China accounting development

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Chapter 1 Introduction and Overview

CHAPTER 3

BACKGROUND OF CHINA’S

ACCOUNTING DEVELOPMENT

3.1 Introdut!on

As a Communist country, China’s accounting environment is different from other

countries, especially in its political and legal system. In order to have a good

understanding on Chinese accounting development, it is necessary to have an

understanding of the background of China’s social, political and economic development

process, as well as its legal system. his chapter will introduce the essential underlying

environmental backgrounds upon which China’s accounting has been developed. !y

reviewing these backgrounds, it will also answer "uestions such as# $ho plays the leading

role in China’s political, economic and cultural life% !y what process does China’s

legislation abides% $hat factors motivate China’s economic development% $ho handles

the Chinese accounting legislative system and, how is Chinese accounting being

developed%

he first section of the chapter is the introduction& the second section will introduce

a background of China’s political structure as well as the party’s role in government and

the society, so as to enable the reader to have an understanding of China’s political system

and its functions. 'ection hree will introduce the accounting legislative system and

authority agency in charge of China’s accounting affairs to show how and to what e(tentChina’s accounting system is influenced by outside factors, and 'ection )our will briefly

review the history of China’s accounting development before and after the establishment

of *+C in 1-, so as to give the reader an impression of the whole process of China’s

accounting development.

3." T#$ L$%d!n& Ro'$ o( C#!n$)$ Co**un!)t P%rt+ !n C#!n%

he Chinese Communist *arty CC*/, formed in 101, established the *eoples+epublic of China in 1-. he new China takes socialist as its basic political system.

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3nvironmental factors in China’s )inancial Accounting 4evelopment since 1-

'ince then CC* has been the leading core in China’s political, economic and social life,

and China’s socio5economic life is influenced and colored by politics afterwards.

•T#$ r$'%t!on)#!, -$t$$n t#$ CCP %nd t#$ &o/$rn*$nt

6he Chinese Communist party is the primary political force in China. 7nlike

parties in $estern democracies, it is a tightly organi8ed movement that controls and leads

society at all levels. he party sets policy and controls its e(ecution through government

officials who are also party members. he effect is to make the government an organ of

the party9.1 Although 6more authority was concentrated in the central government under

the 'tate Council. +eal power, however, lay with the Communist *arty, especially the

Central Committee. his Committee held together the triad of power5army, government,

and party9.0 All the institutions including the :ational *eople’s Congress :*C/, 'tate

Council and related ;inistries and !ureaus are under the leadership of CC*. In China the

slogan 6he core energy of leading our undertaking is Chinese Communist *arty, and the

basic theory of guiding our thought is ;ar(ism5<eninism and ;ao =edong’s hought9> ,

is well known by anyone at one time or another. And now the directing thought of the

*arty is based on 4eng ?iaopings theory- .

he organi8ational structure of the CC* and its relationship with the government can

be shown in figure >51.

6he Chinese Communist party is organi8ed as a hierarchy, with power concentrated

at the top. Above the local units, or cells, is a pyramid5like structure of party congresses

and committees at various levels, culminating in the :ational *arty Congress. *rior to

1@0, the highest party office was that of chairman, held for more than 02 years, through

most of the *eoples +epublics history to that time, by ;ao =edong. In an effort to ensure

that the power ;ao had enoyed was never again concentrated in one person, a new party

constitution adopted in 1@0 abolished the chairmanship and replaced it with the

administrative position of general secretary to the 'ecretariat92 .

16Chinese Cultural 'tudies# Concise *olitical Bistory of China9, file#?downloaded articles aboutChinaChinese Cultural 'tudies concise political history of China.htm.0 'ame as 1> he author’s own e(perience. ;ao’s thought is said to be the application and development of ;ar(ism5<eninism in China. he main contents of ;ao’s thought include# 1/ heory of newdemocratism revolution& 0/ heory of socialist revolution and construction& >/ heory of construction of revolutionary Army and military strategy& -/ heory of politics and tactics& 2/heory of ideological and political work and cultural work& D/ heory of *arty’s construction.- 4eng’s heory is said to be the successor to ;ao =edong’s hought, and the new stage of ;ar(ism5<eninism’s development in China. he core of 4eng’s theory is the theory of constructingsocialist theoretical system with distinctive Chinese characteristics. It systematically answered such

"uestions as the road and stages of socialist development, the essential task, and the promotingforces, outside condition, the political guarantee, strategic procedure, the leadership and backingforce of the *arty as well as the union of the county. he *arty’s fundamental guideline under the

primary stage of socialist was established according to 4eng’s theory.2 'ame as 1.

