaging effect of the massive financialisation inflicted on the „real‟ production and trading sectors. This ignorance of the problems while endorsing the „free-market‟ orthodoxy and advancing „shareholders value‟ has enabled FVA to be part of the new technology of power that facilitates the

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dynamics of unregulated markets in the interest of a small group of financial elites.

6.5 Distortion of the Price-Discovery Process

As discussed in Section 6.1, FVA is not a reliable evaluation of fundamental value given the inherent problems of financial markets. Unlike other markets, financial markets are inherently volatile, as they are driven by expectations about the future (Spencer 2000). Market valuation is influenced significantly by radical uncertainty and market speculation that shift the market value far away from its fundamental value. As Boyer (2007, p. 781) recognised, “even when one assumes that dividends are perfectly well known, one observes a very large fluctuation of stock market prices that never converge towards the reconstituted fundamental value.”

Since this feature of financial markets is inherent and quite general across the globe, the wide adoption of FVA as the result of the efforts of IFRS should be re-examined critically. In the previous HCA system, share-market prices were not taken into account for value measurement in accounting disclosure; hence the volatility of share markets was virtually isolated, having limited effect on measuring values in other economic sectors. In this sense, FVA allows this erratic market valuation to be transmitted into the internal evaluation produced by the firm, which would significantly influence any economic decisions made upon this valuation information. In the contemporary financialised economic environment, this thesis argues, this technical feature distorts the price-discovery process and enables the excessive volatility of financial markets and the fragility it causes to permeate the entire economic system.

In describing the central problem of neoliberalism, Epstein (2005, p. 12) argued that the neoliberal economy led to:

…speculative and excessively liquid financial flows that create debt-laden balance sheets, overly short-term perspectives, volatility and mispricing of important asset prices, including exchange rates, and subsequent misallocation of resources and unstable economic growth. 206

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In light of this discussion, this section explores the effects of the mispricing of important asset prices mentioned in this description to further illustrate the significant role that accounting measurement (FVA) plays during massive financialisation and its immediate problems.

6.5.1 Mispricing the ‘Risk’

The decades of deregulation pushed by financial institutions during the neoliberal era has not only led to a powerful financial boom across global economies, but also introduced its structural flaws into the macro-economic system. The environment that has been constructed by this financial boom contains, borrowing Crotty‟s (2009, p. 565) term, “a powerful incentive to pursue high-risk, high-leverage strategies” in the capitalist system:

[In the US] in 1981 household debt was 48% of GDP, while in 2007 it was 100%. Private sector debt was 123% of GDP in 1981 and 290% by late 2008. The financial sector has been in a leveraging frenzy: its debt rose from 22% of GDP in 1981 to 117% in late 2008 (Crotty 2009, p. 575).

Again, this is a shift fundamentally justified and fuelled by efficient financial market theory. The assumption of „rational behaviour‟ ensures that complex financial innovations (mostly derivatives) allow the risk associated with those financial instruments to be divided into its component parts, such as interest- rate and counter-party risk, because investors could only purchase those risk segments when they feel comfortable to invest after a rational analysis (Crotty 2009). Next, the „self-correction‟ function of the markets this chapter has explained earlier implies some vital „hedging‟ benefits because those risks can be self-adjusted within the market. This kind of benefit can be further expanded through a tightly integrated global financial system where the risks are spread widely across the globe, as Crotty (2009, p. 572) illustrated: “since markets price risk correctly, no one would be fooled into holding excessive risk, so systemic risk would be minimised.”

An examination of what happened during the GFC (2007-2011) reveals the irony in these narratives. For example, Timothy Geithner, US Secretary of the Treasury, stated in 2006: “in the financial system we have today, with less risk

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concentrated in banks, the probability of systemic financial crises may be lower than in traditional bank-centered financial systems.” (Geithner 2006, p. 2) Similarly, the IMF claimed in 2006 that the dispersion of credit risk “has helped to make the banking and overall financial system more resilient” (Tett 2009, p. 1). The degree of system-wide risks made apparent by the current (2007-2010) financial crisis draws this claim into question and has demonstrated the potential damage created as a result of excessive risk-taking through financial derivatives.

Instead of providing risk-avoiding information in measuring financial assets, FVA reinforces the belief that the market prices value correctly despite the complex nature of financial products that are inherently non-transparent (McSweeney 2009). Take Collateralized Debt Obligations (CDO) as an example: in a very general sense, a mortgage-backed CDO converts cash flows from mortgages in its domain into tranches that have different risk characteristics (Sumerlin & Katzovitz 2007). It is normal, according to Chacko et al. (2006), that several thousand mortgages are combined in a single Mortgage-Backed Security (MBS), and that as many as 150 MBSs can be packaged into a single CDO, which is extremely difficult to value. More specifically:

Even with a mathematical approach to handling correlation, the complexity of calculating the expected default payment, which is what is needed to arrive at a CDO price, grows exponentially with an increasing number of reference assets [the original mortgages]…. As it turns out, it is hard to derive a generalized model or formula that handles this complex calculation while still being practical to use. (Chacko et al. 2006, p. 226)

Investment banks and rating agencies create these commercial papers and use extremely complicated simulation models143 to price them. These models are understood as “unreliable and easily manipulated statistical black boxes”; and “market insiders refer to the process through which CDOs are priced as marking to „magic‟ or to „myth‟” (Crotty 2009, p. 567). Not only can they not be priced „correctly‟, but also many of them are not even sold on markets. As reported by the President‟s Working Group on Financial Markets (1999) to the US Congress, about 80 percent of the world‟s $80 trillion derivative contracts

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are sold over the counter in private transactions between an investment bank and one or more customers. All these factors clearly contradict the fundamental argument that market prices reflect the „true‟ and „fair‟ values of those financial capitals.

In terms of accounting practice, the sheer size of financial assets in the world economy 144 leads to significant pressures on accounting measurement. In response, accounting measurements and calculations have become easily manipulated, and hence unreliable, models based on a fictitious efficient- market hypothesis. The uncertainty and inevitable unreliability involved in the pricing process, however, has been widely neglected in much of the FVA debates. As McSweeney (2009) depicted, many textbooks and academic journal articles in accounting and finance draw upon theories and examples that predict the future with such certainty that future circumstances, including cash flows, interest rates and so forth, appear to be knowable. Discussions around the level of uncertainty involved and its manifestation in the emerging neoliberal context have been largely absent. More detrimentally, FVA introduces the instability of the financial market into the valuation process of the firm through the market pricing mechanism. Because this pricing mechanism does not necessarily reflect the implied systemic risks, decision-makers from other sectors will be less likely to be alerted by this pricing signal. This kind of information asymmetry enables key financial actors to transfer risks to other actors in a much more hidden way.

6.5.2 An Accounting ‘Gearing’

Much research points out a „pro-cyclical‟ pattern common within most financial crises (Bernanke et al. 1999, Pritchett 2000, Karolyi 2002, Graciela et al. 2004, Boyer 2007, Borio et al. 2010). The argument centres on an „accelerating effect‟ of financial leverage: during a desirable economic period, the increasing productivity from external sectors generates better profits,

144 For example, at the end of 2007 about 11,000 essentially unregulated, mainly unaudited, and largely off-shore domiciled hedge funds worldwide controlled about $2,250 billion in assets; and the largest 3 percent of hedge funds accounted for four- fifths of total industry assets in 2007 (International Financial Service 2008, n. p.). 209

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which reduces the risk premium in the financial sector, allowing firms to borrow more from banks or other financial institutions; the borrowing also increases the „general‟ value of the firm which encourages more debt-taking activities. In other words, the credit lending mechanism of financial markets amplifies the effect of economic booms. From this perspective, FVA forms an important part of this „gearing‟ tool that reinforces these forms of financial acceleration. For instance, as Boyer (2007) illustrated, when the economic conditions are good, the appreciation of capital will reduce the need for banks to build reserves to comply with prudential ratios; however, in bad times the need will be much greater due to an extra credit squeeze.

The undesirable effect of financial „gearing‟ has never been more obvious than during the global financial and economic meltdown triggered by the US subprime crisis in late 2007. During the GFC, banks and financial institutions have had to revalue assets with reference to „current market prices‟, as FVA requires. When the credit markets collapsed as mortgage defaults escalated, the fair value of assets had to be sharply written off from the balance sheets of many banks and financial institutions. This kind of „paper loss‟ (banks believed that the value of those assets would be much higher in an orderly market) has forced many institutions to become unviable. This failure was probably unexpected when those giant financial firms actively participated in the process of financialisation. The crisis has put enormous pressure on the markets as investors‟ confidence has been destroyed and its damage has been widely spread into broader economies.

During the financial crisis, there have been heated debates about FVA (Bernanke et al. 1999, Pritchett 2000, Karolyi 2002, Graciela et al. 2004, Boyer 2007). Critics have argued that FVA has significantly contributed to the financial crisis. Steve Forbes, Chairman of Forbes Media, gave an opinion on the primary cause of the GFC:

…none of the sub-prime mortgages, credit default swaps, or excessive debt, but the most disastrous Bush policy that Mr. Obama is perpetuating [that] is mark-to-market or „fair value‟ accounting for banks, insurance companies and other financial institutions (Forbes 2009, n. p.).

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Banks have urged, in their discussions with the SEC (American Bankers Association 2008, Mortgage Bankers Association 2008), that FVA exacerbated the crisis by creating a downward spiral as the observed market prices during the crisis were significantly lower than the assets‟ fundamental values. As explained by economist Brian Wesbury:

Mark-to-market accounting rules have turned a large problem into a humongous one. A vast majority of mortgages, corporate bonds, and structured debts are still performing. But because the market is frozen, the prices of these assets have fallen below their true value (Wesbury 2008, p. A25).

Some high-profile figures in financial industry, such as Martin Sullivan, CEO of American Insurance Group (AIG), and Henri de Castries, CEO of AXA145, have regarded the wide use of mark-to-market accounting as a major factor in the crisis (Hughes & Tett 2008). Similar examples can also be found in Wallison (2008) and Whalen (2008).

According to its proponents, however, FVA has been unfairly accused (Turner 2008, Veron 2008). For example, Lisa Koonce, the Deloitte & Touche Professor of Accounting at the University of Texas at Austin said:

This is simply a case of blaming the messenger. Fair-value accounting is not the cause of the current crisis. Rather, it communicated the effects of such bad decisions as granting subprime loans and writing credit default swaps. Even with the difficult issues surrounding measuring the fair value of loans and investments in an illiquid market, as we have seen recently, fair-value accounting only brings transparency to the market. The alternative, keeping those loans on the books at their original amounts, is akin to ignoring reality. (Koonce 2008, n. p.)

Accounting regulators defended FVA; notably, the FASB stressed that: “it is especially critical that fair value information be available to capital providers and other users of financial statements in a period of market turmoil accompanied by liquidity crunches.” (quoted in Pozen 2009, p. 86) In a report submitted to the US Congress by the SEC for the $700 billion federal financial rescue package in October 2008, the regulator claimed that “fair-value accounting did not appear to play a meaningful role in the bank failures that

145 AXA is a French global insurance group based in Paris. 211

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occurred in 2008” (Securities and Exchange Commission 2008, p. 107), and the final recommendation was to give companies more guidance on determining the fair value of investments in inactive markets instead of abandoning it.

In order to alleviate the undesirable effects of FVA, as some researchers (Brunnermeier et al. 2009, Laux & Leuz 2009) have indicated, both US GAAP and IFRS have established certain mechanisms to allow a deviation from market prices in certain situations: first, market prices from forced sales were excluded to protect firms from negative spill-over from distressed banks; second, the standards allowed other valuation models to derive fair values when markets become inactive; third, the standards provided an option of reclassifying fair-value assets into a category to which HCA and less-stringent impairment tests apply.

Despite these compromises, there remained fundamental problems that could not be easily resolved. In practice it is virtually impossible to verify whether a market price is indeed misleading or just a manager‟s attempt to avoid a write- down. Ample evidence (Beatty et al. 1995, Ball et al. 2000a, Ramanna & Watts 2007, Financial Accounting Standards Board 2009a) shows that mangers are reluctant to take write-downs when assets are substantially impaired. The information asymmetry between managers and regulators always presents difficulties in setting up rules that provide the flexibility when it is needed and prevent managers‟ manipulation at other times (Laux & Leuz 2009).

Also, as reflected from these technical adjustments, it is clear that the dynamic of „fairness‟ is political. In essence, FVA is applied when things are good and „protectionism‟ when the results lead to a bad situation. As discussed previously, neoliberalism in practice is „free market‟ when things are good, but massive public bail-outs when things are bad. The ultimate attribute has to be aligned with the interest of big businesses because, in the phrase popular with advocators of discretionary government support, they are „too big to fail‟.

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It can be seen that accounting aligns with financiers in incorporating more „estimations‟ into its framework for the sake of the financialised neoliberal economy. As Roberts and Scapens (1997, p. 238) wrote, “the real power of accounting perhaps lies in the way in which, as a structure of meaning, it comes to define what shall and shall not count as significant”. From this perspective, accounting that is proposed to provide „true‟ and „fair‟ information for economic decision-making (American Institute of Certified Public Accountants 1971) has failed to produce failure-avoiding information in an ever-more-financialised neoliberal economy. What instead has been reinforced by the current move of accounting standards-setting bodies in promoting fair- value-based accounting standards is the idea that financial markets correctively price assets and liabilities. The relationship between this market fundamentalism and accounting pricing signals is firmly established, with inadequate stress on the unreal assumptions upon which it is built. In this sense, FVA pushes the boundary, and hence the damages, of neoliberal financialisation even further by legitimising this kind of valuation, which is filled with estimations and uncertainties as the most desirable measurement method in accounting. With the effects of FVA saturated into the use of balance sheets and income statements, as has been explained above, a completely different economic environment, with a distorted price-discover process, has emerged. This is a world “where almost all asset classes could swing wildly in value” (Tett 2008, n. p.).

6.6 Summary

This chapter has explored the broad context of neoliberalism and financialisation as part of the social practices connected with the research topic, in order to fulfil the first stage of the third layer (discourse of social practice analysis) of the CDA framework. The analysis has reviewed the fundamental assumptions that frame FVA as represented through the discourses articulated within standards-setting committees (the IASB and FASB) and accounting researchers. The analysis reveals a strong bias towards the market mechanism implicated in the wording potential of the FVA discourses. That is, prices derived from arm‟s-length market transactions are

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the correct values because the market would have conducted an effective analysis of all the information required. The expressional potential of this narrative is also realised through the paradigmatic status that has been built upon an un-testable efficient-market hypothesis. This chapter has contested this market fundamentalism through the lens of neoliberalism and its problematic theoretical foundations, as discussed in Chapter Three.

From a historical perspective, the neoliberal underpinnings of FVA are reflected through the changing patterns of fair-value-based accounting standards promulgated by the IASB and FASB as a result of the pressures from the financialised neoliberal macro-economy over the past decades. Given the technical connection among fair-value-based measurement and balance sheets and income statements, the expansion of FVA has disrupted traditional income realisation in accounting. As a result, „real‟ operating performance has been sidelined since the standards-setting bodies started to promote the notion of income that focuses on value change of the „wealth‟. This is a move, this thesis argues, that effectively represents interests of the dominant financial capital in the current financialised neoliberal economies.

The bias of this notion of „income‟ is contrasted through the historical debates among earlier accounting theorists and further evaluated through the damaging effect of ever-rising financialisation on the real economy. The narrowly constructed idea of „user‟ that underlies this notion is evidenced by the empirical accounting research that studies FVA in more recent times. Some of the technical problems of FVA are also self-revealing. What is more destructive, however, is the assistance that FVA provides for neoliberal financiers, such as the distortion of the price-discovery process and the extra accounting „gearing‟ it provides. It is therefore argued that FVA has actively been part of the new technology of power that facilitates the dynamics of unregulated markets in the interest of a small group of financial capitalists.

This chapter has analysed competing discourses to determine that the discursive dominance of the market function as a way of explaining and sustaining the operation of FVA is under challenge, both within and without its discursive boundaries. In doing so, the analysis leads to an exposure of the 214

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traces and prejudices that have been attached to this accounting technique by dominant ideologies and the discourses that constitute them: neoliberalism and financialisation. The „domination‟ of the orthodoxy is a complex process. According to Fairclough, there are many intervening contests associated with the positioning of the „norms‟ and the interpretations of that representation. There are, certainly, choices that societies make as a response to that interpretation. This conjunction requires reflexivity and further deconstruction so that the obstruction and/or continued privileges of the ideological dominance can be challenged and potentially renegotiated. This thesis chooses China‟s implementation of FVA as an example to contextualise the arguments and further destabilise the predominant assumptions that have rationalised the implementation of FVA and the IFRS harmonisation more broadly. This leads to the task of the rest of this thesis.

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7 Chapter Seven – Contextualising Fair Value Accounting in China

This chapter aims to fulfil stage two of the third layer of the CDA framework (discourse of social practice analysis), as discussed in Chapter Four, this stage contests the meaning that has been constructed discursively with the „reality‟ that has been manifested in real-world practices (social practice) to reveal possible gaps or inconsistencies between discursive presentations and social practices.

In the previous analysis, the „logic‟ of FVA has been re-considered from within the theoretical discussions, and within the emerging context of the proliferation of neoliberalism and financialisation. It is evident from the discourses circulated by supporters and promoters of FVA that the underlying assumptions that inform the fair-value-based measurement highlight the demands of „financial investors‟ and obscure the traditional accounting notions such as income realisation, the role of balance sheet and the social responsibility of accounting information. This has been a result of context and pressures that need to be evaluated critically, given the disturbing effects of neoliberal transformation on social conditions. As has been argued, the unfettered market and free trade operate in a way that favours the strong over the weak (Clarke 2005, Harman 2007). Particularly when financial capital flows into a world of de-regulated global markets, the social impacts of this kind of neoliberalised market freedom can be destructive. In this sense, practices, such as the harmonisation of IFRS with national accounting standards, that aim to eliminate „barriers‟ for „freer‟ movement of global capitals, and specific accounting techniques that perpetuates the neoliberal interests, such as FVA, could actually negate the supposed „benefits‟ of neoliberal policies.

The textual representations that this thesis has presented are different ways of defining and conveying reflexive „realities‟. They are social constructs that need to be contextualised to have a sense of their meaning, and this meaning needs to be contested within multiple and competing discursive spaces so that the

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neoliberal bias and its exclusionary operations can be revealed. This can be demonstrated through an investigation that goes beyond the textual level into „real-world‟ practices, as the third layer of the CDA framework directs.

Accordingly, this chapter further contextualises these theoretical arguments by focusing on China to explore the contradictions associated with this accounting change. At a general level, China‟s adoption of FVA faces many hurdles. As widely recognised by researchers (Diekmeyer 2005, Breslin 2006, Eesley 2009), China is still a long way from establishing a well-functioning economic market due to its deficient institutional arrangements in financial information exchange, the legal enforcement system, accountable regulatory agencies, and so forth. As the market through which fair value is obtained is different in China, it is likely that this context will affect the way FVA operates. And it is questionable whether FVA will provide a better representation of value in Chinese companies‟ financial reports. Given these questions, and the possibility that FVA is an inappropriate method of valuing assets in the current institutional context in China, this chapter reveals alternative narratives that inform the problems of the totalising effects of neoliberal discourses this thesis has analysed previously, and hence challenge the neoliberal actions.

It should be noted, however, that this is a difficult layer of analysis to apply in research. As has been recognised in Section 4.3.4, the aspects of practices for investigation can be highly dynamic depending on the specific research topic. The extant accounting literature that draws upon CDA provides very limited guidance for exploring this layer of analysis. For example, Gallhofer et al. (2001) limited their analysis of social practice to an investigation of the funding arrangement between the business sector and policy-makers of New Zealand. Similarly, Cortese et al. (2010) examined the funding relations among the IASC and IASB, international accounting firms and powerful multinational petroleum companies to demonstrate the „hidden‟ practices that contradict their public claims of standards-setting procedures. This thesis elaborates this layer of analysis in a much deeper and more comprehensive way than previous research, due to the larger space available in a PhD project. In applying this method, the following issues are selected as the areas in which to investigate 217

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the relevant social practices, as they are the key areas of interest established in Chapter Six: 1) The main rationale of FVA „being relevant‟. This argument has been reiterated throughout the mainstream voices within the high-profile Chinese accounting journal – Accounting Research. This chapter will show that this rationale is not supported by an examination of some of the institutional settings of Chinese capital markets, such as the signalling role of share prices and the takeover mechanism in China (Sections 7.1 and 7.2). 2) The principle of reliability of accounting information, which has been neglected in the mainstream discourses of FVA. This problem is reinforced by the practical difficulties in applying FVA in China, which leads to provision of unreliable information. This is manifest through alternative discourses identified within Chinese accounting academic journals (Section 7.3). 3) The uncertainty and volatility of financial markets associated with using FVA, which has been „hidden‟ within the mainstream discourses. In this chapter this is exemplified by the real market performance and some well-known market scandals occurring in China (Section 7.4). 4) The proclaimed significance and benefits of the neoliberal market reform, in which mainstream discourses are embedded. This is challenged through a critical review of the development of Chinese capital markets, and the most current (2005–2011) reform which aims to establish „freed‟ capital markets in China (Section 7.5).

By connecting the discourses back to these social practices that go beyond the moment of „text‟, as part of the „instantiation‟ of the mainstream discourses, this chapter exposes a fixation of meaning that has developed regarding FVA in China when certain values have been circulated and re-produced in discursive practices, with their multiple and often competing purposes. The multiplicity and controversies arising from this layer of analysis point to a complicated and politicised matrix within which FVA implementation and, more broadly, the convergence of IFRS have occurred in China.

