On April 9, 2009, the Ministry of Finance (MOF) issued Several Opinions on Strengthening the Management of Enterprises’ Financial Affairs in Response to the Current Financial Crisis. The Opinions note that some Chinese enterprises face weak overseas demand, increased investment risks, shrinking asset values, and lower cash flows; accordingly, the Opinions aim to guide enterprises through this rough period.
First, MOF encourages domestic enterprises to actively participate in the process of global resource reallocation, as well as transnational mergers and acquisitions. At the same time, MOF suggests that, before proceeding with an acquisition, an enterprise should carefully review its corporate strategy, financial status and risk tolerance, analyze the necessity and feasibility of the acquisition, and adhere to its internal decision-making policies and procedures while following all relevant laws and regulations. If a potential merger or acquisition involves foreign companies, the acquiring company should also pay attention to exchange rate risk and the laws and regulations of the country in which the investment is going to be made.
Second, MOF requires domestic business operators to be cautious when engaging in financial derivative-related transactions. The Opinions promote investment in financial derivatives as a way for enterprises to hedge market risks; however, MOF warns that enterprises should only invest in derivatives if they are conscious of the risks involved, have an internal control system for derivatives, make reasonable choices regarding the types of derivatives in which to invest, and control the transaction volume and time horizon. In addition, according to the Opinions, speculative actions are strictly prohibited, and enterprises must abide by the rules for trading derivatives.
Third, MOF expects Chinese enterprises to prudently offer external financial guarantee services. Given the deepening of the financial crisis and the mounting risks that enterprises face when providing such services, MOF suggests that enterprises take additional steps to investigate companies under consideration in order to gain greater insight into their operations and more fully assess their solvency. In addition, the Opinions recommend that enterprises establish sound review and approval procedures to evaluate companies seeking financial guarantees, as well as a complete risk control scheme for providing guarantee, mortgage and pledge services.
Fourth, MOF calls for enhanced management of accounts receivable and down payments. The financial crisis has put many export-oriented enterprises at particular risk of delayed or failed collection of their receivables. MOF thus requires enterprises to strengthen their management of order forms, increase the down payment percentage and objectively assess overseas clients’ credibility in order to reduce bad debt resulting from exportation. Moreover, enterprises should take precautions to detect potential default risks. It is worth noting that the Opinions do not mention accounts receivable factoring as a way for exporters to manage credit risks, though this is probably because factoring services are not widely used in China and are largely unaffordable for small and medium-sized enterprises.
In addition to the points above, MOF stresses the importance of cost control, inventory management and cash flow management. MOF advises that, in turbulent times, enterprises should reduce non-production-related expenses, such as administrative expenses, and tighten their budget with respect to raw material procurement. Moreover, to ensure that they have a sufficient amount of cash on hand, MOF expects enterprises to review and enhance their rules and policies for cash flow management and continually monitor their cash status. In trying to shrink their inventory, enterprises are also encouraged to expand their businesses into rural and emerging markets by, for example, taking advantage of the government’s policy to subsidize rural residents who purchase household appliances.
In a nutshell, though MOF makes several recommendations for enterprises to enhance their financial control, their Opinions are not concrete rules or policies. In the Opinions, MOF emphasizes the importance of enterprises’ internal control efforts in coping with the economic slowdown; at this time, however, MOF has not issued any favorable policies, such as tax benefits for business operators.
