China Restricts Access to Financial Information

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Credit checks and financial due diligence not available without permission of the target

Jun. 5 – China’s credit checking companies have apparently been indirectly requested to cease providing financial information on companies in China without the target’s prior approval of the data provided. This will impact upon the ability for businesses to accurately assess targets in cases of M&A and related due diligence work. Although no specific regulatory restrictions have been issued, companies such as Dezan Shira & Associates, which is involved in financial due diligence, have been issued with notices similar to the following from Chinese credit-check agencies.

We understand that financial information is very valuable in the assessment of the credit status of a business. However, you may already be aware that China is still lacking a clear legal framework about how and where to obtain financial information of a non-public company. Recently, it has been reported that there are more controls being implemented by relevant government authorities over the availability of financial information to our information sources. Many of our information sources have told us that they will stop trying to obtain financial information from relevant government authorities immediately. In the meanwhile, we have consulted the remaining information suppliers of ours and told them to follow the policy and instructions of relevant government authorities and not to try to obtain financial information in a way unacceptable to the government authorities.

Accordingly, we have to let you know regretfully that we will not provide detailed financial information in our credit reports unless such financial information is provided by the subject company in a willing way, or is obtained in a public way, or other legal ways.”

The soft way that this is being dealt with is a sign that the Chinese government may be concerned about the actual health of businesses in China. To restrict such data without any change to the regulations demonstrates the power the government has in inflicting pressure on agencies to restrict their activities.

As a result of this, China M&As and other due diligence work, such as checking partners in potential JVs, or in obtaining credit reports for the evaluation of credit lines in business, will be hampered. The good news is that, at present, this is only soft pressure and has not yet been backed up by legislation.

Concerning the health aspect of Chinese businesses, there are a number of aspects that impact upon this. One large reason may be the uncovering of the huge amounts of support, against WTO obligations, that the government provides to state-owned enterprises in international trade. This is also reflected in the struggle for control of audit reports where China has threatened imprisonment for auditors who reveal data to other governments, such as the case with subsidiaries of SOEs listed in the United States.

In terms of smaller companies, this can only be to protect their true status from being observed, which in itself is indicative that all is not well. The worrying side to this is whether or not such restrictions are the beginning signs of a wider problem within the Chinese economy and the inherent health of its businesses.

“It is still possible to conduct due diligence in China, however now more than ever you need the services of a firm extant in China,” comments Chris Devonshire-Ellis, founding partner of Dezan Shira & Associates. “Not being able to utilize the services of credit agencies is a blow, but there are other documented ways to ascertain the financial status of a company, including checks on business licenses, audit reports and capital verification certificates. Companies wishing to conduct due diligence in China should use on-the-ground firms to do so.”

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