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7.1 ‘Value Relevance’ of Fair Value Accounting

As Chapter Six pointed out, through legitimising the assumptions and estimations embedded in a free-market rationale, FVA helps strengthen certain ways of thinking, in which the interests of financial capital become normalised, and where it becomes increasingly difficult to identify problems with the expansion of neoliberalism and its prevailing logic. This is more obvious when there is only a very limited voice presented within the descriptions of FVA in the nation‟s top academic journal, Accounting Research (more details are provided in Section 5.2.5). To support the new CAS, researchers accorded FVA very high status and agreed that it would improve financial reporting in China. For example, Wang (2006, p. 31) stated:

The breakthrough has been reached in many aspects in China‟s New Accounting Standards. Among them the application of fair value measurement is the most noticeable aspect. In the article, we believe that the application of fair value measurement not only hastens the substantive step for the international convergence of accounting standards but also symbolizes the development of our market economy. It has the profound significance for the accounting standards to fully display the function of infrastructure in the capital market146.

Ge (2007, p. 3) believed that “fair value measurements represent the trend of the development in financial accounting. If applied broadly, financial accounting might be able to reflect an entity‟s value or its approximation147”. Wang (2007, p. 12) even summarised his article with a very strong assertion that “there is no doubt that the promotion and application of the fair value accounting lead to the prosperity and development of the Chinese market148.”

146 Original Chinese text: “我国新会计准则在诸多方面实现了突破, 其中公允价值计量属性的运用可谓是最为引人注目的方面。本文认为, 公允价值计量属性的运用, 既是我国会计准则在国际趋同中迈出的实质性步伐, 也标志着我国市场经济日趋成熟, 这对充分发挥会计准则在资本市场中基础设施作用具有深远意义”.

147Original Chinese text: “文章认为, 公允价值计量乃是财务会计发展的大势所趋; 如果公允价值得以全面应用, 则财务会计将有可能反映企业的价值(或其近似值)”.

148Original Chinese text: “毫无疑问, 公允价值的推广和应用对中国市场的理性繁荣和发展大有裨益.”

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Suggesting reasons for the implementation of FVA, Xia and Shao (2007, p. 24) wrote that:

The inadaptability of historical cost accounting to volatile business settings is the inducement of the adoption of FVA, and the objective that the financial reporting of an entity should provide useful information for decision making has also created a suitable environment for the practice of FVA149.

This quote implied that FVA represents a more desirable accounting method than HCA, as it copes with the uncertainties of the current volatile business environment. The core attribute that supporters raised was, again, that FVA provides more relevant information for users.

Lu (2006, p. 81) commented in the abstract of her article:

In general, because of its high degree of relevance, fair value accounting is likely to replace historical cost accounting, and become the measurement basis of assets and liabilities in the 21st century.150

Along the similar line, Wang and Hu (2007, p. 10) described that

Fair value contains a comprehensive attribute which is embedded with both current market value and present value; the information it provides is not only relevant, but also reasonably reliable151.

The rationale of being relevant has also been put forward by the following scholars: Wang et al. (2009), who proposed a framework built upon FVA to provide more relevant information regarding the risks associated with the financial market; Yu (2009), who believed that FVA was the most desirable measurement method for evaluating financial instruments; Xu (2009), who recommended using FVA to lessen the impacts of financial systems‟ pro-

149 Original Chinese text: “认为历史成本会计对不稳定的经营环境的不适应性, 是公允价值会计实践的根本诱因; 决策有用观的财务报告目标, 为公允价值会计实践创造了适宜的环境”.

150 Original Chinese text: “总的来看, 公允价值由于其高度的相关性, 已受到各界的高度关注。公允价值会计极有可能成为21世纪资产和负债的计量基础”.

151Original Chinese text: “公允价值是由“现行市价”和“现值”两种计量属性发展而来的一种具有 “复合”性质的计量属性; 公允价值会计信息不仅相关, 而且具备合理的可靠性”.

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cyclicality152; and Liu (2009), who proposed maintaining FVA on the grounds of being relevant even though it has led to significant controversies during the financial crisis (detailed quotes have been provided in Section 5.2.5).

This argument echoes the rationale of supporters of FVA in the West. As further evidence, in a study of the development and practical applications of IFRS, Ernst & Young (2005, p. 2) noted that “the IASB advocates its fair value approach on the grounds of relevance: the Board quite simply considers „fair value‟ to be the most relevant measurement basis.” Former SEC Chairman Richard Breeden testified in 1990 before the US Senate Committee on Banking, Housing, and Urban Affairs, advocating a move to FVA for all public companies and financial institutions because he “believed that market-based data is the most relevant financial information” (quoted in Mard et al. 2007, p. 14). The US FASB‟s rationale for the implementation of FVA is well summarised in SFAS 159 (Financial Accounting Standards Board 2009a, para. A3):

The Board considers fair value measurements of financial instruments to be more relevant to financial statement users than cost-based measurements because fair value reflects the current cash equivalent of the entity‟s financial instruments rather than the price of a past transaction.

As part of the consistent effort, the IASB and FASB have initiated a joint project to develop an improved conceptual framework for financial reporting (Financial Accounting Standards Board 2009b). Within the Exposure Draft (issued in May 2008) regarding the qualitative characteristics of financial reporting information, the committees have privileged „relevance‟ over other characteristics:

Relevance refers to the economic phenomena, not to their depictions, and therefore will be considered before the other qualitative characteristics

152 A common explanation for the pro-cyclicality of the financial system has its roots in information asymmetries between borrowers and lenders. When economic conditions are depressed and collateral values are low, information asymmetries can mean that even borrowers with profitable projects find it difficult to obtain funding. When economic conditions improve and collateral values rise, these firms are able to gain access to external finance; this adds to the economic stimulus. This explanation of economic and financial cycles is also known as the financial accelerator. (Borio et al. 2010) 221

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[QC12, p.38]…Once relevance is applied to determine which economic phenomena are pertinent to the decisions to be made, faithful representation is applied to determine which depictions of those phenomena best correspond to the relevant phenomena. (International Accounting Standards Board 2008, p. 38)

It is explained here that „relevance‟ should be the first characteristic to be considered when preparing accounting information. This argument provides a strong support for FVA in theory because FVA is often understood as providing more relevant information than HCA. In the sense of CDA, there is a clear „intertextuality‟ – intersections of discourses as found in China and in the West, referring to the same perspective of being relevant. The apparent cohesiveness of the discussion should not be taken for granted. As the rest of this chapter illustrates, the discourse of „relevance‟, or even the keyword „relevance‟, as analysed as part of the first layer of CDA (discourse as text), can be a deliberate construct that belies its complexity and its varied contradictory meanings. It can effectively limit debate and exclude discussion of context and other qualities of financial reporting information that are significant in understanding and developing a more socially responsible accounting practice.

7.2 Exploring ‘Relevance’

As an immediate competing factor, the argument that FVA produces more „relevant‟ information has been strongly contested within Western literature. This section shows that the extant academic research actually provides inadequate evidence to support this assertion (Barth 1994, Barth et al. 1995, Barth et al. 1996, Nelson 1996, Landsman 2007, Mard et al. 2007).

More specifically, much of the FVA research has included empirical studies that have focused on banks, since banks are largely comprised of financial assets and liabilities. According to Landsman (2007), a common way to assess the so-called value relevance of a recognised or disclosed accounting amount is to assess its incremental association with share prices or share returns after controlling for other accounting or market information. The conclusions of prior empirical research on this kind of value relevance of FVA are controversial. Some studies are in favour of FVA. For instance, using data 222

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from US banks from 1971-1990, Barth (1994) proved that the fair values of investment securities were incrementally associated with bank share prices. Barth et al. (1995) provided that fair-value based measures of net income were more volatile than historical-cost-based measures, but the incremental volatility was not reflected in bank share prices. Eccher et al. (1996), Barth et al. (1996) and Nelson (1996) all concluded that the fair values of investment securities were incrementally informative relative to their book values (historical costs in this case) in explaining bank share prices. A more recent finding (Mard et al. 2007) also showed that financial-instrument assets measured at fair values provided statistically significant explanatory power over historical costs in the share prices of banks.

There is also research on areas other than the banking industry. Dietrich et al. (2001) investigated the reliability of mandatory annual fair-value estimates for UK investment property and discovered that relative to historical costs, FV estimates were more likely to be relevant but less likely to be reliable. Research (Barth & Clinch 1998, Sloan 1999), examining FV estimates for tangible assets in the UK and Australia, identified a positive association between these estimates and share prices or returns, which suggested that investors would find FV estimates to be more relevant. Some argued, however, that fair values expressed as exit values are useful primarily (perhaps only) to some creditors and shareholders of companies that face likely liquidation, and of little, if any, value to investors in ongoing firms (Khurana & Kim 2003, Benston 2006). Moreover, given the possible flaws in research design and the sampling errors, the existing empirical findings are still widely believed to be inadequate to fully substantiate strong assertions about the value relevance of FVA (Hernandez 2004, King 2006, Whittington 2008). As King (2006, p. 56) noted, “nobody has ever put forth a convincing case that the FV of assets that cannot and will not be sold is relevant for decision makers.”

In the context of financial markets, nevertheless, the justification of being „relevant‟ has often been uncritically believed and adopted as the grounds on which to advocate fair-value-based models to account for assets and liabilities. As Chapter Six shows, the assumption that financial markets always accurately value corporations is firmly embedded within theories of FVA, and 223

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by focusing on market valuations the fair values reflect current market conditions, and hence provide timely information that increases transparency and prompts corrective economic actions. It has been suggested (in Chapter Six), however, this is an unreal assumption with a strong bias towards the interest of financial capital in the neoliberalised financial market, a bias that has not been well recognised within the current FVA discussion. To further reveal the impact of this argument of „relevance‟, sections 7.2.1 and 7.2.2 point out more problematic assumptions towards the financial markets at a theoretical level. The contradictions and controversies of those problems are further contextualised into the Chinese context (Section 7.2.3 and 7.2.4).

7.2.1 Misconception about Resources Allocation in Capital Markets

A conception that supports the assumption of „relevance‟ between the financial markets and the real economy is that capital markets play a strong role in allocating economic resources (Teweles & Bradley 1998). Behind this assumption, as some research (Rappaport & Maubossin 2001, McSweeney 2009) points out, there is a general misconception, informed by corporations, the media and others, that shareholders‟ investments are investment funds for corporations. Such a claim assumes that financial markets are providers of investment funds for corporations, and hence play a vital role in the resource allocation. In fact, financial markets are secondary markets where shareholders purchase shares from other shareholders, and they should be distinguished from the primary markets where investors provide funds for corporations (McSweeney 2009). In other words, investors, or shareholders, participate in financial markets by trading shares in an existing investment. Only a small fraction of shares traded in financial markets are new investments that are channelled into productive activities in the sense of primary markets (Corbett & Jenkinson 1997, O'Sullivan 2000, Ellsworth 2002). For instance, Corbett and Jenkinson (1997) studied the new funding of the non-financial sectors in Germany, Japan, UK and the US between 1970 and 1994. They found that 93 percent of all physical investment was funded from internal sources rather than from the share markets in the UK, and 96 percent in the US, and the percentages in Germany and Japan were even higher due to the over-reliance on a bank-financed system (Corbett & 224

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Jenkinson 1997). The simple fact is that investment activities in financial markets contribute little funding to new investments in terms of traditional productive activities. In other words, a bull financial market many mean merely increased speculations, rather than an injection of funding that boosts the traditional economy.

In the academic field, research has been intensively engaged with conceptions of market efficiency and practices of various kinds of financial innovations since the late 20th century (Hopwood 2007). At the knowledge level, as McSweeney (2009) remarked, those research activities that have been built around this kind of market efficacy denied the risk of market failure and thereby contributed to the under-estimation of the systematic risks created through those financial „engineering‟. In this sense, scholars have helped strengthen the illusion that increasing values (which, most often, are significant speculative trading and/or bubbles) created by those „innovative‟ financial instruments in the financial markets are improved corporation achievements and hence economic prospects153. As explained in Chapter Six, accounting „innovations‟ built upon market fundamentalism, such as FVA, or comprehensive income, work to maintain this arrangement that drives the speculative cycle of financial transactions. Instead of accounting for those „achievements‟ generated by financial capitals in a more socially responsible way, the fair-value-based accounting framework introduces more „estimations‟, which helps strengthen market fundamentalism and makes real productive and trading activities less accountable.

7.2.2 Misconception about the Mediative Function of Capital Markets

A parallel misconception is a belief in the mediative function of capital markets in a capitalist economy. Given the strong link between the capital market and the real economy, market prices reflect the underlying economic substance of the real economic system. In this sense, fair-value-based measurement that marks to the market is „relevant‟ in measuring the real economic substance of financial assets and liabilities.

153 This can often be seen from TV news, which connects the share market performance to macro-economic prosperity. 225

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Drawing on work from the fields of strategic management and financial economics (Jensen 1993, Young & McGuinness 2001), the connection between capital markets and the real economy lies in a vital link between share prices and managerial actions. According to this theory, if capital markets are to affect company performance, share prices must respond consistently and accurately to the actions of managers, who must then respond to the share prices. Young and McGuinness (2001, p. 55) summarised three ways by which capital markets connect share prices to managers‟ actions: “(1) through the signalling role of stock prices and their effect in guiding managers‟ decisions; (2) by aligning managerial and stockholder incentives; and (3) through the market‟s takeover mechanism.” Based on these assumptions, the capital markets are able to affect the physical economy in a fundamental way through the decisions that managers make in response to the capital-market reactions. This is consistent with the earlier discussion about the influence of neoliberalism on corporate governance, where CEOs are disciplined by performance indicators that are mostly derived from share markets.

A better understanding of this argument about the mediative function of capital markets, according to CDA, can be achieved by contextualising these three assumptions within specific settings so that many intervening and complex contests surrounding the discursive construct can be discovered. In doing this, the next two sections place these assumptions into a Chinese context to search the possibilities of alternative textual meanings that contradict, and hence challenge, the generalised knowledge of this general conception. They centre on a key question: whether or not such a mediative link exists between China‟s capital markets and its real economy. The answer to this question will either sustain or challenge the fundamental idea that a price marked to the Chinese capital markets is a „fair‟ price to be quoted in reporting financial assets and liabilities, as FVA advocates.

7.2.3 The Signalling Role of Share Prices in China

As this section illustrates, earlier research on Chinese capital markets has shown that there are substantial impediments to the firm establishment in

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China of the mediative link. The most fundamental problem refers to the unique share-ownership structure of Chinese listed companies.

During the 1990s, all the listed companies had been former SOEs that were restructured as share corporations as part of the massive privatisation project154 (Qian 2003). To maintain the state ownership in those restructured companies as the government claimed constantly, their shares were split into two broad categories: tradable shares and non-tradable shares.

To briefly introduce this arrangement, this paragraph explains the sub- components of non-tradable shares and tradable shares in China, with reference specifically to Wan and Yuce (2007). The non-tradable shares included state-owned shares and legal-person shares. Stated-owned shares are owned by either the central government, a local government, or by wholly government-owned enterprises. The State Council of China is the ultimate owner of state-owned shares. Legal-person shares are those sold to domestic institutions, including listed companies, non-bank financial institutions, and SOEs that have at least one non-state owner. „Legal person‟ refers to the business agencies or enterprises of local governments who contribute capital and help in establishing the public companies before the IPO. Many legal shares are controlled by the state. Legal-person shares cannot be traded on the share exchanges but can be transferred between legal persons subject to agreement of the share exchange where the firm is listed. Tradable shares include four types: A-shares, B-shares, H-shares and N-shares. A-shares are held by domestic individuals and some domestic institutions. They can be traded freely on the domestic share markets. Foreign investors and companies were allowed to own A-shares after the CSRC approved the Qualified Foreign Institutional Investor (QFII) system in 2003. B-shares are for foreign investors, and are traded in US dollars on the Shanghai Stock Exchange and in HK dollars on the Shenzhen Stock Exchange155. Only foreign investors or people from Hong Kong, Macao, and Taiwan are allowed to own B-shares. Since

154 More details are provided in Chapter Three.

155 The Shanghai and Shenzhen Stock Exchanges are the only two share markets in China.

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February 2001, B-shares have opened up to Chinese domestic investors who have foreign currency accounts in brokerage firms. H-shares are the shares of domestically registered companies listed in Hong Kong. N-shares are the shares listed on the New York, London or other foreign stock exchanges. The term „Chinese capital markets‟ normally refers to the A-shares market because the majority of ordinary investors trading in China are only able to access A- shares.

By June 2005, the total market capitalisation of A-share listed companies in the Chinese share markets was RMB 735.6 billion, of which the value of the non-tradable shares (state-owned shares) was RMB 469.4 billion, accounting for 64 percent of the total capital (according to the calculation of Zhang 1992). In other words, only about 36 percent of shares issued by listed companies were freely available to investors in the markets. The government also imposed very clear quantitative restrictions on the number of companies that could go public or a maximum number of shares that could be issued in a given year (Liu, Q. 2006)156. It is evident that the government maintains a strong control on the supply of shares to meet its demands over time. It has been pointed out by scholars that this kind of control had created a peculiar supply and demand relationship that led to extreme volatility and speculation in the early period (Du & Yong 1998, Tan 2004, Liu, Q. 2006). Tan (2004, p. 384) recounted that “people bought shares as if they were buying lottery tickets” in the early 1990s.

In theory, therefore, when only a minority of SOEs‟ share capital (tradable shares) is under market scrutiny, share prices obtained from the markets are less likely to function as a guide for managers in Chinese listed companies. Some studies prove that share prices in Chinese capital markets often showed very different features to their counterparts in the West. For instance, Du and Yong (1998) found that prices in Shanghai were about 800 times and 400 times more volatile than those on the New York Stock Exchange (NYSE) and Hong Kong‟s Hang Seng Index respectively. Morck et al. (2000) indicated that

156 According to Liu (2006b), the decision-making on this is not transparent to the public, as the number is often given without further explanation. 228

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share prices in Chinese firms were more likely to move in a different direction to those in more developed markets.

This kind of share-ownership structure has prevented the signalling role of share prices and their effect on guiding managers‟ decisions that was suggested by Young and McGuinness (2001), as mentioned previously. Under the circumstances, it is highly likely that dominant shareholders have little, if any, concern for changes in share price compared to their Western peers, because their shares are not tradable in the markets. Another pressing issue associated with separating shares into tradable and non-tradable is the different prices attached to the shares from the same firm. According to Liu‟s (2006) research, most non-tradable shares were priced based on the value of net assets, which were mostly less than RMB 1 Yuan per share at the time when the SOEs were converted into share-holding companies in the early 1990s, and that value has stayed the same on the companies‟ accounts; whilst the prices of tradable shares were far higher, being determined by the markets. This pricing difference presents significant challenges for government reform of the share markets, as Section 7.5 will illustrate. In terms of the „vital links‟ that Young and McGuinness (2001) suggest, these different institutional arrangements inevitably challenge the signalling role of share prices in Chinese capital markets.

7.2.4 The Takeover Mechanism in China

Chinese managers are also unlikely to be as concerned with share prices as their Western counterparts, because of the political influence from the government on company fortunes and shareholder returns in Chinese share markets (Wang, J. 2006). Conventional theories in the West suggest that if managers fail to run a firm effectively, the share price will drop and the firm faces a higher chance of a takeover, where someone else come to acquire a large stake of the firm and profit on the shares purchases by improving its performance (Shleifer & Vishny 1986, Young & McGuinness 2001). As explained in Chapter Six, a neoliberalised market system defends its preference for the disciplinary power of the market over corporate governance in the same way. 229

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Studies on mergers and acquisitions in China (Peng et al. 1999, Su 2005) indicate, however, that there is no active merger or takeover activity in the Shanghai and Shenzhen share markets to discipline management, due to the CCP‟s influences in SOEs‟ corporate governance even when they have been restructured into joint-share corporations. For instance, the appointing, firing and promotion of managers are essentially controlled by the government through the power of Communist Party secretaries, board members, or state- asset-management representatives (O'Connor et al. 2006). To give some indication, Su‟s (2005, p. 123) research revealed that on average 90 percent of board members in Chinese listed companies were government officials and delegates of other SOEs.

Moreover, the substantive control of the Chinese government over China‟s media, as Chapter Five has illustrated, constrains information required by investors to make informed decisions. The quality of market research, or comments articulated from financial analysts, complicate the information exchange due to the large dispersion in their forecasts of earnings that are circulated within the markets (Ang & Ma 1999). For instance, Ang and Ma (1999) compared analysts‟ forecasts between Mainland and HK listed shares and discovered that the aggregate analyst forecast errors for all Chinese shares were around twice that for the shares of HK companies.

The „vital links‟ between share prices and managerial actions (Young & McGuinness 2001) are difficult to establish under the unique institutional arrangement of Chinese capital markets. The contextual differences further challenge the assumption that the movement of share prices reflects China‟s real economic development. The figures below show an obvious comparison between Chinese share markets, which presented a flat pattern between 1992 and 2005, and China‟s GDP, which grew an average 16.23 percent annually during the same period.

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200000 180000 160000 140000 120000 100000 80000 GDP (100 million Yuan) 60000 40000 20000 0 1992 1994 1996 1998 2000 2002 2004

China’s GDP growth between 1992 and 2005 (from National Bureau of Statistics of China www.stats.gov.cn) .

Share Index 2500

2000

1500

1000 Share Index 500

93 04

96 97

95 99

03 92

01 02

94 05

- -

Jul

Jan

Jun

Oct

Apr Apr

Feb Sep

Dec

Aug

Nov

Mar Mar

May May

Shanghai Composite Index between 1992 and 2005 (from Shanghai Stock Exchange www.sse.com.cn).

Proponents of FVA regard market prices as the most relevant information for investors‟ decision-making. One of the rationales for this confidence is the assumption of an interconnection between an economy‟s market signals and its underlying economic substance. The context of the Chinese market described in this section, however, contradicts this assumption and hence challenges the discourses that have sought to explain FVA with this bounded claim of being „relevant‟. The complexities suggest, further, that an accounting-disclosure system built upon the mark-to-market measurements

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might instead lead to more ambiguous and misleading information in its portrayal of real business performance of Chinese listed companies. Even the research (Barth & Landsman 1995, Dietrich et al. 2001) that supports fair value as informative to investors stresses that the level of relevance is affected by the amount of measurement error and the source of estimates – management or external appraisers. This leads to another major area of concern with FVA: the implementation issue, within which the attribute of „reliability‟ of accounting information has been raised and widely debated.

