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March 27, 2011

Hong Kong market prepares for greater competition

Licensed Mainland Chinese audit firms do not
expect an immediate increase in Hong Kong-listed client work as a
result of new H-share licences although there are still competition
concerns emanating from the island.

Big Four firms in Hong Kong have the most to
lose from the introduction of Mainland H-share licences but extra
competition could be neutralised by more work flowing in from the
Mainland.

In December, China’s Ministry of Finance (MoF)
issued 12 coveted H-share licenses that allow Mainland Chinese
firms the right to audit clients listed on the Hong Kong Stock
Exchange, a task that previously had to be carried by a licensed
Hong Kong firm.

Grant Thornton China vice chairman Xia Zhidong
said although the firm has more clients wanting to list in Hong
Kong, H-share work has not yet begun.

PwC China audit partner David Wu said the introduction of Mainland
firms into the Hong Kong market is an important development,
despite it bringing greater competition from mid-tier players,
because supervision and oversight will now increase.

One of the original concerns of allowing
Mainland firms to audit in Hong Kong was that they would fall short
of meeting Hong Kong’s strict auditing standards, but Wu said
greater oversight will enhance the overall quality of H-share
work.

BDO’s Hong Kong chief executive Albert Au said competition is a
worry for local firms, but this could be mitigated by the overall
pie growing on the back of Chinese economic expansion and more
Mainland companies issue IPOs in Hong Kong.

Au said the Big Four currently dominate
H-share audits and have more to lose from Mainland competition than
Hong Kong’s mid-tier firms. BDO Hong Kong, easily the largest
mid-tier firm, only audits two H-share licensed companies.

“If you look both in terms of numbers and market share being
audited by a non-Big Four firm, it would not be surprising that the
Big Four has captured the lion’s share. I would guess more than 90
percent of the H-share audits are Big Four. If these eight domestic
firms are going to gain an entry into this market the immediate
impact would imply the Big Four firm would have been eroded in some
way,” Au explained.

Au believes some of the concerns felt by Hong Kong firms are
misplaced as the MoF has made it clear Mainland Chinese firms are
not coming in to rob Hong Kong firms of clients.
The main objective is to enable Mainland firms to step into the
global arena and start auditing domestic enterprises that are
expanding abroad, inline with China’s ambition for Mainland firms
to expand globally with their clients.

“I think they want to leverage on the
experience of the Hong Kong profession. In fact one of there
criteria for picking up a H-share license is that the domestic
firms must have a local network firm in Hong Kong,” Au said

“For example, BDO has two firms, one in
Shanghai and one in Beijing, with an H-share licence and is working
very closely with us in dealing with any work coming out of their
licenses. This is with the intention of us helping them realise
their vision of getting their Chinese firms up to international
standard and gaining experience dealing with an international
marketplace. They also use it as a spring board to gain entry into
other international financial centres.”

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