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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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