7.3 Discursive Complexity of ‘Reliability’

One particular attribute of accounting information – „reliability‟ – has been marginalised in the ongoing construct of FVA discourses as this section explores later. Reliability is a significant attribute and its relegation in interpretations of FVA has real potential to obscure its relevance. In the sense of CDA, it is important to address this discursive partiality which has come to signify FVA within „general‟ discussion. As Lehman (1999) suggests, the construction of a transparent and open society has been regarded as the main purpose of accountability. But “such openness and transparency can only exist if representation is a function of difference, acknowledged to always be partial, incomplete and in a state of flux, and suggestive of multiplicity rather than singularity.” (Andrew 1999, p. 72) To challenge the boundaries that centralise the knowledge of FVA, this section reveals the multiplicity of the „reliability‟ as manifested within the IASB and FASB‟s working agenda, and the practical difficulties associated with China‟s implementation of FVA as understood within alternative discourses of Chinese accounting academics.

7.3.1 The Discursive Shifting of ‘Reliability’

The marginalisation of „reliability‟ can be traced through the IASB‟s discursive practices, which forms a particular type of social practice tied with the FVA discourse. A study of the keyword „reliability‟ also forms part of the first layer (discourse as text) of the CDA framework (see Section 4.3.1).

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The IASB‟s definition of reliability in its Conceptual Framework (1989) was:

Information has the quality of reliability when it is free from material error and bias and can be depended on by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent. (IASB Framework 1989, para. 31)

Within the joint IASB and FASB project of developing a conceptual framework for financial reporting, there is a change of language that signifies a shift in meaning. The qualitative characteristic „reliability‟ has been replaced with „faithful representation‟ in Chapter 3: Qualitative Characteristics of Financial Reporting Information of the Conceptual Framework for Financial Reporting 2010 (issued by the IASB in September 2010; hereinafter called Framework 2010). The Board argued:

The comments of respondents to numerous proposed standards indicated a lack of a common understanding of the term reliability. Some focused on verifiability or free from material error to the virtual exclusion of faithful representation. Others focused more on faithful representation, perhaps combined with neutrality. Some apparently think that reliability refers primarily to precision. (Framework 2010, para. BC3.23)

In order to explain what reliability was intended to mean, the Board considered that the term faithful representation, the faithful depiction in financial reports of economic phenomena, encompasses the main characteristics that the previous frameworks included as aspects of reliability (Framework 2010).

This replacement, however, has been considered by some (Bradbury 2008, Whittington 2008) as an important change to eliminate the possibility of a trade-off between relevance and reliability when it was first suggested in the ED of this CF released in 2008. According to Whittington (2008, p. 148), “this trade-off is frequently invoked as a reason for not using fair value measurements, which are perceived as often being relevant but unreliable.” It is suggested that these changes align well with the committees‟ working agenda to incorporate FVA in the IFRS. To a large extent, FVA has been founded on the belief of a free-market mechanism. In many ways, this is obvious, but its explicit recognition is necessary to avoid assuming these underpinnings as natural and incontestable. 233

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This is an important change from the point of view of discourse. Fairclough (2001, p. 6) believed that “many of these [major] social changes do not just involve language, but are constituted to a significant extent by changes in language practices.” In this case, the change of language here contains the real effect of relegating the opposition to FVA, because the problem of „reliability‟ is frequently invoked as a reason for not using fair-value measurements (more discussion of this is provided in the next section). It becomes more difficult to criticise FVA based on the notion of „reliability‟ because the word „reliability‟ is no longer part of the qualitative characteristics of financial reporting information endorsed by the authoritative standards- setting bodies.

Giving a more ambiguous name to an essentially similar characteristic, the IASB further defined the term „faithful representation‟:

Free from error does not mean perfectly accurate in all respects. For example, an estimate of an unobservable price or value cannot be determined to be accurate or inaccurate. However, a representation of that estimate can be faithful if the amount is described clearly and accurately as being an estimate, the nature and limitations of the estimating process are explained, and no errors have been made in selecting and applying an appropriate process for developing the estimate. (Framework 2010, para. QC15)

From this explanation, even though it appears that the committee has started to acknowledge the uncertainty with which accounting deals, this departs from the image of being „scientific‟ and „rigorous‟ that the accounting profession often seeks to portray, and those notions of „prudence‟ and „conservatism‟ that were emphasised in an earlier conceptual framework (Framework 1989). This explanation apparently tries to legitimise the „estimation‟, and the possible errors that follow, in the new accounting practice.

The IASB also noted in an Exposure Draft issued in May 2008:

For a representation to imply a degree of completeness, neutrality or freedom from error that is impracticable would diminish the extent to which the information faithfully represents the economic phenomena that it purports to represent. Thus, to attain a faithful representation, it may 234

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sometimes be necessary to disclose explicitly the degree of uncertainty in the reported financial information. (International Accounting Standards Board 2008, p. 37)

As reflected in these discourses, it would be difficult for the IASB and FASB to legitimise FVA if the characteristic of „reliability‟ were still stipulated in the conceptual framework, due to the substantive and largely unavoidable „unreliability‟ involved in FVA practice. By changing the language, like renaming the „mark-to-market‟ price as „fair value‟, the committees are discursively creating a boundary for „faithful representation‟ paralleling the „estimation‟ and its possible errors. When the „estimation‟ becomes acceptable and even synonymous with „faithful‟, the potential problems become less clear. To reveal the problems and de-stabilise the totalising effect of this kind of discursive construction of FVA, the notion of „faithful representation‟ needs to be explored critically.

7.3.2 Destabilising ‘Faithful Representation’

The term „faithful representation‟ can be contested because of the significant professional judgement involved in determining a fair value. At a practical level, this is already self-evident in the hierarchy specified by the FASB, which has been embraced by the IASB as well (Ernst & Young 2005, p. 3):

Level 1: use quoted prices for identical assets or liabilities in active markets.

Level 2: If not available, use observable (quoted) market prices for similar assets and liabilities.

Level 3: If not available, use other valuation techniques.

Derived from Ernst & Young (2005, p. 3).

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Except at the first level, where observable market prices for identical assets and liabilities in active markets are available, measurement requires various techniques used to measure fair value. In these cases, „fair value‟ will be basically determined by hypothesising what a market price would be if there were a market based on management assumptions about the future, such as demand, interest rates, exchange rates, economic growth rates and effects of competition (Ernst & Young 2005). In Level 3, where inputs are unobservable market inputs, the FASB (2006, p. 22) stated that:

The fair value measurement objective remains the same; that is, an exit price from the perspective of a market participant (seller). Therefore, a fair value measurement using unobservable market inputs within Level 3 shall consider the assumptions that market participants would use in pricing the asset or liability, including assumptions about the amount a market participant (buyer) would demand to assume the risk related to the unobservable market inputs used to measure fair value.

The valuation approach indicates that a significant number of estimations must be involved in applying FVA, and the majority of these estimations are based on unrealistic financial evaluation models157. As this thesis has pointed out, this move is indicative of the shift towards incorporating more „estimations‟ into accounting frameworks. As Roberts and Scapens (1997, p. 238) wrote “the real power of accounting perhaps lies in the way in which, as a structure of meaning, it comes to define what shall and shall not count as significant”; this shift of focus legitimises the assumptions and estimations made in the process of accounting measurement. The inclusions and exclusions become normalised, and it becomes increasingly difficult to identify problems.

In terms of CDA, the tension between what FVA represents as meaning and what can never be absolutely „meant‟ by that representation can be exposed in a search for contested discourses. There have been strong concerns among critics that the greater the subjective estimation and judgement involved, the less reliable the accounting information would be. It has been considered that the estimation involved in the second and third levels of fair-value

157 See Sections 6.4 and 6.5 for more discussion of the problems of current financial evaluation models. 236

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measurement potentially introduce estimation error into the balance sheet and the income statement (Barth & Landsman 1995, Penman 2007). Hernandez‟s (2004) study demonstrated that the use of an entity‟s own assumptions about expected cash flows and the appropriate interest rate could mean that different entities determine a different fair value for an identical financial instrument. In this way, entities holding identical financial instruments can appear very different depending on the assumptions they use for measuring those financial instruments.

Furthermore, some researchers (Penman 2007, Whittington 2008) argue that there is an inherent incentive for managers to make biased choices. Penman (2007, p. 41) warned that “the stewardship perspective underscores the downside: rewarding managers based on their estimates exposes the shareholder to moral hazard.” Benston and Hartgraves‟ (2002) study on Enron indicated that estimating future cash flows and applying a discount rate to obtain fair values provided substantial room for managers who wanted to manipulate net income by choosing assumptions that would offer them the gains they wanted to record. This is also supported by Watts (2003), who argued that creating accounting valuations based on managers‟ estimates of future cash flows was a serious error.

The preference for the concept of „reliability‟, rather than „faithful representation‟, is also identified among accounting firms, professional bodies and practitioners from multiple sources. It should be noted that this section provides discourses addressing only the older term „reliability‟ because the newer term „faithful representation‟ has yet to emerge in the discussion. To some extent, this reinforces the effect of the language change. It becomes very difficult for this thesis to criticise the notion of „faithful representation‟ because all references have to be made to the older term „reliability‟. However, this analysis is still believed to be valid because „reliability‟ is similar in its underlying essence to „faithful representation‟.

In supporting „reliability‟, Ernst & Young (2005, p.2 ) stated that “in our view, reliability is a necessary precondition that must be met for information to be relevant: information needs to pass a reliability threshold before it can be 237

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considered relevant at all.” Along a similar line, Hernandez (2004, p.172) claimed that “users find information relevant only if they consider it to be reliable, so if determining market exit prices involves highly subjective assumptions, the reliability and the relevance of the financial statements will be substantially reduced.” This point was also raised by European practitioners, such as Hoogendoorn158, Bruggink159, O‟Malley160 and Hofste161 during an interview (Langendijk et al. 2003) regarding the introduction of FVA in the EU. In the US, the Federal Reserve Board affirmed as well:

The subjectivity now inherent in estimating the fair values of illiquid financial instruments could diminish reliability in financial reporting to such an extent as to vitiate the asserted relevance of fair value. Likewise, the AICPA (2001) considers that using fair value reporting is only as useful as the reliability of the valuation techniques used. (Hernandez 2004, p.172)

There has been direct and indirect evidence of unintended consequences of FVA in practices that reinforce the issue of reliability. For instance, managers can be reluctant to take write-downs even when assets are substantially impaired according to some research (Ball et al. 2000b, Ramanna & Watts 2007). During the 2007-2011 GFC, the IMF (2009a) reported that estimates of loan losses from banks such as Citigroup and Goldman Sachs far exceeded their write-downs and exceeded the difference between the loans‟ carrying values and banks‟ fair-value disclosures for these loans according to FAS 107

158 Professor Martin Hoogendoorn RA (1959) is a partner at Ernst & Young, where he is head of the Professional Practice Reporting department. He is Professor of Financial Accounting at the University of Amsterdam and Chairman of the Council for Annual Reporting. (Langendijk et al. 2003)

159 Professor Bert Bruggink (1963), head of the Control Directorate of the Rabobank Group, has worked at Rabobank Netherlands since 1986. Since 1998, he has been part-time Professor in the Technology and Management Faculty of the University of Twente, teaching on financial institutions and markets (management control). (Langendijk et al. 2003)

160 Tricia O‟Malley was appointed to the IASB in January 2001. In October 1998, she was appointed as the first full-time chair of the Canadian Accounting Standards Board. (Langendijk et al. 2003)

161 As of 2001, Petri Hofste has officially been one of the partners in the KPMG IAS Advisory Services Group in London, her role especially being to deal with financial- instruments accounting and the financial-services industry. Hofste is also a member of the Implementation Guidance Committee on IAS 39, which was set up by the IASC, and is a member of the FEE Banks Working Party. (Langendijk et al. 2003) 238

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– Disclosures about Fair Value of Financial Instruments. Laux and Leuz (2009) also demonstrated that managers‟ concerns about litigation could make a deviation from market prices less likely even when it would be appropriate:

It is important to recognize that giving management more flexibility to deal with potential problems of FVA (e.g., in times of crisis) also opens the door for manipulation. For instance, managers could use deviations from allegedly depressed market values to avoid losses and impairments. Judging from evidence in other areas in accounting (e.g., loans and goodwill) as well as the US savings and loans (S&L) crisis, this concern should not be underestimated. (Laux & Leuz 2009, p. 827)

So far the notion of „reliability‟ associated with FVA has been challenged by exploring the competing representations from multiple dimensions within the accounting discipline. This is believed to be valid for challenging the term „faithful representation‟, because the „faithfulness‟ depends on the level of „reliability‟ of the accounting information. The debates and competing evidence presented by the exploration reveals the narrowness of the preference of „relevant‟ that has been centralised in the discursive construct of FVA by the IASB and FASB. Nevertheless, this notion of „reliability‟ still needs to be contextualised and contested further to obtain a fuller understanding of this accounting change in China. The rest of this chapter focuses on alternative Chinese discourses surrounding these theoretical debates as part of the social practices under investigation. This approach helps not only expose more dispersed resistance and struggle within Chinese communities, but also inspires broader challenges to current neoliberal systems of socio-economic inequity.

7.3.3 Alternative Discourses to the ‘Reliability’ in China

Despite the oversight of „mainstream discourses‟ in terms of the theoretical strength of FVA, Chinese academics and practitioners have discussed the problems in other media outlets, including the internet, newspapers and other less influential academic journals162. Their voices, however, are considered to be given limited discursive space in the debate. For instance, the journals

162 In comparison to the Accounting Research journal.

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drawn upon in this section could only be identified from those ranked as B or C in the journal-ranking lists released by the Academic Degrees Committee of the State Council (2008); and most of the PhD theses discussed here are normally not accessible to the public 163 . Based on the third layer of CDA analysis, this lack of access and prestige exposes the narrowness and exclusivity of the mainstream discourses in establishing the major referential idea for FVA in China.

There have been many concerns about the feasibility of applying FVA in Chinese society, and a quite considerable literature has engaged with the limitations and possibilities of FVA in terms of the „reliable‟ information it provides. As provided as follows, much of the criticism is focused on the market conditions in China.

Some critics have expressed general concerns that the markets in which a fair value is derived are not ready for the adoption of FVA. As Bi (2006, p. A11) wrote in the weekly accounting newspaper Accounting Messenger164,

Currently China lacks active markets for most of [its] production factors, their resource markets are underdeveloped [and] the level of marketisation is low, all these [factors] mean significant difficulties in measuring „fair value‟165.

Zhou and Li (2006, p. 56) agreed that “[the operation of] fair value [accounting] is largely dependent on a well-functioning market mechanism.” They believed that the current market conditions for a full implementation of FVA were still under development, as they claimed in China Management Informationization (a C-ranked journal in the ADCSC 2008 ranking list):

The current security markets, resource commodity markets and human resources markets [and] especially capital markets are still under

163 This is because it requires registration fees for a membership or a fee for each access through National Knowledge Infrastructure of China (CNKI) – the biggest academic database in China: http://eng.cnki.net/grid2008/index.htm.

164 Original Chinese text: “财会信报”.

165 Original Chinese text: “目前中国缺乏活跃的市场，要素市场不成熟，市场化程度低，公允价值的确定存在很多困难”.

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development. The effect of the Share Structure Split Report has not been clear. A lot of non-tradable shares could not be circulated immediately at the early stage of the reform. Even though they become tradable after the lock-up period, it is questionable whether or not the capital markets could function well under the new share ownership structure and convey the mediating function through price signals. As for the resource commodity markets, such as telecommunications, oil, publishing etc., they are still a monopoly operated within China. The price signals derived from these markets are not necessarily the correct ones for measuring fair value. It is even more difficult for measuring intangible assets from the market. The efficiency of the capital markets gives rise to dilemmas of evaluating financial assets [when] using the discounted cash flow models. The most problematic market is probably the human-resources market. If we say that the markets of labour have had some progress along with the economic development and the entry of foreign enterprises, the markets for managers are still extremely underdeveloped due to the long-standing tradition of appointing managers by the government166. (Zhou & Li 2006, p. 56)

Similarly, Liu (2006, p.45) raised concerns about China‟s market environment in Metallurgical Financial Accounting 167 (a C-ranked journal in the ADCSC 2008 ranking list):

China is currently in the primary stages of a market economy. The market system is still under transition from a centralised economy. Even though we have had relatively mature commodity markets, the currency markets, foreign currency exchange markets and capital markets are not completely liberal, and the interest rate and currency exchange rate are not determined by the market; this leads to difficulties for value measurement (particularly for Fair

166Original Chinese text: “现在看来，无论是证券市场、产品或要素市场以及人力资本市场都很难达到完善的程度，尤其是证券市场。股权分置改革的成效究竟怎样还需要时间以及实践的考验，而且改革之后的初期不可能马上实现全流通，这是目前股权分置改革相关公告中明确写明的。即使股票实现全流通，在经历股权分置阵痛之后的中国证券市场能否在新的运作方式下焕发生机活力、发挥准确引导价格信号传递功能都是一个难以回答的问题，毕竟影响中国证券市场的原因是多方面的。我国的市场开放程度已经有了相当大的进步, 但是仍然有很多影响市场公平竞争的现象，比如电信、石油、出版等行业仍然存在明显的垄断。在这些市场上折射出的价格信号很难准确指导决策，尤其是对于外国的投资者而言。而这仅仅是有形资产，涉及无形资产的公允价值就更加难以确定。实物资产计价不公允、相关法规的欠缺以及金融等证券市场的非有效性使得对无形资产未来现金流量的计量、现实价格的估算等相关指标都难以确定。而中国的人力资本市场应该说是最薄弱的一块。如果说对于一线劳动力资源的价格确定随着经济的发展以及外资企业的加入显得更加有效率的话，那么高层管理人员以及经理人的市场则是处于相当不发达当中，当然其中占国民总资产绝大部分的国有企业影响巨大。由于长期实行委派制以及一些传统的价值观影响，国有企业的经理人或是通过非法渠道证明自身的价值，或是怀着无尚崇高的奉献精神奋斗在企业发展的重要位置。所有这些都不是一个完善的人才市场的表现.”

167 Original Chinese text: “冶金财会”.

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Value). Therefore we are facing considerable barriers for the implementation of Fair Value accounting168.

Chen and Gao (2006, p. 37) believed as well that “China is still at the early stage of its market economy”. They asserted that there would be significant problems after the adoption of this standard, arguing in Liaoning Guang Bo Dian Shi Da Xue Xue Bao (a B-ranked journal in the ADCSC 2008 ranking list published by Liaoning Broadcasting Television College169), that:

There have been no [real] active markets for productive resources; transactions among related parties are prevalent within markets; business activities are not conducted formally [in terms of the true sense of at arm‟s- length transactions]; there are lots of market frauds and scandals. If [we] fully adopt fair value [accounting], [it] will open up areas for fraud and creative accounting from business enterprises. [For instance] if we fully apply the American standards on debt restructuring, which recognise the gains from debt reconstruction as profits, [it] offers opportunities for creative manipulation of profits170. (Cheng & Gao 2006, p. 37)

Xia (2006, A05) proposed, in the financial newspaper Securities Times, that “the promulgation of the new accounting standards leads to significant challenges towards the accountant” in the following aspects: “one is the technical difficulties of applying the standards, the other one is the complexity of professional judgements thus leading to more frequent creative accounting171.” Similar concerns can be identified from Liu (2006), Sun and

168 Original Chinese text: “我国市场经济体系还处于发展阶段。我国的市场经济仍然处于发展阶段, 既处于计划经济向市场经济转型的过程当中, 因此市场体系还不完善。虽然我们目前拥有了一个较为成熟的商品市场, 但我们的货币市场、外汇市场和资本市场还没有放开, 而非市场化的利率和汇率就为资产和负债的估价( 尤其是公允价值) 带来一定困难, 因此应用公允价值计量基础还存在很大困难.”

169 Its Chinese name: “辽宁广播电视大学”.

170Original Chinese text: “而中国目前市场经济处在初级阶段，没有形成活跃的生产资料市场，关联交易普遍，诸多经济行为也不规范，弄虚作假屡禁不止，如果广泛地使用公允价值，将会给企业利用公允价值造假留下空间。如果照搬美国的债务重组准则允许将债务重组收益作利润处理，又给造假者虚构利润以可乘之机”.

171Original Chinese text: “新会计准则的出台对实务界提出了严峻的挑战，主要表现在两个方面，一个是会计准则的技术难度系数加大，另外一个是会计自由裁量权加大，更依赖会计人员的职业判断，导致财务数据操纵概率增大”.

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Liu (2006), Zhang (2006), Su (2007), Dai (2007), Wang (2007), Xu (2007) and Liu (2008)172.

Some scholars expand the argument further into more specific technical aspects of the market mechanism. Much of the discussion can be found from some websites specialising in accounting and finance. Tu and Li (2009, n. p.), for example, wrote:

The serious difficulty of measuring and reporting fair value is how to make sure the measuring process is reliable. It is of concern that the difficult situation is not caused by the fair value measurement itself, but the people who utilise fair value and the environment in which fair value is derived. The environment includes accounting standards-setting [and its] supervision, the enacting and enforcement of laws and regulations and other environmental factors. Therefore, [it is critical that] to ensure appropriate applications of standards are applied by competent accounting practitioners with timely information; to rely on experts‟ valuation; to enhance internal and external governance; to strengthen the supervision by law-enforcement [as they are] effective measures in ensuring the reliability of implementing fair value accounting173.

