SOE reforms will boost China’s valuation sector

By Jiang Wei Source:Global Times Published: 2015-9-17 21:23:01

Industry no longer prioritizes State-sector benefits

Illustration: Peter C. Espina/GT

China's central government recently released guidelines for another round of reforms of State-owned enterprises (SOEs), aiming at further improving their functioning in the economy. One of the key aspects is to diversify the ownership structure of the SOEs, which will surely involve a huge amount of mergers and acquisitions (M&As), as well as sales and purchases of assets. Given that the existing SOEs are worth up to $15 trillion according to media reports, the new reform process could bring lots of business for the valuation profession, which will in turn contribute to the establishment of an efficient pricing mechanism for asset transfers, so that the loss of State assets can be prevented.

Despite the deregulation initiative launched by China's government in recent years to streamline its administrative measures, cut government reviews and approval items and delegate more power to self-regulated professional bodies in the economy, valuation still remains a mandatory requirement during sales and purchases of State-owned assets, such as asset transfers in M&As. Other business activities that require mandatory valuation include IPOs, land and property transfers and the setting up of foreign joint ventures.

China had almost 10,000 appraisal institutions, more than 100,000 registered valuers and over 300,000 people employed in the valuation profession by 2013, after only 27 years of development. Actually, the first valuation project in China only took place in 1988 when the equity of the Dalian Iron Mill was evaluated and a Sino-US joint venture was established.

China's valuation landscape is often regarded as segmented since the regulation of valuation services in China remains fragmented, given the control of various professional organizations and the clear separation between land and buildings and other types of assets in the valuation process. This is further complicated by the existence of over seven separate professional designations and the bifurcation of valuation standards of different professional bodies. Some even argue that the fragmentation of China's valuation industry may add to the confusion for foreign investors.

In my opinion, this is not the case. It would be better if we use the words "well-structured" to describe China's valuation scenario, as China's valuers are classified by their disciplines of, or expertise in, different types of assets. This is one of the advantages of a central planned economy, which often designs the structure first before it starts to initiate any new program. The benefit of such a structure is that valuers can focus more on their own disciplines rather than being regarded as a jack of all trades. It also means they can be complementary with each other as there is a clear distinction between them, making it easier for clients to employ valuers who can perform valuations well enough in certain areas of their specialty.

For example, China has a different designation for valuation of different types of assets, including certified public valuers (CPV) for assets in general, real estate valuers (REV) for property and construction, land valuers (LV) for land, valuers for mine rights (VMR), and price evaluators (PE) for price assessment in general.

There was a time when the role of the valuation profession was to safeguard national interests in the initial stages of SOE reform and prioritize the benefits of the State over other parties, leaving the other parties in a difficult situation on certain occasions. Things have improved nowadays, with every party being equal, and valuers providing independent, objective and fair opinions on the value of an asset. Investors and the general public have confidence that there is consistency, impartiality and accountability in the service offered.

Moreover, the competence of the valuers has been greatly improved thanks to the efforts made by professional organizations in the industry in developing their own standards and codes of practice, and in providing training and continuation development programs. For example, the China Appraisal Society (CAS) has released over 26 standards covering professional codes of ethics and practice norms, making it not only a leader in China's valuation profession, but also an active participant in global valuation affairs.

To further boost the valuation profession, efforts have been made to inaugurate an appraisal law since 2005. According to People's Daily, the third round of review of the draft law is now on the agenda of the top legislature and it is expected that the law might be released within the year if things go well.

While the new round of SOE reform will trigger greater demand for valuation services, there are other areas in which there is a growing need for the industry's services, including financial reporting and accountancy. There is also an increasing need for valuers to be involved in China's overseas investment, and to help with the progress of property tax valuation, indicating that there is plenty of space for the valuation profession to develop further.

The author is professor and head of the Department of Finance at the School of Economics at Shenyang University, and visiting research scholar both at Oxford University and Cambridge University. He is also a member of the Professional Board of the International Valuation Standards Council.

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