Hong Kong exchange to take first sip of Tsingtao: Teresa Poole reports on a milestone in Chinese reform

IN 1903, when an Emperor still lived in the Forbidden City in Peking, British and German businessmen established a brewery in the eastern Chinese coastal city of Qingdao, using the local Laoshan spring water and imported German raw materials. The beer was popular all the way south to the bars of Shanghai.

Ninety years and a Communist revolution later, Tsingtao Brewery yesterday notched up an important milestone in China's long march towards economic reform, when it became the first mainland company to seek a Hong Kong stock exchange listing. Just as importantly, it is the first company to satisfy the rigorous requirements of Hong Kong's accountancy system and the colony's stock exchange.

Tsingtao (which was allowed to ignore the Communist transliteration of Qingdao to make the most of its valuable brand name) is the first of nine Chinese state industries chosen last October for direct listing in Hong Kong. That it has taken so long for any of the companies to produce a prospectus gives some idea of the clash of cultures when Western accountancy rules are imposed on a Communist country's state-owned factories.

According to K M Wong, a partner at the accountants Coopers & Lybrand in Hong Kong, the difficulties go beyond a difference in accountancy standards. It is as much about the attitudes of Chinese state companies to outside auditors and accountants.

'The sort of auditing we have in Western countries is alien to state-owned Chinese companies,' said Mr Wong, whose firm is auditing Guangzhou Shipyard, another of the nine. A veteran of dealing with Chinese companies, he is used to their ways. 'Most of the time they come up with questions like: 'Why do you need this document?' ' Requests for documents that may be fundamental to an audit are likely initially to provoke arguments that they are confidential and cannot be shown to outsiders.

The companies have had other priorities up till now. They are state industries operating within China's 'iron rice bowl' system in which providing health care and education for one's employees' families is as important as any notion of profitability. As such, they rarely keep their accounts in a fit state to impress outsiders. Mr Wong described one company reporting profits which, when Coopers had made the adjustments to international accountancy standards, was left with a significant loss.

According to Elizabeth Loh at Arthur Andersen, the accountants that audited Tsingtao Brewery, it took six weeks' fieldwork in Qingdao to prepare the accounts. With one product and a relatively simple corporate structure, the brewery is one of the most straightforward of the nine.

The differences in accounting philosophy can be enormous. Chinese state companies depreciate assets - buildings, equipment and so on - over 20 years even though they have an economic life of five years, Ms Loh said. There is no provision for doubtful debts, no concept of stock-taking, and foreign currency translation is done at the unrealistic official rate. The emphasis is on balancing the source of funding (the state) with how the money has been spent. 'They are not really profit-oriented,' Ms Loh summarised.

With its books now in order, Tsingtao Brewery is ready to hit the capitalist high road in a big way. It is issuing 317.6 million new 'H' shares ('H' for Hong Kong) at 3.836 renminbi each to raise HKdollars 859m ( pounds 76.7m).

It has already attracted the attention of Anheuser-Busch International, the largest brewer in the United States, which is taking 45 million shares in the new issue. Anheuser's stake also ensures that 25 per cent of the company's shares will be in foreign hands, enabling it to pay much- reduced tax rates for Sino-foreign joint ventures.

The 'H' shares trade in Hong Kong dollars on the local exchange and must be purchased in the same currency. Just to add to the companies' problems, the Chinese company spiced up the exchange rate factor at the beginning of this month by removing the ceiling on renminbi trading on the official markets. Since then the rate has slumped from RMB8.20 to RMB10.80 to the US dollar, providing a warning for investors in companies where profits are mainly renminbi-denominated.

Tsingtao Brewery is more insulated than most from this problem because 32 per cent of its production was exported, or in effect sold for foreign exchange, in 1992. It also offers an internationally known brand name.

The potential for big growth in China is even greater. China's economic reforms have created an army of new beer drinkers along with the legions of new entrepreneurs, and beer consumption has risen more than fourteenfold between 1980 and 1992. Tsingtao, a market leader even with less than 3 per cent of national output, is poised to tap further growth.