In this quote, they, like many other researchers, indicated some of the supporting factors, such as the law and regulatory supervision and enforcement, accountants‟ knowledge; and the appraisal of fair value, that are essential if the reliability of accounting disclosure based on fair-value measurement is to be achieved.

In terms of the appraisal institutions, for instance, Sun and Liu (2006, n. p.) argued:

Fair value is not easily obtained. The fundamental issue is how [these] appraisal institutions conduct the valuations. The formalisation of the

172 These are all PhD theses identified from the CNKI database.

173Original Chinese text: “当前公允价值会计实务中如何保持程序的可靠性正是公允价值计量与列报的难点之一，而最令人担忧的是公允价值在运用中遭遇的窘境，并不是公允价值本身引起的，而是公允价值的使用者和公允价值所处的环境造成的。这些环境包括会计准则制度、监管力度、法律法规的完善程度及与公允价值相关的一些因素。因此，如何保证高素质的会计人员运用合理的程序及时地、不受干扰地获取公允价值信息；如何依赖专家的估计；如何强化内部和外部的监管；如何健全法律法规加大舞弊和操纵的惩罚力度，均是解决公允价值会计可靠性的有力保证”.

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appraisal market becomes another critical consideration in implementing the new standards174.

Similarly, Lv (2006, p. 003) claimed:

The new standards require that financial derivatives be recognised in the balance sheet which demands a number of regulatory mechanisms including risk management….

[Furthermore] evaluation techniques of financial instruments and effective corporate governance are challenges not only for financial supervision bodies, but also the accounting bodies175.

A major reason, according to Wang (2006, p. 137), has been the lack of practical guidance on appraisal practice:

Referring to asset appraisals, there have been standards on asset evaluation and its professional ethics; however, there is a lack of detailed guidance to meet the demand of the new accounting standards176.

In terms of the market conditions in Chinese capital markets, Liu (2006, p. 45) commented in Metallurgical Financial Accounting177 (a B-ranked journal in the ADCSC 2008 ranking list) that:

There are differences between the users of accounting information in China and those in advanced market economies. Take, for example, listed firms: the majority of listed companies in China are still state-owned enterprises in the general sense; [this is] because the state is the largest shareholder.

Moreover, many other major shareholders have a very close relationship with the government. [On the one hand,] the state and those significant

174Original Chinese text: “公允价值不容易取得,关键看评估机构如何评估。评估市场的规范,也将成为准则实施后的重头戏”.

175Original Chinese text: “新准则要求衍生金融工具在表内的确认和计量，这种确认和计量要求有完善的风险管理政策、金融工具估值技术及有效的内部控制制度等，这些既是对金融机构风险管理的挑战，同时也是对相关会计监管机构的挑战”.

176Original Chinese text: “从我国评估准则制定实践来看, 虽然已发布了资产评估业务准则和职业道德准则方面的基本准则, 但相关的具体准则还很不完备, 准则制定缺乏系统性。这些使得资产评估执业缺乏具体的指导和规范, 不利于提高评估执业水平, 无法满足新会计准则下会计和审计等对高质量评估的需求。我国应加快资产评估准则的制定和发布, 早日建成资产评估准则体系”.

177 Original Chinese text: “冶金财会”.

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shareholders have fewer demands about accounting information than those in Western [economies]. [On the other hand,] those individual investors lack basic financial accounting knowledge. These differences imply different demands on accounting information than those in other capitalist countries178.

More specifically,

There are not many types of financial instruments available in the markets, and there are lots of regulatory constraints. All these represent significant challenges to the adoption of the international accounting standards [regarding] financial derivatives179. (Liu, R. 2006, p. 45)

In terms of the legal context, Liu (2006, p. 45), in her PhD thesis, illustrated some legal issues that would prevent the success of the new standards:

The legal context within which the IFRS was developed and operated is different [to that of] China. The Company Law and Securities Law put strict emphasis on net profits, which leads to an over-emphasis on earnings of listed firms. For instance, Company Law requires that if a company needs to issue new shares it must have a mean of annual net earnings/assets ratio of not less than 10% over the past three financial years, and the net earnings/assets ratio must not be less than 10% over the past financial year.

For a company who wants to issue convertible securities it must have net earnings/assets ratio greater than 10% consecutively over the past three financial years….

Currently the IASB is proposing to replace the Income Statement with Comprehensive Income Statement without directly reporting the traditional net profits. The change suggests that we have to adjust the existing legal

178 Original Chinese text: “我国会计信息使用者与发达市场经济国家尚存差距。以上市公司为例, 我国多数的上市公司仍然属于国有控股企业, 国家是企业最大的股东, 而这些大股东与政府又有着千丝万缕的联系, 这样就造成了所有者缺位及股东非人性化, 使得会计信息掺入了多人为的因素, 并不是真正的市场行为; 再者, 我国股权结构十分特殊, 分为国有股、法人股和社会公众股, 非流通的国有股和法人股往往占一家上市公司股权的绝大部分, 所以相关股东对高质量的会计信息需求不是很高, 而少部分流通股的 80%甚至 90%都是由股民所操纵, 他们通常缺乏投资经验和基本的财务知识, 因此他们对于高质量的财务信息也没有什么特殊的有效需求; 最后机构投资者数量十分少, 专业的财务分析师队伍还不成熟, 这也是我们与西方发达国家的一个巨大差距”.

179Original Chinese text: “其次, 我国的金融产品单一, 政策上的限制十分多, 对于国际金融衍生品会计准则的接纳也存在很大的困难。以上这些都对我国市场经济体系的建立和健全提出了很大的挑战”.

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requirements to cope with the new accounting standards, which means substantial operating costs180.

There have been concerns about other general issues, such as: a) The competency of accounting professionals. Ye, Huilin, general manager of Association of Chartered Certified Accountants (ACCA) China, stated:

Currently we have a lot of accountants, but we seriously lack competent [and] high-quality professionals. There are about ten million accounting practitioners, among whom only about sixty thousand have high level accreditation…. China needs at least 350,000 certified public accountants to cope with the rapid rise of economic development, but there are only about 80,000 CPAs, of whom only 15% have internationally recognised qualifications. The need for high-level accountants and internationally recognised CPAs will only become more and more pressing181. (Yang 2006, n. p.) b) The organisation structure of Chinese accounting standards-setting bodies. Liu (2008), who studied the different accounting standard settings between the US and China, published in Journal of Social Science of Jiamusi University (a B-ranked Journal in the ADCSC 2008 ranking list), in which he questioned the dominant role the Chinese government plays in standards-setting:

Exposure Drafts are released on the FASB‟s website [which is] open for public viewing. However, there have been over 30 Exposure Drafts released [by the Chinese Accounting Standard Committee] but none of them have been available to the public [only circulated among certain organisations]. The

180 Original Chinese text: “我国的法律、法规环境还与国际财务报告准则对应的环境要求存在不一致。根据我国公司法和证券法的规定, 无论是股权融资还是债权融资, 对于公司的净利润都有着严格的要求, 使得大家格外注意净利润这个指标。比如对于公司增发股票而言, 公司法要求公司最近 3 年的加权平均年净资产收益率平均不得低于 10%, 而且最近一个会计年度的净资产收益率不得低于 10%; 对于发行可转换公司债券而言, 则要求最近 3 年连续盈利, 且最近 3 年净资产收益率平均在 10%以上, 属于能源、原材料、基础设施类的公司可以略低,但是不得低于 7%, 经注册会计师核验, 公司扣除非经常性损益后,最近 3 个会计年度的净资产收益率平均值原则上不得低于 6%。而国际会计准则理事会正在准备进行一项改动, 欲用全面收益表来代替损益表, 不再直接提供净利润的相关信息, 这就意味着我们如果要接受国际财务报告准则就需要大规模的修改我国业已成型的公司法、证券法等相关法律, 这将产生大量的执行成本”.

181 Original Chinese text: “目前中国会计人员不少，但缺乏高层次、高素质与复合型人才。国内财会队伍现有 1000 万人左右，有高级职称的会计人才也有 6 万多人，但是高层次的，尤其是素质比较全面，既熟悉国际市场规则，又懂国内法律法规的人才严重不足。”ACCA 大中华地区总监叶慧琍表示：“根据中国经济高速发展的需要，至少急需 35 万名注册会计师，而目前实际具备从业资格的只有 8 万人左右，其中被国际认可的不足 15%.而随着中国经济继续跨越式发展，未来高层次财会人员和国际注册会计师的需求缺口会越来越明显，中国急需更多与国际接轨、熟练掌握国际财会界游戏规则的高级人才”.

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[accounting] standards-setting body – the Chinese Accounting Standard Committee – is a government institution department under the Ministry of Finance. Meanwhile, the Ministry of Finance is the supervision body of all State-Owned Enterprises. All the activities of [accounting] standards-setting must be approved by high officials in the Ministry. Since 1997 the Chinese Securities Regulatory Commission has been heavily involved in the accounting standards- setting process. The standards-setting committee is not well balanced representatively; it needs accounting theorists, as well as practitioners. But currently the majority of members are government officials. They represent the interests of government and state-owned enterprises182. (Liu 2008, pp. 2-4) c) The regulatory supervision of accounting information. Guo (2006) published a paper on the website of the Institute of Finance and Banking, Chinese Academy of Social Science, arguing that “ineffective supervision causes the overflow of misleading accounting information” because:

[In China,] the Ministry of Finance is the regulatory body of accounting in charge of standards setting and its enforcement. However, according to Accounting Law, [all sorts of government departments such as] finance, auditing, taxation, People‟s Bank, Securities and Insurance regulatory committees could [also] implement supervision and inspection of companies‟ accounting information based on their respective laws and regulations. Again, it lacks proper coordination amongst these supervision bodies, which has severely undermined the effectiveness of law enforcement183. (Guo 2006, n. p.) d) Some of the impacts on companies’ income tax calculation. Wang (2006, pp. 14-15), in Corporate Finance (a C-ranked journal in the ADCSC 2008 ranking list), wrote:

182Original Chinese text: “美国 FASB 征求意见的全文放在互联网的主页中，人人都可以免费下载。相比之下，我国已征求意见的具体准则有 30 多份，但尚未见一份向社会公开提供的讨论备忘录。相比之下，我国会计准则的制定机构是财政部门会计司下的会计准则委员会，它是一个典型的政府机构。同时，财政部又是大多数国有企业的主要部门，而会计司又是财政部的职能部门。准则的制定者代表性不足。我国准则制定人员代表性的缺乏，主要体现在其所代表的利益主题的单一性。从目前来看，无论是起草小组或核心小组的成员，几乎全是技术性的政府官员。他们仅仅是基于政府机构以及基于国有资本所有者的利益代表”.

183Original Chinese text: “外部监督不力导致会计信息失真现象泛滥。在我国，会计工作的主管部门是财政部。财政部负责制定会计制度及监督实施。根据《会计法》的规定，财政、审计、税务、人民银行、证券监管、保险监管等部门应当依照有关法律、行政法规规定的职责，对有关单位的会计资料实施监督检查。按理说，我们的监管应该是有效的，能防止会计信息失真的泛滥。但是，实际上监督乏力、监管手段缺乏的现象依然存在。证券监管、财政、审计、税务等部门都有权监管会计信息的真实性和可靠性。但是，各个监管部门缺乏配合，各自进行监管，没有达到各家齐抓共管，形成有效的和相互补充的监管机制”.

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The new accounting standards will take effect on 1 January 2007, but the relevant guidance on income tax calculation will not be available until the late 2007 and most likely than not until2008. Some of the changes will be due to the new profits and expenses occurred after the new accounting standards. For instance, those share options are to be recognised as an accounting expense, but it is not clear whether or not this expense is deductable for company income tax [purposes]. Debt Restructuring allows gains/losses derived from „fair value change‟ to be recognised in the income statement, but there has been no guidance on dealing with those gains/losses when calculating income tax. So far one thing that has been clear is that the assets revaluation gains after adjusting the fair value are not assessable income for the company. This implies lower costs for the management of earnings, which encourages listed companies to focus on short-term profits and ignore long- term risks184.

The relevant quotes and references could be readily extended. However, the purpose here, instead of providing a comprehensive representation of alternative views, is to give visibility to the alternative arguments articulated by academics and practitioners frustrated by the potential problems associated with the new standards, especially FVA. The presentation of these alternative discourses is important to this thesis given the particular approach of the methodological framework. On the one hand, it reveals the „social practice dimension‟ which, as Fairclough (1992, p. 4) illustrated, “attends to issues of concern in social analysis such as the institutional and organizational circumstances of the discursive event and how that shapes the nature of the discursive practice”. In discovering these circumstances, the contextual „differences‟ of Chinese society recognised by these alternative discourses reveal the difficulties in the implementation of FVA in China.

184Original Chinese text: “按照类似进度，在 2006 年初新会计准则体系发布并于 2007 年 1 月 1 日在上市公司施行之后，所得税相关的配套文件可能最快于 2007 年末发布，最可能的情况是 2008 年发布应该说，就新会计准则而言，其对所得税方面的影响主要体现在一些新收益与新费用方面。比如，股份支付准则规定，诸如股票期权、股票增值权之类的股权方面的激励，要在等待期内确认为费用。那么，此类费用是否可以在所得税前扣除，便成为一个问题。而这一问题不仅仅涉及到所得税的会计处理，也与制定股权激励方案时的权衡与全面考虑相关。又如，债务重组准则规定，以现金清偿债务的，债务人应当将重组债务的账面价值与实际支付现金之间的差额计入当期损益；以非现金资金清偿债务的，债务人应当将重组债务的账面价值与转让的非现金资产公允价值之间的差额计入当期损益。那么，这种增加的当期损益需不需要计算缴纳所得税，就成为一种悬疑。同时，这其中，“非现金资产公允价值”又引出另一个同类问题，即由于公允价值的引入导致的当期损益的增减，在所得税上如何计算与处理。有文章介绍了新会计准则导致 “吹牛不上税”的问题，即对于操纵利润比较流行的上市公司，在对部分资产负债使用公允价值计量时，可能会出现每期不断调高资产公允价值，或调减负债公允价值，以增加账面利润的情况；而根据财政与税务部门的初步协商，该利润在形成当期不需缴税，从而使上市公司当期造假成本降低，进而更加注重短期操纵、忽视未来风险”. 248

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On the other hand, it involves the constitutive and constructive effects of discourse that Fairclough (1992, 2001) proposes. More specifically, the expression of the alternative discourses itself, rather than being absolutely accurate, contains greater significance through exposing the fact that the „mainstream‟ discourses presented in previous chapters are only one „narrative‟ amongst many others. A discussion of alternatives exposes the control and exclusion required for a singular narrative to exist. Such control is necessary in order to maintain certain systems of thought and action. In this sense, allowing the „not said‟ to be considered, as this section provides, opens up possibilities of meaning and challenges the operations of domination in discourse that try to obscure knowledge of FVA.

7.4 Re-examining ‘Uncertainty’ and ‘Volatility’

In the previous sections, the major referential idea that FVA provides more- relevant information has been contested with reference to the alternative discourses identified within China. It is argued that the language change that the IASB and FASB have been proposing would influence the debate of FVA. Within the discourse, as this thesis argues, the term „uncertainty‟ that the committees have emphasised requires further examination because of changing pressures from the neoliberal economic environment. From this perspective, this section explores the contingent nature of „uncertainty‟ and places it into a Chinese context with real-world practices and examples to reveal the challenges presented to FVA from both inside and outside China.

As noted in the previous section, when referring to the notion of „faithful representation‟, the IASB explained:

Faithful representation does not imply total freedom from error in the depiction of an economic phenomenon because the economic phenomena presented in financial reports are generally measured under conditions of uncertainty. Therefore, most financial reporting measures involve estimates of various types that incorporate management‟s judgement. (International Accounting Standards Board 2008, p. 37)

In this quote, the IASB argued that accounting information cannot be free from error due to „conditions of uncertainty‟. This seems reasonable: no-one 249

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would expect that the accounting information can possibly approach 100 percent accuracy. The committees have also been consistent with this point of view. For instance, when AICPA (1971, p. 58) defined the qualitative characteristics of reporting in 1971, it noted: “the reliability of financial statement information is affected not only by uncertainties inherent in the subject matter, but also by the degree of precision of the measurement process.”

In the Exposure Draft of Conceptual Framework issued in May 2008, the IASB explained the reason of replacing „reliability‟ with „faithful representation‟, saying that “either board‟s existing framework conveys the meaning of reliability clearly enough to avoid misunderstandings.” (International Accounting Standards Board 2008, p. 41) and “the comments on almost any controversial proposal by a standards-setting body also indicate the lack of a common understanding of reliability.” (International Accounting Standards Board 2008, p. 47) Further, the IASB argued that the components of reliability are representational faithfulness, verifiability and neutrality, and its discussion of representational faithfulness also encompasses completeness and freedom from bias with reference to the current definition of „reliability‟ stipulated in the framework 185 . In this sense, the board considers that faithful representation is the term that “encompasses all the key qualities that the previous frameworks included as aspects of reliability.” (International Accounting Standards Board 2008, p. 47)

Although the effect of using a more ambiguous term to define the meaning is questionable, there is a lack of awareness within the discussions about the emerging pressures from the financialised neoliberal economy on the meaning of „uncertainty‟. As has been argued in this thesis, the deregulation of the financial sector and the massive process of financialisation during the neoliberal era have given the term „uncertainty‟ a fundamentally different social relevance to the traditional concept. The neglect of this kind of influence

185 The IASB framework (paragraph 31) says: “information has the quality of reliability when it is free from material error and bias and can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent”. 250

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in the discursive practice is problematic, as FVA has been constructed as a device through which the market can be signposted and represented as the appropriate allocative forum. Without critical awareness of this ideological significance, it would be difficult to challenge this perception and detect the long-term damage it inflicts at a societal level.

7.4.1 An ‘Extra’ Volatility

As has been argued in Chapter Six, FVA obscures the value creation process by mixing current profit with unrealised gains and losses from FV changes. Also, financial markets do not deliver a reliable evaluation of fundamental value, which challenges the „value relevance‟ of information derived from FVA. As this thesis has illustrated in previous chapters, the rise of neoliberalism has shifted the focus of capitalist economies to financial capital. This has been channelled through the comprehensive process of financialisation (Epstein 2005, Harvey 2005, Gamble 2006, Robison 2006, Palley 2007, Dore 2008). According to critiques of financialisation (Epstein 2005, Palley 2007, Dore 2008), our economy has become increasingly unstable and financially vulnerable because values (tangible or intangible, present or future) have been transformed into those highly liquidated and short-term-oriented financial capitals that can be exchanged immediately in „freed‟ markets. The mobility of those financial flows contributes no „real‟ value to the „productive‟ economy but pushes speculation even higher and promotes riskier investments. In other words, economies have become „uncertain‟ in a fundamentally different way to the traditional understanding of the term. Instead of tempering that excess and providing sober assessment, accounting has aligned with neoliberal values by introducing more estimates into the frameworks, such as FVA, to cater for the mobility and uncertainty of financialised economic activities. In this sense, accounting has become a tool of neoliberalism.

A major disturbing effect of FVA techniques, which contributes to the penetration of neoliberalism, is to introduce the volatility caused by the swings or fluctuations of financial markets into traditional accounting disclosures, such as reported earnings (see Sections 6.4 and 6.5). The market valuations that contain substantive amount of expectations about hypothetical future 251

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events become the legitimised accounting measurements. This kind of change in accounting language has real influences on people‟s perceptions and, thereby, practices regarding the efficacy of „free‟ markets. Accounting is not only insufficiently alert to the speculative characteristics of financial markets, but also helps legitimise the risky penetration of the markets. Under FVA, the fair-value-based balance sheet must recognise the value changes of assets/liabilities that might be simply caused by short-term speculations, and the same amounts of changes have to be reported in the income statement as part of profits/losses. Legitimising this kind of fluctuation is problematic because assets can be over-valued if it is fuelled by the overly optimistic views common in the financial markets. The fair value of the assets can also fuel that optimism. During a market downturn, however, this effect downwards the assets to a much lower FV, which might widespread further fluctuations into the market causing „extra‟ volatility without bearings of underlying economic substance. The discrepancy between the fundamental value and „fair‟ value measured by financial markets is believed to increase with a heightened degree of uncertainty (see Section 6.5). The volatility of earnings in financial reporting that FVA generates has been a real concern and a major challenge for FVA. This has also been manifested in China‟s experience of adopting FVA.

In order to tighten the focus of the exploration, the following sections of this chapter centres on one particular CAS: ASBE No. 22 Recognition and Measurement of Financial Instruments, which is equivalent to IAS 39 Financial Instruments: Recognition and Measurement. ASBE No. 22 has had a distinct influence on the adoption of IFRS in China, given the tremendous changes this standard has brought to the accounting disclosure of Chinese listed companies. According to Shi (2007)‟s study, about 78 percent of total listed companies on the Shanghai and Shenzhen Stock Exchange hold other companies‟ shares. Under the standard, the financial assets are to be measured at their fair value and any variation is recorded in the profits and losses of the current period (Chinese Accounting Standards Committee 2009). Therefore, any increase/decrease of the share price of those cross-holding shares flows into reported profits/losses; this increased the volatility of reported earnings significantly when Chinese capital markets experienced dramatic changes between 2006 and 2008. 252

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This feature of FVA has sparked debate within the broader public who participate in Chinese capital markets. Early warnings regarding volatility were circulated before the actual implementation of the new CAS. For instance, On 29 November 2006, Wang, Bai-Lian, director of ShenZhen Galaxy Securities, pointed out that “the new Chinese accounting standard is expected to significantly change the profits of listed companies, and bring about new investment opportunities 186 ” (Wang, B. L. 2006, p. A08). This message appeared to encourage investors with „new investment opportunities‟, the factor that brought the implied „opportunities‟ actually being the substantive fluctuation of share prices. Fu (2006, p. 018) predicted in the newspaper Economic Information Daily (20 February 2006) that “the new Chinese accounting standard would cause a 20 billion RMB increase in listed companies‟ 2006 profits187”. Fu warned investors to be cautious about the possible risks of such a large difference.

In reality, the market turbulence between 2006 and 2008 indeed severely changed the financial reporting of Chinese listed companies. The performance of Chinese capital markets over the past five years (2005-2010) has been volatile. The market had remained stable until the end of 2005. However, beginning in early 2006, the market started to rise unexpectedly. The Shanghai composite index increased continuously from 1200 points in January 2006 to its highest level, 6092 points, in October 2007 – a jump of 407.67 percent in less than two years. The markets started to fall after that. The Shanghai Composite Index decreased from 6092 points on October 16, 2007 to 1728 points on October 31, 2008 (Shanghai Stock Exchange, www.sse.com.cn) – a fall of 71 percent in about one year. Since then the markets have been relatively stable, with the index number fluctuating between 2400 to 3400 (from October 2008 to April 2011)188.

186Original Chinese text: “将于 2007 年 1 月 1 日实施的中国新会计准则，有望极大地改变上市公司的财务报表数据，使上市公司的利润在短期内发生剧烈变化，从而带来新的投资机遇”.

187Original Chinese text: “这将导致国内上市公司 2006 年业绩 20 亿元的增长”.

188 The index numbers are from the Shanghai Stock Exchange, www.sse.com.cn. 253

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Under the new accounting standard, which requires FVA, the dramatic change in share prices was reflected in listed companies‟ accounting reports. For instances, Livzon Group, one of the leading pharmaceutical companies in China (listed in ShenZhen Stock Exchange:000513), reported a 75.53 percent fall in net profits for the first quarter of 2008 compared to the same period the previous year. Even though the net profits from operating activities were 142.18 million Yuan, an increase of 34.19 percent compared to the period of 2007, the fall in prices (the fair values) of those cross-holding shares contributed a loss of RMB170.85 million (Livzon Annual Report 2008). China Credit Trust Co., Ltd, a major non-banking financial institution, reported a half year loss of RMB317 million in 2008, while in the previous year it had had a profit of RMB 931 million (Huang 2008). According to Huang‟s (2008) report, the biggest contributor to the loss was the fair-value changes in those cross- holding shares. This kind of influence of FVA on the reporting of earnings is enormous; this has also been acknowledged by the regulator, as Li, Xiao-Xue (2007, n. p.), the secretary of CSRC, admitted that:

According to statistics, this year‟s first-quarter profit of listed companies has increased by 95% and earnings per share growth of 78%. About one- third of the total profits came from the fair value changes in the cross- holding shares of other listed companies. Securities and Futures Commission, Ministry of Finance have been aware of that the existence of manipulations of accounting numbers through abusing the fair value measurement. Therefore Ministry of Finance will enhance the monitoring of the implementation of the new accounting standards. Spot checks will be carried out toward the 76 qualified accounting firms that prepared the financial statements for listed companies189.

The volatility introduced by FVA reflects little about the companies‟ real productive performance, but much about financial speculations from capital markets. It can be seen that investors who seek information that reflects the „real‟ value and long-term prosperities of the business would obtain little useful information from those accounting numbers. Referring to the theoretical discussion in Chapter Six, a practice like this implies that the

189Original Chinese text: “据统计，今年一季度,上市公司利润增长高达 95%,每股收益增长达 78%。而利润总额中，约三分之一来自于上市公司交叉持股所产生的投资收益。证监会、财政部监测发现，存在个别上市公司随意估值、操纵数字、虚增利润的情况，并表示，已经对执行新会计准则后，股东权益增长超过一定幅度的上市公司予以重点关注，并将对 76 家有审计上市公司资格的会计师事务所进行抽查，一旦发现违法违规问题，将取消其审计资格”.

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traditional concept of income meaning a match of costs with revenues has been sidelined. Those unrealised gains derived from fair-value-based measurement flow into the income statement, which leads to much more volatile earnings. This disrupts the traditional notion of income realisation; however, it provides crucial „updated‟ information to financiers for speculative investments and presents opportunities to them because the volatility this reporting method creates can also be used to make windfall gains. This can be demonstrated through some real cases identified in the market after implementing FVA in China, as the next section shows.

7.4.2 The Myth of ST Changkong

The case of ST Changkong (listed on Shanghai Stock Exchange: 600137) provides a typical example of the effect triggered by the volatility in the accounting disclosure within the Chinese context. On 20 December 2006, ST Changkong formally started a process of debt restructuring190 and entered into a trading halt. The share price was RMB 7.18 per share before trading was suspended (Shanghai Stock Exchange, www.sse.com.cn). Trading was resumed on 13 April 2007 after completing the debt reconstruction. On the same date the share price reached to its historical high of RMB 85 per share in the morning, which was an increase of 1,083.84 percent within one day. The bulge was triggered by the company‟s predicted earnings of RMB287 million – an increase of almost 2,107.69 percent compared to the previous year‟s figure (RMB13 million), before the debt reconstruction (Sina Finance 2007). The dramatic rise in earnings was not from normal operating activities but a change of accounting disclosure. ASBE No. 12 Debt Restructuring requires the assets or equity interests received or surrendered by the debtor or the creditor to be measured at fair value; the resulting gains or losses are recognised in profit or loss (China Accounting Standards Committee 2007). This could not have happened under the old Chinese accounting standards in which fair value is not used and the resulting gain is credited to „capital reserve‟ only.

190 Debt restructuring is defined as an event in which a debtor is in financial difficulty and a creditor grants a concession to the debtor in accordance with a mutual agreement or a court judgment. 255

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The rise lasted for a very short period of time, and the share price has begun to fall since then191. The legend of ST Changkong became front-page news the next day across the media. Several days later it began to be reported192 that the majority (over 99 percent) of the quarterly profits was the result of an accounting treatment – recognising the fair-value change of the reconstructed debts. Apparently ST Changkong had managed to reconstruct its debts with creditors in a way that satisfied requirements of the new CAS (which had taken effect on 1 January 2007) so that the gain from debt reconstruction was able to be recognised as profits. The details of the gain (RMB 285,386,260.76) were disclosed in the company‟s 2007 half-year report 193 (ST Changkong Annual Report 2007, p. 3).

ST Changkong had released an announcement on 11 April 2007 – two days prior to the resumption of trading – in which the company predicted a net profit of RMB 271 million. The announcement was accompanied by a note to explain the source of this profit:

It is predicted that in the first quarter of 2007 the company will significantly increase profits due to the debt re-reconstruction that has been completed by 2006. Since 1 January 2007 the creditors have waived the debts which resulted to gains from debt re-constructing of about RMB 271 million. Based on the new accounting standards, these gains are recognised as profits for the current period194. (Shanghai Stock Exchange 2007, p. 1)

191 On 14 May 2007 the price was RMB 38.76 – a decrease of 54.4 percent in a month. On 25 November 2008, the share price was RMB 7.78 per share, similar to the price right before the debt reconstruction (Shanghai Stock Exchange, accessed 15 January 2010, available from: www.sse.com.cn).

192 A list of relevant news can be found from www.google.cn (accessed 15 January 2010, available from: http://www.google.cn/search?source=igchina&hl=zh- CN&rlz=1G1GGLQ_ZH- CNCN333&q=ST%E9%95%BF%E6%8E%A7&btnG=Google+%E6%90%9C%E7%B4%A2 &aq=f&oq=).

193 ST ChangKong was renamed to „Langsha‟ on 25 May 2007 after the debt reconstruction (accessed on 26 January 2010, available from: http://quote.591hx.com/Company/gpgm_600137.html).

194 Original Chinese text: “预计 2007 年第一季度公司将大幅盈利主要是公司债务重组已于 2006 年完成，2007 年 1 月 1 日起相关债务人已豁免了公司相关债务，按照新会计准则，债务重组收益（2.71 亿元）计入公司当期损益”. 256

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The implication of this message is clear: this gain was only a one-time windfall and could not be sustained. But the misinterpretation of this accounting information by the markets signifies how easily a simple change in accounting disclosure overturns the share price and magnifies the speculative investment in Chinese capital markets. Moreover, it contradicts the claims that FVA enhances the quality of accounting information for rational economic decision- making.

In the sense of CDA, this real-life event, as an example of a social practice facilitated by FVA, destabilises the discursive boundary that neoliberal discourse tries to create. According to the discourse, markets are deemed to be self-optimising and hence accurately value assets. This forms the fundamental supposition of the theories of FVA that prices derived from market transactions reflect the correct values as the market analyses all necessary information effectively. Because these discussions have been privileged, alternative views have been given limited space in various debates of FVA both inside and outside China. This has made it difficult to more broadly articulate the problems of presupposing markets to have „efficiency‟ and „benefits‟. The volatility in Chinese capital markets discussed in this section points to the complexities of the alleged „realities‟ that those mainstream discourses have constructed (see Chapter Five). In this sense, claims for the technical strength of FVA and its neoliberal benefits should be treated with suspicion, because they are formulated through a matrix of discourses that are not always self- evident.

To provide further evidence, the next section reviews some alternative discourses that challenge the implementation of FVA in China with reference to the unique contextual differences in Chinese society and institutions. This presentation broadens possible interpretations that require consideration of contextual complexities in the operation of FVA. This is an oversight that has been evident within the dominant description of FVA in China (see Chapter Five). The market responses to FVA, as this section shows, expose further tensions between the technical development of FVA and the underlying assumptions that allowed it to emerge. The next section demonstrates that both the technical strength of FVA and its claimed neoliberal benefits are not 257

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static; instead, they are dynamic and should be considered with reference to the context in which they operate.

From the point of view of discourse, it is important to recognise the contextual implication, and to make it visible in the language that has discursive centrality in policy- and decision-making to influence the outcomes of the debates. From this perspective, the „differences‟ presented by alternative discourses will reinforce the significance of recognising the fact that FVA presents multiple and often competing meanings under different socio-political apparatus in China.

7.4.3 Concerns about Earnings Management

Earnings management based on FVA was actually a source of concern before the release of the new CAS in February 2006. Some alternative perspectives from dissenting practitioners or academics could be found in other forums. These included some less influential newspapers and academic journals than those high-profile media outlets identified in Chapter Five. On 20 February, 2006, He Wang-nan195 (2006, p. A12) commented on the damaging effect of FVA on earnings management in China, in Yangchen Evening, a newspaper published in GuangZhou:

What is even more worrying is that fair value accounting would highly likely become a tool of earnings management. The old accounting standards require that gains in debt-reconstructing couldn‟t be recognised as profits in an income statement, but as a reserve…this has been very effective to prevent some companies to manipulate profits through debt-reconstructing. But now this is changed; fair value accounting enables the company to recognise such gains into profits. As we know that most of banks in China are state-owned, whether or not those banks can waive the debts depends on the local governments, which is not transparent to the public. Besides, those related parties could take advantage of the new rule to manipulate earnings and

195 He, Wang-nan has been one of the most influential non-official commentators of finance in China over the past 20 years (1990-2010), according to a survey conducted by the biggest financial website in China, www.sina.com.cn (accessed on 18 March 2010, available from: http://finance.sina.com.cn/focus/stock20year/index.shtml).

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hence share prices through insider trading, which is, again, at the expense of small shareholders….196

Similar concerns have been circulated elsewhere since February 2006 – the time of the release of the new CAS. For instance, on 21 February, 2006, one week after the release of the new CAS, Chou (2006, p. 017) claimed in Securities Times, one of the most popular financial newspapers in China, that “FVA would bring about significant influences on the performance and asset value of listed companies, which would lead to a substantive revaluation of A- shares197.” Although without directly criticising the new CAS, Chou (2006) expressed a strong concern on the subjective judgements involved in evaluating the fair value and hence the expanded room for further earnings management in the markets. Identified from the newspaper China Real Estate Business, Yu (2006) worried about the difficulties in implementing the new CAS, and indicated that:

The premise of adopting the new standards is the existence of active markets and independent institutions for evaluation. These two conditions are weak which offers greater opportunities for earnings manipulation198. (Yu 2006, p. 012)

The same concern was also given explicit acknowledgement within academia. However, the academic journals that published these concerns (such as Finance and Accounting, Economic Practice, Observation of Industrial Economy, Hebei Academic Journal, Modern Enterprises, Metallurgical Financial

196Original Chinese text: “更让人担心的是，公允价值极有可能成为调节利润的工具。债务重组不能作为利润，只能计入资本公积，是数年前郑百文的个案而制定的。三联重组郑百文前，后者仅欠建设银行的债务就高达 22 亿元，为了确保重组成功，建行豁免了 14 亿元，如果这 14 亿元全部作为利润的话，小小的郑百文岂不一下子从每股亏损二三元，一跃而每股盈利五六元，股价岂不是要炒上天了？财政部这才制定了债务重组的会计准则，事实证明，这一会计准则对一些高负责公司利用债务重组蓄意包装利润起到了很好的作用。可如今，黑变成白，白又变成黑了。须知中国的银行多为国有（控股）银行，能否豁免债务常常取决于地方政府一句话。再则，一些关联方还可以通过一面豁免债务，一面做高业绩来操纵股价，搞内幕交易，吃亏的又是小股民”.

197 Original Chinese text: “新会计准则将对上市公司业绩和资产价值产生重要影响，从而带动 A 股价值的重估，增加二级市场新的投资机会”.

198Original Chinese text: “采用公允价值模式新会计准则的前提是必须有比较活跃的相关交易市场和客观公正的评估机构，而在这两点上我们的基础都比较薄弱，这就在客观上存在操纵利润的可能”.

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Accounting, The Science Education Article Collects, China Management Informationization, Finance and Accounting Horizon, Times Finance and Finance Forum199) are considered much less authoritative than Accounting Research. Among them only Finance and Accounting has a B-ranking, the majority are ranked as C or lower in the ADCSC ranking list. This suggests that top journals followed the party line in advocating FVA, while only lower-prestige journals allowed the criticisms to emerge.

Within these academic journals, many commented on the possibility of a sudden rise of earnings management from Chinese listed firms in 2006 – before the promulgation of the new CAS. Xie is one such author. In Economic Practice, she suggests that “the more debts you have, the easier you could make up the profits200” (Xie 2006, p. 139). She expressed strong concerns about the possible misuse of the new standard, as she wrote that “there becomes enormous room for cooking the book. The new standards allow greater use of accounting tools such as fair value and all sorts of provisions, which provides more flexibility for companies to manipulate profits201.” (Xie 2006, p. 140)

In Modern Enterprises, Pan (2006, p. 66) warned that “fair value becomes a tool for earnings management due to the lack of transparent regulatory supervision 202 ” when referring to “ASBE No. 7 Exchange of Non-Monetary Assets, which allows the gains from the exchange of non-monetary assets to be recognised as current profits, instead of the Reserve as the old standard prescribed203”. This was also supported by Jia (2006). In his article published in Observation of Industrial Economy, he studied ASBE No. 36 Related Party

199 The Chinese titles of these journals are: 财务与会计; 经济工作; 产经观察; 河北学刊; 现代企业; 冶金财会; 科教文汇; 中国管理信息化; 财会经纬; 财会园地; 财经论坛.

200 Original Chinese text: “负债越高包装越易”.

201Original Chinese text: “利润调节空间仍大。新会计准则中的公允价值计量及各种减值准备成为利润操纵最主要的手段,上市公司调节利润的空间仍很大”.

202Original Chinese text: “成为调节利润的工具由于相应的配套法规和体制还很不完善”.

203 Original Chinese text: “非货币(即实物)交易,过去非货币交易产生的收益只能计入资本公积金,新会计准则实施后可直接计入当期收益,进入企业利润表”.

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Disclosures and concluded that “the related parties, due to the imperfections of market mechanism, intentionally twist the fair value, utilising various techniques in order to increase profits204.” (Jia 2006, p. 170)

To He Xian-min, as his publication in Hebei Academic Journal, the “fairness of fair value measurement could hardly be achieved205” when “the market system has yet been established in China” and “many firms „control‟ their profits206” (He, X. M. 2006, p. 164). He Xia-min (2006, p. 164) argued:

China has had relatively mature commodity markets, but the currency markets, foreign currency exchange markets and capital markets have not been completely developed yet; the changes of exchange rate and interest rate are not determined by the market mechanism. It is still very hard to obtain a true and fair evaluation of assets and liabilities by drawing upon market prices for business firms207.

Another point worthy of considering here is that many researchers referred to previous market scandals in which standards allowing fair-value measurement were abused by many Chinese listed companies. As Xie (2006, p. 139) wrote:

On 12 June 1998, fair-value measurement was introduced into ABSE No. 12 Debt Restructuring for the first time. It was then expanded into ABSE No. 7 Exchange of Non-Monetary Assets in an effort to improve the quality of financial reporting and the convergence with international standards. It turns out that massive abuses of these standards resulted, this attempt was ceased and fair-value measurement was removed completely from CAS in 2001208.

204 Original Chinese text: “关联方为了获得利润最大化，在市场制度不健全的前提下，利用技术手段，在交易双方定价时，故意扭曲公允价值，虚增利润”.

205 Original Chinese text: “公允价值很难获得”.

206 Original Chinese text: “市场经济还没有建立”及“大量的企业操纵利润”.

207 Original Chinese text: “中国商品市场比较成熟了,但货币市场、外汇市场和资本市场还没有完全放开,利率和汇率还没有完全市场化,对于资产及负债状况进行真实和公允的判断还具有相当的困难”.

208 Original Chinese text: “公允价值在1998 年出现于“非货币性交易”、“债务重组”等具体会计准则中, 后因实际运行中出现很多公司滥用公允价值操纵利润的情况而在2001 年修订后的准则中被限制使用了”.

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In responding to the fair-value measurement after its failure during the first experiment, the CASC noted in 2002 ABSE No. 6 – Intangible Assets (China Accounting Standards Committee 2002, para. 12):

1). It is difficult to obtain fair value due to the absence of active markets in many sectors, which offers room for companies to manipulate profits by subjectively measuring the fair value. 2). Avoiding the use of fair value measurement is consistent with the characteristics of being a developing market economy in China. Replacing the fair value by historical costs is a critical feature of the standards. The purpose of this approach is mainly for regulating Chinese capital markets by minimising the abuses of some accounting standards such as debt reconstructing, assets swaps or cross- holding shares, etc.

What forced the regulatory commission to make the decision was a series of well known market scandals in China, such as the QiongMinYuan, ZhenBaiWen and YuQinBai cases209, among which the companies reported substantive fictional profits by using FVA (Liu 2002, He, W. N. 2006). ASBE No.12 Debt Restructuring, for example, allowed debtors to use fair value to reconstruct their debts to appear in their income statements210. For instance, ZhenBaiWen – one of the leading department store groups in China – was able to change its earnings per share from a loss of RMB 3 to a profit of RMB 6 after reconstructing its debts to its major creditor, China Construction Bank, in 1999; this proved to be one of the biggest market scandals in China (Liu 2002). Given the fact that China‟s major banks – the biggest creditors – were mostly state-owned, and the listed companies were mostly state-owned as well, most of the debt reconstructions were negotiated among very closely related parties without transparent information disclosure to the public. As a result, it was well perceived by the markets that the debt reconstruction was conducted merely to produce fictional earnings to attract investments; both the company (debtor) and the creditor211 were believed to benefit from this kind of price manipulation (see Zhang & Chen 2003).

209 The Chinese names: 琼民源，郑百文，渝钦白.

210 As discussed previously, „reconstruction‟ means that debtors negotiate with creditors about methods of repaying debts, such as issuing new shares or trading other assets to creditors.

211 It should be noted that they were also shareholders at one time. 262

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Such volatility and scandals in Chinese capital markets were „real-life‟ cases that contradicted the idea of market benevolence. On the one hand, these examples of alternative discourses offer different descriptions that may suggest other ways of imaging FVA in China. On the other hand, they also reflect the failure of „mainstream discourses‟ in representing „difference‟ and the multiplicity involved in interpretations of fair-value-based accounting practices in China. This is a failure that may serve to exclude potentially transformative narratives from mainstream representation, and hence limit the enabling possibilities of broader considerations or understandings, upon which more socially responsible accounting could be achieved (Andrew 1999).

7.5 More Political Significance

To explore social practice (the third layer of the CDA framework) in more detail, this section fulfils another important task: exposing the political significance of discursive practice. This is conducted by placing the textual meaning into broader social practices to reveal social relations that may be of cultural and political significance. According to Fairclough (1992), the way we use language is a dynamic social process that may come to be politically or ideologically „invested‟ in particular ways. As he (Fairclough 1992, p. 66) described: “social practice has various orientations – economic, political, cultural, ideological – and discourse may be implicated in all of these without any of them being reducible to discourse.” In this sense, discursive practice draws upon conventions that naturalise particular power relations and ideologies; however, these conventions themselves, and the ways in which they are articulated, are merely instantiated in discursive events.

In the context of this thesis, FVA and, more broadly, the convergence of IFRS in China have been articulated within a politicised matrix of meaning construction of a range of conventions, such as „relevance‟, economic efficiency and market freedom. The discursive practice, however, neither positions itself in relation to them nor orients its results towards them. So far this thesis has in part exposed the narrowness of the discursive practice through analysing some of the key concepts, such as „relevance‟ and „reliability‟, underlying the

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way that FVA has been spoken of or interpreted in the high-profile academic journal and some other mainstream media outlets. However, an understanding of the political relevance of CDA still requires a critical explanation of the location of the discourse within its broader socio-political dynamic and the internal effects of that location on naturalising the conventions (Fairclough 1992).

The approach of this analysis identifies systematic variation within discourse communities based on sets of social variables, and traces connections across institutions and movements between institutional orders of discourse (Chouliaraki & Fairclough 1999). There have been systematic references within speech communities to the notion of „market‟ in the discourses of the convergence and FVA. The benefit of the „market‟, or, more specifically, the capital markets, has been a central referential point that links the processes of subject constitution in this event. The contradictions between the discursive production and the real-world practice of the „market‟, as this section explores later, reveal the hidden problems of the market construction in China and substantiate the political nature and immediate consequences of neoliberal reform.

7.5.1 A Critical Reading of Chinese Capital Markets

To demonstrate the systematic variation according to a set of social variables (in this case, the significance of „market‟), the investigation draws upon the discursive space wherein government officials and regulatory bodies commented on the new CAS. As discussed in Chapter Five (particularly Section 5.3), the government discourse has viewed the new CAS as one of the important infrastructures to facilitate China‟s ongoing economic reform. To reiterate some of the examples: the new accounting standards “improve the market economic system” (Jin Renqing, Minister of Finance); “reflect the demands of China‟s market-oriented economic development” (China Banking Regulatory commission); “enhance the level of „opening-up of the Chinese economy” (Chen, Yugui, Secretary-General of CICPA); and “meet the needs of innovation in the security market” (Fan, Fuchun, Deputy Chairman of the

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Chinese Securities Regulatory Commission) 212 . As has been argued, these discourses reflect the Chinese government‟s commitment to instituting a „free market‟ and foster neoliberal capitalism through technologies such as accounting.

Within these discourses, „capital markets‟ have been given significant consideration in order to rationalise the introduction of the new CAS in China. Fan, Fuchuan, Deputy Chairman of CSRC, said on November 30, 2006:

First, the promulgation and implementation of the new accounting standards adapted in a timely way to the share-market reform…. In the second place, it effectively meets the needs of innovation in the security market…. In the third place, it meets the need for high-quality financial accounting information in the security market…. It has a direct influence on listed companies‟ corporate governance; it helps those companies improve the accounting system and financial management, which further improve the company‟s decision-making, internal control as well as the corresponding aspects in performance appraisal, etc. For accounting firms and other service agencies, the promulgation of the new accounting standards, on the one hand, offers new business opportunities; on the other hand it creates a new need for improving the internal control system due to the greater business risks that might occur during the process of introducing the new rules. In addition, the implementation of the new standards will update investors‟ knowledge of investing213. (Fan 2006, n. p.)

The Vice-Minister of the MOF, Wang, Jun (2007, p. 4) also argued that:

In a market-economy system, using a different reporting system would provide misleading information and affect the exchange of capital. We therefore need to develop a set of standards that is harmonised with IFRS as IFRS is a high-quality standard that has been adopted globally. The convergence will help both domestic and overseas investors understand the accounting information reported by our listed companies.

212 More quotations can be found in Section 5.3.

213 Original Chinese text: “首先，新会计准则的颁布和实施及时适应了股权分置改革后证券市场所面临的新形势的需要„ 其次，新准则的颁布和实施有力地配合了证券市场金融创新的需要„ 最后，新会计准则的颁布和实施充分满足了证券市场发展对高质量财务会计信息的需求„ 就上市公司而言，执行新会计准则会对公司的会计核算产生直接影响，推动公司不断完善会计核算系统，提高财务管理水平，也会进一步影响到公司的经营决策、内部控制系统，以及相应的绩效考核等各个方面，有助于从总体上改善公司治理状况。对于会计师事务所等服务机构而言，新会计准则的颁布和实施一方面提供了新的业务领域，同时，由于许多新概念、新规定的引入，也必然会加大相应的业务风险，客观上要求更新审计理念，完善内部质量控制体系。除此之外，新会计准则的实施将会更新投资者的投资理念，广大投资者也会自发地评价执行新准则对公司的影响，事实上前期证券市场对此已有所反映”. 265

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To understand these discourses and their implications in practice, the essential reference – „capital markets‟ – requires a critical reading. In the context of this thesis, it is a major variable that connects the key points of this thesis, such as FVA, IFRS convergence and neoliberalism. It is not only the place where fair value is obtained, but also the fundamental notion underlying the neoliberal ideology. The market through which fair value is obtained is different in China from those in Western countries, and this context affects the way FVA operates, as evidenced by the volatility in financial reporting (see the previous sections of this chapter). Given the complications and contradictions, it is questionable whether FVA will provide a better representation of value in Chinese companies‟ financial reports on the grounds of being „relevant‟ or „reliable‟.

Given these questions, and the possibility that FVA is an inappropriate method of valuing assets in the current institutional context in China, it is important to consider the validity of the government‟s assertions about the role that the new CAS plays in the development of Chinese capital markets. The following sections, positioning the investigation within the broad literature of neoliberalism, explore the progress of Chinese capital markets. The investigation exemplifies how an accounting technique can be the handmaiden of neoliberalism, pushing forward an image of a market that is belied by its underlying architecture.

7.5.2 The Dominant Player and Its Reform Agenda

As mentioned in the government discourse, the new accounting standards are considered to facilitate capital-market reform. This is appealing given the alleged benefit of „market freedom‟ as articulated in neoliberal philosophy. Traditionally the states intervention into the capital markets has been a cause of serious concern in China. It has been widely recognised that the Chinese government‟s heavy involvement from the establishment to the daily functioning of the markets has been the major reason for market „inefficiency‟ (Xiao 1991, Mok & Yao 1993, Tan 2004, O'Connor et al. 2006, Francis et al. 2009). Hence, any reform that pursues less state intervention and more market freedom is likely to be popular. To better understand the nature of the 266

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market situation and provide necessary background information, this section briefly reviews the development of Chinese capital markets and some unique features.

7.5.2.1 Early Development of Chinese Capital Markets

The Chinese government started to form the nation‟s capital markets not long after the 1978 economic reform. The agenda centred on transforming the ownership structures of the SOEs by converting them to share corporations (Tan 2004). The underlying assumption was that, by changing the ownership structure from state-owned into „modern‟ corporations, the corporate governance problems that the SOEs experienced could be solved (see Chapter Three for more details).

However, this fundamental assumption requires a critical re-examination, as China‟s institutional environment might enable the Chinese capital market to function in a way that contradicts the ideas espoused in any corporate-finance or strategic-management text in the West. This is also crucial to the discussion of FVA in China because the links between the mark-to-market values and their real economic substance that theories of FVA assume could only become comparable when the market fundamentals align with those prevailing in the Western economies. A brief review of the early development of Chinese capital markets sheds some light on the driving force of the reform that is unusual to other capital markets. This, in turn, allows the key question of China‟s market mechanism, which is central to the discussion of FVA, to be better understood.

The Chinese government introduced financial reforms as early as 1981 to raise capital from selling bonds and securities for SOEs; however, there were no regulations or formal share markets to govern the transactions of capital markets (Tan 2004). The first integrated and state-sanctioned stock exchange, the Shanghai Stock Exchange, was „re-established‟ in 1990, almost 40 years

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after the closing of the stock market in China in 1949214. The Shenzhen Stock Exchange was created by the following year. The main reason for introducing the shareholding system, as recognised by many researchers (Xiao 1991, Mok & Yao 1993, Tan 2004, Francis et al. 2009), was to reform the SOEs, because at the time more than one-third (about 100,000 SOEs) were operating at loss under the planned economy, which had become a serious fiscal burden. At the time, SOEs accounted for only 34 percent of GDP but absorbed about 75 percent of domestic credit; also they were facing severe risks of ever-increasing triangular debt (unpaid bills between state enterprises, state banks and the government), which had accumulated to over 4900 billion Yuan (or 95 percent of GDP) (Su 2005). It is suggested by scholars (Xiao 1991, Su 2005) that the reform of SOEs was vital for the political survival of the Chinese government in the face of potential political and economic turmoil, such as had accompanied the mass privatisation of the former Soviet Union and other Eastern European governments in the early 1990s.

Under the circumstances, letting those SOEs go public could have been an effective option for easing the burden on the government215, particularly given the high saving rate in China at the time. According to Mooney (1992), while it was tremendously difficult for state banks to extend credit to SOEs, there was no shortage of capital for buying shares from the public, as about one trillion Yuan worth of savings was estimated to be available. In Shenzhen alone, for instance, total private savings in the bank was estimated to reach five billion Yuan in 1990 and there were five listed companies that had raised 270 million Yuan successfully from the public at the time (Luo 1991).

However, there was a fundamental problem associated with those firms that went public. They were those SOEs that had serious issues of corporate governance and were experiencing unprofitable production. Theoretically, it would be difficult to persuade people to invest in such companies. And indeed people‟s attitude towards share-issuing was initially hesitant, even sceptical.

214 There had been stock exchanges during the regime of the Republic of China before 1949.

215 Bad debt was estimated to be as much as 25 percent of state bank assets in 1996, according to Su (2005). 268

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Even though there had been many share-issuing experiments across the country long before the establishment of the stock-exchange markets, few of them had been fully successful. Zhang (1992) provided an example of this – the Shenzhen Development Bank, which was formed to be the first shareholding bank in China: in 1987 it planned to raise 10 million Yuan by issuing 0.5 million shares. However, it attracted few public buyers at first; the company then tried to sell the shares to its employees, who bought only 50 percent of the shares. Eventually company executives went to Shenzhen‟s first party secretary of the CCP, former mayor Li Hao, for help. Li personally bought some company shares, which was a sufficient signal for other officials to jump on the IPO. In the end, despite all these efforts, the company sold only 7.92 million, or 79.2 percent of the original planned number of shares. As Zhang (1992) noted, during this time, many state companies bought shares on such administrative orders.

Interestingly, the scepticism was replaced in the early 1990s by a massive jump in the popularity of buying shares when people realised that trading shares could be the fastest way of making money, especially in an unregulated market (Tan 2004). The limited shares available and the increasing demand created a raging bull market, as Tan (2004) revealed: the total issued share value in the market was 270 million Yuan and the public bank deposits for share application amounted to 5 billion Yuan in ShenZhen in 1990.

It should be noted that there has been ample literature providing information on the development of Chinese capital markets: the reason this thesis chooses to present the above is to highlight a phenomenon that a major factor – the business performance of listed firms – was seriously sidelined during the early practices of the markets, which diverges from modern theories‟ major reliance on measuring share values in capital markets.

7.5.2.2 Appeals for Market Reform

During the 1990s, all the listed companies were former SOEs, and the government stated that the aims of restructuring those SOEs as share corporations were to clarify property rights, improve corporate governance and 269

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encourage commercial modes of operation (Qian 2003). Accordingly, a particular share-ownership structure was adopted to maintain state ownership in those companies. The shares of listed companies were divided into two categories – tradable shares and non-tradable shares; only about 36 percent of shares issued were tradable to investors in the markets (Section 6.2.3 contains more details of this share-ownership structure and the associated problems).

There were concerns for this peculiar shareholding structure. One major criticism raised by participants in the markets was that most listed firms were carve-outs from their parent SOEs, and that the government still controlled the majority of their shares (Fung et al. 1998, Tan 2004, Su 2005, Liu, J. 2006, Chen et al. 2008, Francis et al. 2009). As a result, the dominant shareholders, who determine company policy, would not be influenced by the share-price movement because their shares were not tradable in the markets. As many (e.g. Young & McGuinness 2001, O'Connor et al. 2006, Francis et al. 2009) have pointed out, the inefficiencies in Chinese markets are due, in part, to information asymmetry: investors have little ability, and hence incentive, to discover company-specific information under this peculiar share-ownership structure. Also many researchers (Fung et al. 1998, Kim & Singal 2000, Tan 2004, Gao & Kling 2006, Fong 2009) have suggested that political and policy factors become the primary reasons for market movements because company fortunes and shareholder returns are highly dependent on political factors, which are under government control. For instance, Jin and Tang‟s (2001) investigation attributed policy factors to the 16 huge market fluctuations with amplitudes exceeding 20 percent in the period from 1992 to 2000. Shi (2001) also identified that policy changes were responsible for 30 out of 52 abnormal fluctuations during the same period.

As shown above, the domination of state ownership in listed companies and a lack of transparent information disclosure present real difficulties that might stunt markets‟ healthy development. The highest regulatory body – CSRC – even admitted that “the short history of the Chinese stock market had been marked by cases of fraud and dishonesty” (cited in Ding & Graham 2007, p. 567). Investors tended to choose short-term speculative investment strategies, 270

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being conscious of those fundamental problems and the associated risks. There had been strong calls for urgent reforms of the markets to cope with these problems.

7.5.3 The Split Share Structure Reform

A reform agenda was put forward that claimed to change the shareholding structure of Chinese listed companies by converting those non-tradable state- owned shares into free-floated tradable shares. The reform is commonly referred to as “Split Share Structure Reform216” (SSSR) in Chinese discourse.

As Chapter Three has suggested, although it is proceeding at a very slow pace, China‟s overall economic reform reflects general patterns that are consistent with the neoliberal changes on the world socio-historical stage. Challengers of neoliberalism (as discussed in Section 3.2) have highlighted the political nature of the neoliberal projects. As cautioned by MacEwan (2005, p. 172):

The „deregulation‟ advocated by neoliberalism is actually a different kind of regulation to overcome the obstacles and resistance to the institutions of a free economy. To the critics, the establishment or the „marking‟ of such an ideal market for neoliberalism embodies remarkable hegemonic relations that cannot be neglected. The following section contextualises this argument within the reforms of reducing state-owned shares in the Chinese capital markets. The reform, it appears, is to restore a sound market mechanism in China‟s capital markets by removing excessive government intervention. It can be seen, therefore, as a significant project if China wants to establish an institutional framework in which the markets with „free-market‟ values can flourish.

216 Original Chinese text: “股权分置改革”. 271

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This project is also significant to this thesis because the market status immediately affects the pricing signals for measuring fair value. As theories of FVA assume, a „freed‟ market sets up a crucial foundation for measuring fair value. The observable price derived from an arm‟s-length transaction reveals the „fair‟ value of assets and liabilities and provides more relevant information for better decision-making. The application of FVA could hardly be legitimised without a sound market mechanism in place. China has been actively working on fostering such an ideal environment so that Chinese markets could be seen to be as efficient as others. It ensures, as well, the legitimacy of the adoption of FVA. By thus positioning this reform in a broader neoliberal context, the following analysis articulates more contesting meanings and facts within multiple discursive spaces than the narrow interpretation of the „mainstream discourses‟.

Leading academics (as published in Accounting Research) have articulated a single predominating view of the capital market reforms. To reiterate some of the comments, the ongoing reform of Chinese capital markets that began in the late 1990s was regarded as a successful process that would “enhance the corporate governance, and improve transparency and better supervision of listed companies217” (Liu & Zhang 2006, p. 8). More specifically, Liu and Zhang (2006, p. 8), among others, referred to some detailed measures that the CSRC has taken: “imposed Split Share Structure Reform; reformed the procedure of listing and financing for listed companies; promulgated a number of administrative rules; and enhanced the information disclosure, the investigation of flaws and the supervision of certified public accountants218.” The outcomes of these measures are that “the efficiency of the capital markets has been increasingly improved219” (Liu & Zhang 2006, p. 8) and “the proper

217 Original Chinese text: “强化公司治理，提高运作透明度，治理违规行为”.

218 Original Chinese text: “中国证监会推进股权分置试点，改革了上市和再融资的程序，颁布了大量监管规章，加强了上市公司信息披露和舞弊查处力度；财政部加大了对会计信息质量和注册会计师审计质量的检查”.

219 Original Chinese text: “资本市场的有效性逐步提高”.

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environment for implementing the fair value accounting has been basically established220” (Liu & Zhang 2006, p. 8).

It is believed that the complexities associated with the reforms have been overly disguised and (re)constructed by these „mainstream‟ representations. The attempts of reforming the ownership structure of Chinese listed firms, as the following discussions show, are highly politically motivated projects that are too contradictory to be represented under the „mainstream‟ assumptions.

7.5.3.1 The First Attempt

A significant event that deserves serious consideration here is the first reform that the government launched in 1999. It was an unsuccessful attempt with a three-year trial. Although some research has addressed it (Liu, Q. 2006, Ding & Graham 2007, Wan & Yuce 2007), the first reform has gone relatively unnoticed within the discussions surrounding the current SSSR (2005–2011).

In September 1999, the CCP promulgated a policy – Decision Regarding Several Important Issues Related to the Reform and Development of State- owned Enterprises – for reforming the ownership structure of SOEs. While officials from the State Department of China indicated that the government was contemplating five principles to reduce state-owned shares, there was no specific guidance established at the time to coordinate the reform (Liu 2006b).

In the absence of detailed information, rumours started to circulate within the markets regarding the government‟s possible actions. A major issue that has been revealed in the current literature (Wan, L. 2005, Liu, Q. 2006, Ding & Graham 2007, Wan & Yuce 2007) was how the government planned to price the state-owned shares when they were converted. As explained earlier, most of the non-tradable state-owned shares were carried on account at a price less than RMB 1 per share based on the value of net assets; whereas their counterpart tradable shares were priced by the markets at a much higher price. So when the rumour implied that the government was considering

220 Original Chinese text: “有助于公允价值应用的环境已初步形成”. 273

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selling its shares at the book value rather than the much higher market price, there was huge speculation about a possible windfall to investors (Wan, L. 2005). Correspondingly the Shanghai Composite Index climbed to historic highs, jumping from 1893 to 2218 between February and June of 2001 (Shanghai Stock Exchange, www.sse.com.cn).

However, the rumour was dispelled on 12 June 2001, when the State Department of China finally announced that the state-owned shares would be sold at market price rather than at net asset value. Despite the arguments provided by the government and supportive academics that those measures were good news for the capital market (Chao 2001, Ding & Graham 2007), private investors soon realised that the state would be the only beneficiary if the extremely low cost state-owned shares were sold at the much higher market prices.

The market reacted badly and the Shanghai Index quickly slumped. By October 22, 2001, the Index had dropped 32 percent, and total market capitalisation had shrunk by RMB 600 billion Yuan (Shanghai Stock Exchange, www.sse.com.cn). “The Social Security Fund, which was the strategic investor behind at least one listed company and was the supposed beneficiary of the reduction Measures, lost RMB 160 million Yuan” (Ding & Graham 2007, p. 574). On 22 October 2001 the CSRC announced that they would suspend the reform, and within one day of the announcement the Shanghai Index increased almost 10 percent (Shanghai Stock Exchange, www.sse.com.cn). During the suspension period, no consensus was reached on which reduction methods would be most appropriate, and therefore on 23 June 2003 the State Department eventually terminated this reduction effort. Ding and Graham (2007) commented on this event, after analysing data from public media, that “the termination of the Measures revealed that the alleged urgency of improving corporate governance and protecting smaller investors was not the primary purpose of the Measures, but was, at least in part, a rhetorical move by the government” (Ding & Graham 2007, p. 575).

Some scholars (e.g., Liu, J. 2006, Wan & Yuce 2007) believed that the failure of this reform attempt was the main reason causing the bear market from 274

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2001 to 2005, within which the Shanghai composite index experienced a 47- month consecutive fall from 2245 points in mid-2001 to 998 points in mid- 2005. During this period, according to Liu‟s (2006) study, over 70 percent of shares were at their historical low prices, with market capitalisation wiping off over RMB 2.8 trillion Yuan and over 70 million investors suffering heavy losses.

7.5.3.2 The Current (2005–2011) Split Share Structure Reform

The government resumed the reform in 2005, but with some notable differences. First, the reform had a different name: it had been explicitly called „selling off state-owned shares‟ in the first attempt, whereas this time it formally appeared in the discourses as „Split Share Structure Reform of Listed Companies‟. The name contained no word that directly signified the selling off of state-owned shares, although that was the ultimate goal.

Further, the most sensitive issue of how to price those non-tradable shares appeared very vague. The government imposed no specific requirement on this pricing issue, but claimed to leave it to be negotiated among all the shareholders of A-shares. As stipulated by the CSRS in Administrative Measures on the Split Share Structure Reform of Listed Companies, released on 4 September 2005:

Non-tradable shareholders of the listed company shall consult floating A- shareholders on the share reform scheme that is fit for specific circumstances of individual listed company pursuant to applicable laws, regulations and measures on the Share Reform (Chinese Securities Regulatory Commission 2005, n. p.).

The general principle of the pricing mechanism was:

…to formulate a reform plan conducive to corporate development and market stability, a listed company and its shareholders shall take into account both the current and long-term interests of all shareholders and the situation of the listed company, adopting effective measures to stabilize the share price including shareholding increase by controlling shareholder, share repurchase by the listed company, predefining the terms on sale of non-tradable shares, predetermining the resale price, introducing the put warrant scheme and so on. (Chinese Securities Regulatory Commission 2005, n. p.)

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Instead of labelling itself as the final judge as in the previous reform attempt, the government appeared to step down and leave the decision-making to shareholders. However, in spite of the claim that the pricing procedure would be determined by all the shareholders, when over two-thirds of shares were owned by the state, the government was essentially the ultimate decision- maker, quite similar to the first reform attempt.

In addition, the CSRC ruled out the immediate circulation of those state- owned shares to avoid the immediate impacts on the share markets. Article 27 of the CSRC‟s Administrative Measures required that:

The sale of originally non-tradable shares after the reform plan is completed shall comply with the following provisions: (1) The non-tradable shares shall not be traded or transferred within 12 months from the date of implementation of the reform plan; (2) A former non-tradable shareholder who holds more than 5% of the total shares of a listed company, upon expiry of the lock-up period as stated in Article 27.1 of the Measures, may sell their shares, with a maximum of 5% of the total shares of the listed company within 12 months via the trading system of the stock exchanges, and not more than 10% within 24 months. (Chinese Securities Regulatory Commission 2005, n. p.)

The State Council required all public-listed SOEs to complete the reform by the end of 2006. The reform began on 8 May 2005. “Four companies including Sany Heavy Industries, Tsinghua Tongfang, Zijiang Enterprises, and Jinjiu Energy were chosen as the first pilot companies” (Wan & Yuce 2007, p. 376), so with a 12- to 24-month-ban on trading, the first float of those previous non- tradable shares would not be traded in the markets until 2007, and most be traded in 2008 and 2009. Therefore there was no immediate market fluctuation this time, such as the markets had experienced in the previous reform.

The markets remained stable until the end of 2005. However, beginning in early 2006, the markets started to rise sharply as the Shanghai composition index increased continuously from 1200 points in January 2006 to its highest point 5902 points in October 2007 – a jump of 392 percent in less than two years. Commenting on what caused this bull market, public media has

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normally referred to three factors. 1) The funding liquidity had been profound after decades of economic growth. The sources of the funding came from China‟s foreign-exchange reserves, which had exceeded US$ one trillion for the first time in October 2006 (State Adminstration of Foreign Exchange 2006), and also from private savings. According to Pang (2007), Chinese residents' private savings slipped by 278.4 billion Yuan in May 2007, and it was suggested that the booming capital market drove more and more Chinese to invest their money in shares. 2) There was an influx of overseas capital. According to Fortune China (Lin 2008), this amounted to over 470 billion US dollars in 2007. 3) Other political factors, such as the hosting of Olympic Games in Beijing, also may have contributed (although there has been very little academic research addressing this issue).

The markets stared to fall after their peak in October 2007. The Shanghai Composite Index decreased from 5903 points on 12 October 2007 to 1728 points on 31 October 2008 – a fall of 71 percent in about one year. While the mainstream discourses blamed the US sub-prime crisis, there were different voices pointing out that the SSSR was the fundamental cause (Li, J. 2008, Ma et al. 2008, Wang & Ge 2009, Zhang 2009), largely in relation to the potential impacts on the markets as non-tradable shares were liquidated after the lock- up period. During the reform, the supply of shares in Chinese share markets increased significantly when the previously non-tradable shares, which occupied about 64 percent of the total market shares, were converted into tradable shares (an increase of 178 percent in share supply). The potential impacts of massive selling on the markets could have damaging effects on the share prices.

In Chinese discourses, the liquidation of those tradable shares after the lock- up period is referred to as „JieJin 221 ‟. There has been academic research studying the effect of JieJin on share markets. Zhang (2009) revealed, as shown in the following table, that by the end of 2010, most non-tradable A- shares would be past the lock-up period:

221 Original Chinese text: “解禁”. 277

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Year The number of The percentage Market The percentage (up to) JieJin shares of total A- capitalisation of total market (billion) shares (billion RMB) capitalisation (billion RMB) 31/12/2007 128.50 8.06% 2,244.20 7.29% 31/12/2008 162.07 9.18% 2118.31 17.2% 31/12/2009 685.09 37.81% 3458.71 27.16% 31/12/2010 357.69 19.54% 3763.47 29.30% Source: Zhang (2009).

Li (2008) indicated that the A-share market capitalisation was about 7.1 trillion Yuan up to 30 April 2008; however, this amount would be increased to 22.6 trillion Yuan, equivalent to two times the volume of shares at the time, pouring into the markets. Wang (2005, p. 180) also predicted what would happen from 2006 to 2008 in her PhD thesis:

Under the policy that requires a 12- to 24-month lock-up period before selling those non-tradable shares after their conversion into tradable shares, 37 billion (5 percent of 740 billion) non-tradable shares would become free floats after one year, which even exceeds the total amount of IPO issuing in 2003 and 2004. After the lock-up period, the whole free float would reach 300 billion shares, which could all be sold out as long as the market price were greater than the current mean price of 2.8 Yuan/share…those shareholders of non-tradable shares would sell those shares high, and buy back low to still maintain the control…there would be enormous pressures on the markets in the next three years222.

This statement described a genuine concern from researchers such as Wang on a possible scenario, in which the state – the ultimate shareholder of all those non-tradable shares – cashed out the windfall arising from the huge difference between the cost and the market prices of the previously non- tradable shares.

222 Original Chinese text: “根据政策，非流通股转为流通股后需要等待 12 至 24 个月后才可以上市流通，一年后将会有 370 亿（7400 亿的 5%）的非流通股进入市场，这个数量甚至超过 2003 和 2004 所有的 IPO 的总和。解禁期过后，所有的 3000 亿解禁股将会被抛售，只要市场价格高于 2.8 元每股的成本价…非流通股的股东们会在高位上卖出股票，然后再低位上再买进来继续保持控股权…接下来的三年市场将有不可承受的压力.”

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Since 2008 there has also been research on the connection between the share price change and the JieJin. Zhang (2009) identified a strong connection between the share-price declines and the volume of shares being attributable to JieJin. For instance, September 2007 and March 2008 were the two months where the greatest number of shares were liquidated (after passing the lock-up time for JieJin), as well as the two months where the markets experienced significant fall (Zhang 2009). Li (2008) indicated that the arithmetic mean price of an A-share was about five Yuan per share by the end of 2005, which had increased to over 15 Yuan per share as of 30 April 2008. Therefore the average gain of selling those previously non-tradable shares would be over 200 percent in just two years, which presented an irresistible incentive for shareholders to sell off the shares and cash out the gains. That is why Ma et al. (2008, p. 2) warmed that “in 2007 the bull market has successfully absorbed the impacts of the JieJin; however, with the increasing amounts of JieJin and its cumulative effect, if the macro-economic condition deteriorated and the market liquidity couldn‟t catch up, the markets would suffer unbearably223”.

This kind of information, however, was not delivered to the public. Those PhD theses and research articles are only accessible to researchers who have registered to access them and can pay the requisite fees. The relevant criticisms and debates specifically revealing the potential impacts or risks of JieJin on share prices were sidelined in public media between 2007 and early 2008: very few instances of such criticisms can be identified in the public media from that time. For example, one of the biggest financial websites in China – Sina.com.cn – has a specific section (http://finance.sina.com.cn/nz/chinaggzw/3.shtml) dedicated to the SSSR. The latest news in that section, however, was dated 16 July 2007 when the author accessed this site on 8 April 2011. Of the five posts in 2007, only one („Investment Fund Industry: there‟s limited impact of the Split Share Structure Reform on the market‟) referred to the reform. A browse of nearly 500 posts in 2006 reveals that most of the news was about how strong the shares had

223 Original Chinese text: “2007 年的牛市已经成功地吸收了解禁带来的冲击，但是，随着解禁数量的增加和累积效果，如果宏观环境恶化及市场流动性不能跟上的话，市场将遭遇不可承受的冲击.” 279

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performed in the bull market. There were only two articles posted in 2006 mentioning JieJin. One („The peak time of JieJin hasn‟t come yet‟), posted on 8 August 2006, briefly introduced the numbers of shares that would be allowed to be circulated in 2007 and 2008 but contains no evaluation of the consequent influences. The second („The amount of JieJin surges today, beware of the risk of selling off‟), posted on 9 November 2006, only gave a brief introduction to the situation of JieJin for five specific companies, but without referring to the broad impacts on the markets. In another section on this web portal that is specifically dedicated to the topic of JieJin (http://finance.sina.com.cn/focus/dafeixiaofei/4.shtml, accessed on 15 June 2009) shows that no information at all was posted between 21 March, 2007 and 5 February, 2008.

These phenomena suggest a massive media censorship of JieJin within the Chinese media. During the 2006 and 2007 bull market (a jump of 392 percent in market index in less than two years), very little information, if any, was posted on China‟s biggest internet portal about JieJin and its impacts. And virtually none was posted during the months of March 2007 and February 2008, when the markets experienced their biggest drop (from about 6000 points to 2000 points). Only after February 2008 (the time when the market reached its lowest point) did relevant information start to appear (Appendix 5 contains a screen shot of the website with relevant dates highlighted). In the CSRC (government) website, the section on the SSSR has not been updated since 20 April 2007, and there was no mention of JieJin as of June 2009 (http://www.csrc.gov.cn/n575458/n4238522/n4238662/index.html accessed on 15 June 2009224). A further search on www.baidu.com – the biggest web searching engine225 in China – with the keywords “大小非解禁” (JieJin) shows similar patterns (accessed on 9 April 2011). There was vast amount of news about JieJin and its disastrous effects on the markets, but the author could not find any that had been posted before 2008. In other words, when

224 This section had been removed from this website on 9 April 2011 when the author revisited the site. Moreover, nothing could now be found relating to JieJin.

225 This is the „legitimised‟ web-search engine endorsed by the Chinese government after Google was expelled from China in 2010 due to its refusal to comply with the censorship policy imposed by the government. 280

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shareholders were liquidating those previously non-tradable shares into the markets between 2007 to 2008, which was believed by some researchers (as discussed earlier in this thesis) to cause the catastrophic drop in share prices, the public was not informed of this critical issue, as the public media went silent about it.

This kind of information asymmetry is extremely harmful to those smaller retail investors, especially domestic individuals, who are the major market participants. Wan (2005) indicated that retail investors – individuals investing their own funds, as opposed to institutional investors – accounted for 99.52 percent of total A-share accounts in China by the end of 2004. Those who have not been fully informed about the potential impacts of JieJin on the markets would hold the shares with unrealistic optimism, misled by the media, when the markets started to fall. A survey conducted by Phoenix News Service – the biggest Hong Kong-based broadcasting company – shows that 88.6 percent of investors had a loss from A-share trading in 2008, of whom 48 percent lost over 50 percent of their capital (Phoenix News 2008). It should also be noted that there is no information regarding the profits that the state has gained from selling off those state-owned shares.

In terms of the long-term development of capital markets, the reform seems to have liberated the listed companies from the government control in only a limited way, because no matter what investors‟ expectations from this reform, the state can still be the dominant shareholder in those listed companies. This has been actually stipulated in another document released by the CSRC on 23 August 2005:

The Share Reform is designed to float the former non-tradable shares rather than for the purpose of unloading state-owned shares through the open market…. The controlling shareholder of the state-controlled listed company shall determine a reasonable minimum stake in the listed company under its control in light of the national layout and structural adjustment strategy with respect to the public sector economy. State capital shall be persistently maintained to the extent that it holds dominant control and acts as the leading force in sectors that are vital to the national economy and public welfare, as well as in the state-controlled listed companies that are fundamental and the pillar for the national economy. Where necessary, the state-owned shareholders may increase its stake in such listed companies 281

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through buying shares in the open market. (Chinese Securities Regulatory Commission 2005, n. p.)

This is also a concern that Wang (2005, p. 180) predicted before the reform in his PhD study: “those shareholders of non-tradable shares would sell those shares high, and buy back low to maintain the control”. If the state intends to maintain the control, the SSSR has very little effect in terms of accomplishing its proclaimed purpose: changing the ownership structure of Chinese listed companies through converting the non-tradable shares into tradable ones. Instead, it is highly likely that those shares are „freed‟ in name but still controlled by the most powerful agent. And during the reform process, the large amount of retail-investors endured the costs of information asymmetry and hence the market manipulation.

7.6 Summarising the Social-Practice Analysis

This chapter has undertaken the third layer (social-practice analysis) of CDA framework, which seeks an „instantiation‟ of discursive practice within social life to make sense of the discourse that people use to represent and/or recreate certain social realities. This analysis has been conducted within a Chinese context.

The first issue investigated is the discourse associated with the keyword „relevance‟. The rationale of being „relevant‟ has been a major referential point that supporters of FVA draw upon. This chapter has explored the assumptions that facilitate this belief with reference to the practical „reality‟ of the assumptions in China. It is argued that the claims of „relevance‟ are largely embedded with misconceptions about resource allocation and the mediative function of financial markets. By investigating these assumptions in the institutional settings of Chinese capital markets, such as the takeover mechanism and the signalling role of share prices, this chapter has sought out possible alternative meanings that contradict and thereby defy this generalised knowledge of FVA.

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The second keyword that this chapter has examined is „reliability‟. This has been approached through revealing a discursive change within the IASB‟s discourses as a significant social practice that closely relates to the notion of „reliability‟. By shifting the discourse of „reliability‟ to that of „faithful representation‟, the standards-setting body is discursively creating a boundary for legitimising the „estimation‟ in its framework and possible errors that follow in the accounting practices. As shown in this chapter, the attribute of „reliability‟ is indeed a difficult barrier for FVA to overcome, as shown by concerns from accounting researchers and practitioners both inside and outside China. By showing the contextual „differences‟ of Chinese society as represented through alternative Chinese discourses, this chapter has revealed and challenged the „control‟ of mainstream discourses in China that try to sideline the problem of „reliability‟ in a fair-value-based measurement framework.

In light of the discussion of neoliberalism and financialisation, this chapter has provided more evidence of the social practices of implementing FVA in Chinese markets. The volatility that has been manifested in Chinese capital markets as a result of using FVA since 2006 exemplifies the inherent uncertainty and volatility of financial markets discussed in Chapter Six. The story of ST ChangKong as a real-life example further demonstrates the „misinterpretation‟ of accounting information by the markets and its disrupting effects. The alternative discourses from dissenting practitioners and academics identified from other forums than the mainstream outlets form further evidence that reflects the failure of mainstream discourses in representing the „difference‟ involved in interpretations of fair-value-based accounting practices in China.

The last section of this chapter has centred on the political significance of neoliberal theories and contradictions that previous chapters have advanced. The social practice of Chinese capital markets is chosen as the key area for the third layer of CDA due to the fundamental position of the „market‟ in theories of neoliberalism, FVA and IFRS. The investigation into Chinese capital markets has explored how an accounting technique can be the handmaiden of neoliberalism, pushing forward an image of a market that is belied by its 283

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underlying architecture. The analysis shows that these markets have been manufactured and tempered by the SSSR and the accompanying regulatory intervention from the Chinese government. It demonstrates that the public interest has not been served by the volatility brought into Chinese capital markets due to the reporting earnings under FVA, and that there are problems with the claim that financial reporting based on „fair value‟ are in fact derived from active and free markets. This exploration points to the broader purpose of FVA in China and the consequences of neoliberalised public policies that redefine the global and domestic politico-economic order.

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8 Chapter Eight: Summary and Reflections

This chapter provides an opportunity to summarise the key issues that have been raised in the adoption of IFRS in China, and the possibilities that this may have for the future development of accounting in response to the neoliberal context. Accordingly, this chapter revisits the ideas put forward in previous chapters and reflects upon the implications and the overall importance of the research to the field of study.

8.1 The Convergence of IFRS in China

Primarily, this is a thesis about changes in accounting in China, with a particular focus on its latest reform in accounting standards-setting. The current CAS, released in February 2006 and effective since January 2007, represents the convergence of CAS with IFRS. Given the substantive difference between the new CAS and its previous version, the convergence of IFRS was viewed as a „bold‟ or „milestone‟ step unprecedented in China‟s accounting standards-setting.

The Chinese government‟s rationale for the convergence of its accounting standards mirrors the theories that have driven the establishment of international accounting standards in contemporary Western societies. It suggests that the implementation of IFRS would enhance the transparency and comparability of general-purpose financial statements across international boundaries. Proponents of IFRS also argue that consistent financial information would reduce the costs of cross-border financial reporting for corporations and facilitate the movement of funds in global capital markets (International Accounting Standards Board 2005a, Tweedie 2005). As noted in the discourse of high-profile figures at both the international and national levels, establishing and improving a single set of high-quality global accounting standards is the logical consequence of the trend of economic globalisation (see Chapter Five). According to the IASB, all accounting standard-setters should continue to work toward this goal (International Accounting Standards Board 2005a).

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In spite of the controversies that have been vigorously debated within accounting communities, the ongoing progress of the IFRS harmonisation project has been remarkable. With over 100 countries across the world embracing the IFRS, this international collaboration presents a significant topical area for both accounting researchers and practitioners. Given the unique social and political environment in China, the convergence offers an excellent opportunity to examine the development of IFRS in a different social context. It is interesting to know how the IFRS has been implemented in China and what effects this has brought into China‟s broad socio-economic transformation. This is, as well, an important area of research that might provide further insights on the far-reaching influences of the internationalisation of accounting standards at a broader level. To fill the gap (see Chapter Two), this thesis has contributed to this emerging area of study with a systematic review of the convergence project in China.

8.2 An Inter-disciplinary Approach – Applying CDA

As described in its early chapters, this thesis adopts an alternative approach to accounting research, which is still dominated by positivism. This thesis, then, can be viewed as an attempt to overcome some of the limitations of positivism that alternative researchers (e.g. Tinker et al. 1982, Chua 1986a, Williams 1989, Funnell 2001, Young 2003, Hopwood 2007) have identified. Accounting is not seen as a neutral technology, but as “perpetuating an ideological, managerial bias and as bolstering unequal economic relations” (Chua 1986a, p. 623). For instance, particular concepts of value became dominant because they benefited the interests of dominant groups in society during a particular period, such as the prevalence of the notion of fair value as demonstrated by this thesis. While a positivist epistemology, according to Funnell (2001, P. 60), “may see it as a sign of methodological integrity to give exclusive priority to content over context in the search for meaning”, the alternative approach explores the knowledge at the deeper historical, social and philosophical levels to understand the role of accounting in complex contexts. Following up this call of negotiating such relationships in a variety of ways, this thesis highlights the discursive partiality in the communicative

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process upon which we „construct‟ the research topic and how language mediates our access to the possibilities of building up a more socially responsible accounting practice.

The thesis is also built upon the particular ontological belief that the research topic under investigation does not exist as an external reality without the influences of certain social discourses, or without reference to history, and certainly without being filtered through our understandings of foundational philosophy, morality and ideology. For instance, FVA does not present an independent reality with an ultimate „real‟ existence to be discovered by people; rather, it is more about the way in which we represent this technique, within which it is abundantly sign-posted, debated, imagined and contested. In this sense, “discourse denotes social struggles to operationalise certain „knowledge‟, facilitating the emergence or non-emergence of certain ideas, practices, thoughts and processes” (Andrew 1999, p. 75). Discourse, therefore, is conceptualised in this thesis as affecting other facets of the social as well as being shaped thereby, with the political and ideological aspects of the interaction between social structure and discourse.

Fairclough‟s CDA offers an ideal methodology for this thesis to explore both the conceptual constructions of the event and the practical effect in a systematic way. As reviewed in Chapter Four, adopting CDA as a methodology framework is rather a new phenomenon in accounting research. This thesis has attempted to exemplify the application of this form of discourse analysis in an accounting context to enrich the current understanding, and calls for more awareness of the role that language plays in accounting practices. This is also valuable for further critical research in accounting, finance and related areas, from a pedagogical perspective.

More specifically, this thesis has focused on the discourses of the convergence and FVA in terms of its social conditions and effects at various levels (situational, institutional and societal) within the three-layer analytical framework suggested by Fairclough. At the first layer (textual analysis), discourse is perceived in a more linguistic manner as „text‟ that represents the world. According to the second layer (discursive practice analysis), discourse is 287

a mode of practice that is shaped by socio-structural conventions, norms and codes in signifying and constructing the world. It holds that the way in which a text is framed can have a substantial influence on behaviour; as does the way texts are interpreted and to what effect this interpretation is influenced by other contextual factors. The third layer (social-practice analysis) highlights the practical exemplification of discourse to reinforce its political, and especially ideological, implications. As well as being shaped by the social structure, discourse is perceived as helping construct social identities, social relationships between people and systems of knowledge and belief by naturalising particular power relations and ideologies (Fairclough 1989, 1992). This enables a more „critical‟ discourse analysis than its traditional usage in linguistic studies.

8.3 Neoliberalisation and Accounting Change

Both the critical approach of accounting inquiry and CDA that this thesis adopts focus on the broad social, political and ideological contexts in which the research topic has emerged. This has also enabled a theoretical exploration that calls for a critical review of the engagement of „free-market‟ assumptions in international attempts to unify accounting regulations at the global level. It is widely recognised that the belief in a „free-market‟ orientated social system has been the primary force that has shaped different aspects of contemporary societies. In spite of its significance, this ideological dimension of the convergence project has been largely absent from the current accounting literature. This is considered problematic, because without an understanding of this layer of the globalisation project, it would be difficult to detect the long-term damages this accounting movement brings about in a societal level.

8.3.1 Neoliberalism and Financialisation

In a general sense, free-market ideology has dominated world socio-economic history since the 18th century. From Adam Smith‟s view of the „invisible hand‟, to the theories of Nobel Laureates Hayek and Milton Friedman, the hegemony

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of the free-market has been promoted extensively. The view proposes that the market should control the production and distribution of goods and services with only limited interference from the state. The last 40 years (from 1980 to 2011) have witnessed the proliferation of a particular form of this political- economy belief, which is often described as neoliberalism.

Neoliberal theories suggest that markets are superior to other social mechanisms for allocating resources and organising the economy, which has provided a strong rationale for resistance to state-interventionist theories such as the Keynesian approach during the early stages of the neoliberal era (Harvey 2005). This kind of economic efficiency, according to neoliberals, enhances overall output and improves living standards for all people because the improved economic opportunities will „trickle down‟ to the poorest (Johnston 2005). A further extension of this doctrine argues that the globalisation of free markets is the best way to extend these benefits to the whole world.

Although neoliberalism promotes less states intervention and more market freedom, in practice it operates very differently. According to critics (Rapacynski 1996, MacEwan 2005, Munck 2005, Gamble 2006, Ong 2006, Harvey 2007), neoliberals actually promote a different type of state intervention to overcome the obstacles and resistance to the institutions of a free market. This has been manifested in the rules and policies imposed by neoliberal states, such as massively privatising public assets, deregulating financial markets, abolishing institutional protection for labour, opening up global capital markets, abandoning government responsibility in social-welfare provision, and so forth. The establishment of these „ideal‟ conditions for free markets to flourish has always been a contested political process, and not a natural event as neoliberals have claimed (Munck 2005).

In practice, following neoliberal policies, a new form of capitalism is facilitated that profoundly alters the public and private sectors, as well as lifting restrictions on the way businesses conduct themselves nationally and internationally. All these could be viewed as a shift in power relations between capital and labour. Instead of benefiting all people as a whole, ample research 289

(as this thesis has referenced) demonstrates the destructive effects of neoliberal policies in many countries, where social inequalities and concentrations of wealth and power have surged (Harvey 2005, Johnston 2005, Shaikh 2005, Philion 2007).

On the global stage, as this thesis has illustrated, neoliberal deregulation has created an ideal institutional framework for the rising of financialisation in global economies. It has been pointed out that the shift of power and influence from the old manufacturers to the new sectors of capital, especially in finance and banking, has been a central feature of the neoliberal change since the 1970s (Harvey 2005, Robison 2006). Harvey (2005, p. 33) wrote that:

The support of financial institutions and the integrity of the financial system became the central concern of the collectivity of neoliberal states (such as the group comprising the world‟s richest countries known as the G7). In the event of a conflict between Main Street and Wall Street, the latter was to be favoured…. While the slogan was often advanced in the 1960s that what was good for General Motors was good for the US, this had changed by the 1990s into the slogan that what is good for Wall Street is all that matters.

The policy response to the GFC and its impact on both Main Street and Wall Street saw an acceleration of state intervention to ensure the ongoing survival of both institutions. Much of this was couched in terms of „social benefit‟ whilst under-reporting the long-term social debt that resulted from risk- exposed capital markets seeking to minimise the consequences of excessive financialisation226.

8.3.2 China’s Reform Path

The reform path that China has undertaken since the late 1970s has aligned itself with this broader neoliberal movement. The extant literature illustrates the following major characteristics of China‟s economic reform: 1) the establishment, firstly, of „markets‟ in the economy that adhere to a central- plan and public ownership (Shirk 1993, Solinger 1993, Wang 1994); 2) the expansion of the markets by fostering international trade and opening up

226 More details of the rising power of finance are provided in Chapters Three and Six. 290

domestic markets for overseas capital (Lardy 1995, Gao 1996, Prasad & Wei 2008); 3) the massive privatisation of public assets and SOEs (Krug 1997, Song 2004, Guthrie 2006); 5) the substantial withdrawal of the government from social-welfare provision (Wang 2003, Harvey 2005, Ong 2006); 4) active participation in the world economy by seeking membership of international organisations such as the WTO (Garnaut et al. 2001, Song 2004); and 5) the voluntary convergence of domestic standards with international ones, such as the IFRS (Zhang et al. 2009a). The signal being sent by these activities is that China wants to embed its new economic system in a more „free-market‟ pattern. Positioning this in the neoliberal context, China has been deliberately establishing a particular type of institutional arrangement that has the illusion of „freedom‟.

8.3.3 FVA and Neoliberalism

Given the focus of this thesis, FVA exemplifies the penetration of neoliberalism and financialisation into accounting. This thesis has demonstrated that the increasing importance of those financial instruments and the shift into high- tech and information-orientated economies have significantly influenced the rapid progress of accounting standards for fair-value measurement. Theoretically, FVA assumes a significant faith in the market mechanism, aligning it with the kind free-market fundamentalism that has been propagated by neoliberalism. It is, therefore, suggested that FVA is an accounting method that is heavily invested with neoliberal values, and it is a manifestation of neoliberalism that has been promoted and actively adopted by accounting regulators across the world despite its shortcomings and its volatility. This thesis, as summarised in Section 8.4, has contextualised these assumptions and arguments relating to the damaging effect of neoliberalism on accounting within the processes of promoting and promulgating the IFRS and FVA in China.

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8.4 The Main Observations Revisited

8.4.1 A Suspicious Discursive Consistency

At the discursive level, as shown in Chapter Five, the adoption of IFRS has been highly praised by the key players with influential discourses circulated among mainstream media outlets. The new CAS signifies, according to high- profile figures from international accounting standards-setting bodies, an enormous advance that is logical and beneficial for the development of both the Chinese economy and World capital markets. While this view has received considerable attention outside of China, a „suspicious‟ discursive consistency has been identified within China itself. The Chinese government, mainstream media and leading Chinese academics, who have both the political power and the ability to influence knowledge, have effectively created a favourable „social identity‟ for the convergence and FVA. The multiplicity of the meaning underlying this massive social event is overtly obscured.

The analysis of keywords such as „fair value‟, „economic reform‟, „market efficiency‟, „income realisation‟, „users‟, „value relevance‟ and many others, provide clues as to the assumptions of the discursive practice, which have rarely been challenged and decoded as a category for debate. From the perspective of CDA, as Chapter Three illustrates, the marginalisation of „alternatives‟ within dominant discourses has significant effects on the construction of knowledge, and the meanings given to the dominant discourses are the product of complex and contesting realities, social struggles and mediations. Exploring the reasons and causes for this process of „silenced‟ or limited access, as the CDA framework directs, helps expose the socio- cognitive aspects of text production and interpretation that have naturalised particular power relations and ideologies. The analysis, as has been explained in Chapter One and Chapter Five, is contextualised within a key aspect of the new CAS – the adoption of FVA.

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8.4.2 The Discursive Position of Fair Value

The analysis begins from the discourses associated with the broader IFRS harmonisation project of the IASB and FASB. A closer examination of some of the keywords reveals a shift within this discourse space that can function to frame certain meanings. Chapter Six questioned the discursive position of the notion of fairness that FVA contains. The connotations of the label „fair‟ are influential because „fair value‟ is a powerful and persuasive expression. It is difficult to counter an argument for „fairness‟ and correspondingly, a reporting method that relies on the use of „fair‟ value. The analysis shows, however, that „fair value‟ is essentially a particular version of „current value‟ with strong connotations of the market mechanism. The „fair‟ value, according to the description, is a price that could be concluded between market participants. In other words, the price determined by the market is the „fair‟ price. This essence becomes less obvious when this concept is represented discursively with the new term „fair value‟ a very strong and heavily value-loaded label.

8.4.3 The Shifted Notion of Income Realisation

There have been other narratives that are crucial to the evaluation of FVA. In reading and contextualising relevant discourses, this thesis has indicated that the recent move of the IASB and FASB requiring the statement of comprehensive income on the basis of changes in the value of assets and liabilities lets FVA outweigh over the traditional historical-cost-based accounting methods. The standards-setting bodies have actively attended to discourses in favour of a particular concept of „income realisation‟ that frames „income‟ as an enhancement of investor wealth. Because FVA provides more up-to-date information of financial position, it is assumed to satisfy this new expectation of „income realisation‟. As a result, the old theory that income measurement should be clearly attached to firms‟ real production by tying income with real operating performance has been sidelined in the current discourses. Accounting, in the selection of what to report and what not to, is devised in a way that accounts for the need of the „users‟ – owners of financial capital, as narrowly and covertly constructed nowadays.

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A critical reading of this discursive change has indicated that this kind of current-value measurement (FVA) and economic income realisation had been virtually disallowed in the accounting profession for some time. The wealth- enhancement concept of income had not been the mainstream practice within the accounting frameworks until the recent moves by the IASB and FASB. It is indeed a central issue that has been vigorously debated within the modern accounting profession. The traditional concept of income has been sidelined in the committees‟ discourse, which is significant to the discussion of FVA by creating a context that prefers FVA over other methods.

The recognition of early discourses (see Section 6.4.1) has challenged the prevailing „texts‟ that illuminated a favoured identity for FVA, because these discourses disguise the real performance of firms from financial statements with the value changes that occur on „paper‟. Because this approach, as this thesis has explained, caters to the interests of financial capital and the neoliberal economy, it is a shift that has been heavily shaped by neoliberal ideology, and it is one of the practical manifestations of neoliberalism in the accounting discipline. In light of the literature pointing to the damaging effects of the financialised neoliberal economy on the real production sectors, this thesis has suggested some of the technical problems of FVA, such as the distortion of the price-discovery process and the mis-pricing of risks, that work in the interest of neoliberal financiers (see Section 6.5). The practical manifestation of some of the problems, such as volatility, has also been exemplified through investigating into the social practices of FVA in Chinese markets (see Section 7.4). In doing so, the analysis has given real-life examples, such as the volatility in Chinese firms‟ financial reporting and previous market scandals, that contradict the bias influenced by an idea of market benevolence.

8.4.4 Exploring ‘Relevance’

The rationale of value determination being relevant has been identified as a major referential idea that supporters of FVA draw upon. This thesis has attempted to deconstruct this notion by re-examining its two fundamental assumptions. It is pointed out that belief in the value relevance of FVA is 294

embedded with problematic, yet unquestioned, assumptions about financial markets and the benefits of the market mechanism. Misconceptions have developed about the function of financial markets in resource allocation and in reflecting the underlying economic substance of the real economic system. A closer acquaintance of China‟s institutional settings (see Section 7.2), such as the signalling role of share prices and the takeover mechanism in China, have further demonstrated the contradictions and controversies of those assumptions. This has challenged the discourses that have sought to explain FVA with the bounded claims of being „relevant‟.

8.4.5 Exploring ‘Reliability’

This thesis has also demonstrated a covert attempt by the IASB and FASB to facilitate fair-value-based accounting practices through a discursive shift that replaces „reliability‟ with „faithful representation‟ (see Section 7.3). This introduced ambiguity in an attempt to legitimise „estimations‟ and possible errors that may follow new accounting practices. From the perspective of CDA, it will become difficult to criticise FVA based on the notion of „reliability‟ in the future because the word „reliability‟ is no longer part of the language endorsed by the authoritative standards-setting bodies for communicating or describing the qualitative characteristics of financial-reporting information. Consequently, when „estimation‟ becomes synonymous with „faithful‟ and „mark-to-market‟ becomes „fair‟, the potential problems of these accounting standards and practices become less clear.

Through the alternative discourses identified in China, this thesis has recognised some contextual „differences‟ that highlight the practical difficulties of applying FVA in China. In doing so, the discussion has challenged the singularity of mainstream discourses. This opens up the possibility that meaning can be challenged and the discursive domination that obscured the knowledge of FVA can come into question.

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8.4.6 The Political Implications of Fair Value Accounting and the Split Share Structure Reform in China

The examination of the institutional settings of Chinese capital markets, such as their historical development, the most recent SSSR, etc. (see Section 7.5), forms an important part (discourse as social-practice analysis) of the three- layered analytical framework of CDA that this thesis adopts. The investigation has illustrated that the movement of the markets has been subject to heavy state intervention, and the share price of Chinese capital markets renders very limited information about the performance of the listed firms and the overall economy.

FVA, however, requests financial-statement preparers to quote this market price as „fair value‟ and carry the resulting value changes into the income statement. This is problematic because this market price is not a fair indication of a firm‟s financial position, but projects mostly the distorted share-price movements caused by the strong intervention of the Chinese government. The adoption of FVA, however, is important as it signals a technical commitment to the ideals of neoliberalism: for FVA to work, it requires a free and active capital market. This thesis argues that FVA has sustained the neoliberal transformation in China, as it has legitimised the transformation of the market and has supported the appearance of an efficient market in the terms created within a neoliberalised global capitalism.

This process identified in China reinforces the divergence between the theory and practice of neoliberalism that many political economists have argued. The Chinese government justified the reform as necessary to create greater welfare for all people in China. But in practice, FVA has produced significant volatility in the Chinese capital market which has only benefited a small number of well positioned „informed‟ investors. The proclaimed market efficiency that could be achieved by the SSSR is questionable as the government still controls the proportion of shares it would like to maintain. Given the level of media censorship, the information about the reforms was limited to a „fee paying‟ elite within China. This made it impossible for the vast majority of the Chinese population, including retail investors already active in the market, to actually 296

participate in the market for the new shares. As a result, rather than advancing the public good in China, the adoption of FVA and the SSSR have provided another opportunity to reposition powerful political and economic elites. The process has reconfigured capital markets in the image of those in advanced capitalist economies, but is devoid of the regulatory and socio- political context apparatus to rationalise its relevance and reliability in the Chinese context.

8.5 Future Developments

At the time of this thesis being finalised, the IASB and FASB announced the completion of the first phase of their joint project to develop an improved Conceptual Framework for IFRS and US GAAP (International Accounting Standards Board 2010). Described as “a sound foundation for future accounting standards that are principles-based, internally consistent and internationally converged” (International Accounting Standards Board 2010, n. p.), the general Conceptual Framework represents a considerable step forward towards the final goal of a „real‟ globalisation of IFRS, with the US on board. Given the scope of possible influences and complications, this is a significant topical area for research. Despite much discussion of „global accounting‟, there has been little discussion of the neoliberal ideology in this accounting standard harmonisation project and its implications for global financial reporting.

By connecting the topics of IFRS harmonisation, China‟s accounting change, FVA and neoliberalism, this thesis has contextualised accounting change within the broader political economy and highlighted the importance of accounting as part of the architecture of contemporary neoliberalism. The shifts in accounting techniques identified in this thesis show the neutralisation of bias and highlight a dominant set of values which do not address broader social concerns. In this sense, accounting has the potential to play a pivotal role in repositioning social emphasis to ensure economies work in the interests of the community at large. As such, further consideration may be given to the process in which the „symbolic universe‟, like neoliberalism,

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comes to dominate in other contexts and its capacity to refocus accounting practice on the needs of global elites. In this way, socio-economic crises led by global capitalism can be contested in new and insightful ways.

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APPENDICES

Appendix 1

The Chinese Uniform Accounting System227

A. The chart of accounts

Fifty accounts were redesigned by the Ministry of Finance. These can be classified into two categories: fund applications228 and fund sources229 (Tzu-Jin Lei-Yuan). Thirty of the redesigned accounts belong to the former category and the rest to the latter. For convenience, all fund application accounts are given a general title of „assets‟ while fund sources are termed „funds‟. Among these accounts, 16 were introduced for the first time in order to further strengthen the economic management of state enterprises, to improve accounting measurements, to tighten the control of the cost of products and to provide accounting information more economically, efficiently and effectively.

B. Form and content of accounting statements

Chinese accounting statements can be divided into three categories according to their economic nature: (1) statements reflecting the fluctuations of fund applications and fund sources; (2) statements reflecting the cost of main products; and (3) statements reflecting the performance of an enterprise. In accordance with the accounting law and regulations, industrial enterprises should submit to the superior administrative departments monthly, quarterly or annually: (1) a balance sheet;

227 This section is based on Zhou, Z.H. 1988, 'Chinese accounting systems and practices', Accounting, Organizations and Society, vol. 13, no. 2, pp. 207-224. 228 Chinese text: 资金应用. 229 Chinese text: 资金来源. 338

(2) an income statement; (3) a statement of cost of commercial products; (4) a statement of the unit cost of main products; (5) a statement of the total cost of goods produced; (6) a statement of goods sold and sales revenue; (7) a statement of fixed assets and current funds; (8) a statement of profit distribution. In order to support the reform of the Chinese economic structure and effectively improve national statistics, state enterprises are also required to prepare a statement of the net value of industrial products, which will be mentioned later. Among these statements, the most important are the balance sheet, the income statement and the statement of the unit cost of main products.

Balance sheet In comparison with its Western counterpart, there are significant differences in the form, structure and contents of the Chinese balance sheet. The first relates to the theory that total fund applications must equal total fund sources. In a broad sense, the meaning of fund applications is very similar to that of assets, and fund sources might be seen as being comparable to the concepts of equity and liabilities that are used in Western countries. From the perspective of political economy, however, equity in Western countries represents the private ownership interest and the claims of creditors. In China, in contrast, total fund sources are owned by the state on behalf of the people. In order to emphasise the socialist nature of state-owned enterprises and to avoid any misunderstanding that might occur because of the use of Western accounting terminology, the Ministry of Finance decided to use the fund terminology rather than assets and equity.

The second difference relates to the structure of the balance sheet. Whilst the accounts of fund applications are shown on one side and the accounts of fund sources appear on the other side, the balance sheet itself is based on the principle that specific funds can be allocated for specific purposes. For example, fixed fund sources cannot be used for 339

the purchase of raw materials, nor can current fund sources be used to pay for the acquisition of fixed assets. As a result, the balance sheet can also be divided into three sections on both sides: fixed assets, current assets and assets for specific uses on one side and fund sources from the state and retained profits, current liabilities and funds for specific purposes on the other side.

Income statement The structure of the income statement is roughly the same as that of Western countries. It starts from the sale of products and ends with a figure for net profits. But there are a number of specific regulations for preparing this statement that introduce a number of important differences. Sales revenue, for example, is recognised at the time of cash receipt or the date of delivering goods. Moreover, state enterprises are permitted to offset their short-term loans, which are used to improve productivity or replace existing fixed assets, directly against their operating profits before these are assessed for tax. Finally, certain supplemental information has to be attached to the income statement for superior authorities to assess the performance of the unit. Examples include the ratio of the total profits to the total fund sources and a detailed list of non-operating income and expenses.

Statement of the unit cost of main products. This statement mainly reflects changes in the cost of main products. The cost of products is divided into two categories: the cost of comparable products and the cost of non-comparable products. The distinguishing attributes relate to the structure, the content and the quality of the products. The reduction of the costs of comparable products is usually seen as one of the main indicators in assessing the performance of state enterprises.

340

Chart of Account

341

Balance Sheet

342

Income Statement

343

Appendix 2

The Structure of China’s Government Administration

CENTRAL GOVERNMENT

Central Cities Autonomous Provinces Beijing, Shanghai, Regions Tianjin

District County City

Township Town District County

Township Town

The Central Organs of State Power

National People's Congress

Standing Committee of National People's Congress

President of the People's Republic of China

Supreme People's Supreme Central Military State Council Procuracy People's Court Commission

Ministries & Commissions

The diagrams are derived from Hudson (2000, p318).

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Appendix 3

Fairclough’s Approach on the First Layer (Textual Analysis) of CDA

Fairclough (1989, pp. 110-2) provides a list of 10 main questions and a number of sub-questions, that can be used when analysing a text. The questions are divided into three main groups:

1. Vocabulary: 1.1 What experiential values do words have? 1.1.1 What classification schemes are drawn upon? 1.1.2 Are there words which are ideologically contested? 1.1.3 Is there re-wording or over-wording? 1.1.4 What ideologically significant meaning relations are there between words? 1.2 What relational values do words have? 1.2.1 Are there euphemistic expressions? 1.2.2 Are there markedly formal or informal words? 1.3 What expressive values do words have? 1.4 What metaphors are used?

2. Grammar 2.1 What experiential values do grammatical features have? 2.1.1 What types of process and participants predominate? 2.1.2 Is agency unclear? 2.1.3 Are processes what they seem? 2.1.4 Are normalisations used? 2.1.5 Are sentences active or passive? 2.1.6 Are sentences positive or genitive? 2.2 What relational values do grammatical features have? 345

2.2.1 What modes are used? 2.2.2 Are there important features of relational modality? 2.2.3 Are the pronouns we and you used and if so, how? 2.3 What expressive values do grammatical features have? 2.3.1 Are there important features of expressive modality? 2.4 How are (simple) sentences linked together? 2.4.1 What logical connectors are used? 2.4.2 Are complex sentences characterised by coordination or subordination? 2.4.3 What means are used for referring inside and outside the text?

3. Textual structures 3.1 What interactional conventions are used? 3.1.1 Are there ways in which one participant controls the turns of others? 3.2 What larger-scale structures does the text have?

346

Appendix 4 A Brief Explanation of Chapter Seven

7. Chapter Seven: Contextualising Fair Value Accounting in China

7.1 ‘Value Relevance’ of Fair Value Accounting

The argument that FVA provides the most relevant information to users of accounting information is an influential idea that has been supported by the mainstream discourse. This section reiterates this rationale in more detail to establish a context for later analysis.

7.2 Exploring ‘Relevance’

7.2.1 Misconception about Resource Allocation in Capital Markets

7.2.2 Misconception about Mediative Function of Capital Markets

Sections 7.2.1 and 7.2.2 challenge the „relevance‟ by questioning the two major misconceptions of financial markets underlying the mainstream theories and discourses that support FVA.

7.2.3 The Signalling Role of Share Prices in China

7.2.4 The Takeover Mechanism in China

Sections 7.2.3 and 7.2.4 show the real situation (social practices) of Chinese capital markets in terms of the two misconceptions discussed previously to contest the mainstream discourse.

7.3 Discursive Complexity of ‘Reliability’

Section 7.3 examines the social practices associated with a critical issue that has been sidelined in the mainstream discourses of FVA: the attribute of „reliability‟ as a qualitative characteristic of useful financial information.

7.3.1 The Discursive Shifting of ‘Reliability’

Section 7.3.1 demonstrates how the IASB shifted the focus of reliability in its working agenda through reading its relevant discourses, such as using the new term „faithful representation‟.

7.3.2 Destabilising ‘Faithful Representation’

Section 7.3.2 evaluates the problem of this shift by the IASB by positioning the term „faithful representation‟ within the neoliberal financialisation context.

347

7.3.3 Alternative Discourses to ‘Reliability’ in China

Section 7.3.3 further contests the issue of „reliability‟ by presenting more alternative discourses identified in China, which shows the controversies it has caused in social practices in the Chinese society.

7.4 Re-examining ‘Uncertainty’ and ‘Volatility’

Section 7.4 responds to what has been presented in Chapter Six in terms of the problems of FVA within the context of neoliberalism and financialisation with specific references to the social practices in Chinese capital markets.

7.4.1 An ‘Extra’ Volatility

7.4.2 The Myth of ST Changkong

7.4.3 Concerns of Earnings Management

Chapter Six has pointed out the inherent uncertainty of financial markets and the volatility it introduces into financial reporting by FVA; these have not been spelled out in mainstream discourses. This section contextualises the proposed problems within Chinese capital markets. The social practices (real-world examples) provided exemplify the problems as part of the third layer of the CDA framework.

7.5 More Political Significance

Section 7.5 identifies the political significance of the mainstream discourses that emphasise the importance of the markets. This analysis is conducted through a comparison between what happened in practice and what has been presented discursively in China.

7.5.1 A Critical Reading of Chinese Capital Markets

7.5.2 The Dominant Player and Its Reform Agenda

7.5.3 The Split Share Structure Reform

Chapter Six has proposed the problems of this market fundamentalism with reference to the problems of neoliberalism. This section contextualises these problems within China with real-world examples of how actual practices of Chinese capital markets are different to what mainstream discourses or theories assume. The contestation reinforces the political nature and problems of the neoliberal value system.

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Appendix 5

A Snapshot of the Website http://finance.sina.com.cn

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