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Figure 3-1: Organizational Structures of CCP and Its Relationship with the Goern!ent

'ource# 'usan <. 'hirk, he *olitical <ogic of 3conomic +eform in China/ hin lines

indicate weaker authority.

he relationship between the CC* and the government is as <i <i, 1F#>/

described# he CC* is the leading core of Chinese socialist revolution and socialist

construction. he CC*’s leaderships include the leaderships on politics, thoughts and

organi8ations, of which the most important is the *arty’s political leadership on the entirestate and the government. *olitical leadership means political principles, political

directions, the leaderships on the most important decisions and recommendation the most

important cadres to the governmental organi8ations.

he party’s authority over the government is primarily based on its authority to

appoint and promote government officials. he party also sets the general policy line for

the government budget and plan, and oversees the work of the government. )inally the

party is responsible for the ideological education and evaluation of government cadres

and all other members of societyG 'hirk,1>#2D/.In return, one of the basic principles of the government’s works is 6insisting on the

CC*’s leadership, which means the CC*’s political leadership in various levels of the

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governments, and the CC*’s organi8ational leadership in all levels of the governments

must be guaranteed9 <i,1F#-E/.

All maor and important general and specific government policies, and all maor

"uestions concerning the Hovernments work, must first be submitted to the central party/

authorities for e(amination and approval. And only after the relevant discussion are

carried out by the central authority, and the relevant decisions or approval given by the

central authorities, can maor and important general and specific government policies be

implemented =hou, 1@F#1@/.

6he CC* organi8ation e(tends to all corners of Chinese society and can be

perceived as the way that order is maintained in China9abuki, 1#>2/. he CC*’s

control over nonparty organi8ations can be demonstrated in figure >50.

Figure 3-": CCP Central Controls Oer #on-CCP $nits

'ource# abuki, 1#>2, CC* Organi8ation 4ept., Chart of Cadre Assignments for

*ositions 7nder Control of *arty Central, doc. 0, 1E/

)igure >50 shows the ways in which the CC* e(ercises control over non5communistorgani8ations. )irst, with respect to governmental administrative institutions, 6party

organi8ation9 e(ists in the 'tate Council comprising the premier, vice premiers, and other

'tate Council members/, and the 'tate Council plenary meeting organi8ation including,

apart from the standing committee members, the ministry of the finance, foreign affairs,

and other ministries/. 6All5important decisions must be approved by the party

organi8ation before being implemented. In the provinces, provincial party committees

parallel provincial government organi8ations, and all government decisions must be

approved by the party committees before an action can be taken9. 6he Communist *artyorgani8ations that control these governmental personnel carry out 6management of

different levels9 through a three5level hierarchy# the *olitburo level, the Central

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Organi8ation 4epartment, and province5level party organi8ation departments including

party organi8ations in each ministry under the 'tate Council/9 abuki,1#>2/.

'econdly, 6with respect to lawmaking institutions, CC* committees are established

within the :*C and complementary :ational *olitical Consultative Congress and provide

6guidance9. $ithin the courts and the procuratorate, Communist *arty committees are

established, as they are within such mass organi8ations as trade unions, women’s

organi8ations, and youth organi8ations9abuki, 1#>2/.

• T#$ r$'%t!on)#!, -$t$$n CCP %nd NPC

he :ational *eople’s Congress is the essential political system of contemporary

China. According to the Chinese Constitution, all the rights of *+C belong to the people.

he :ational *eople’s Congress and <ocal *eople’s Congress at all levels are the supreme

agency in which people e(ercise the state’s rights, and the :*C has the authorities of

making country’s policies and decisions, and also e(ercises the country’s legislative

rights.

he hori8ontal structure of the central authority of the 'tate can be shown in figure

>5>.

Figure 3-3: %orizontal Structure of the Central &uthorit' of the State

'ource# uan Jicheng, Contemporary China’s *olitical 'ystem, Central !roadcasting and

elevision 7niversity *ress, 1-,*2E/.

$hile 6he :ational *eople’s Congress and its 'tanding Committee is under the

leadership of the CC*, representing the interest of people, to manage the 'tate directly. Its

commission is to guarantee the implementation of Constitution, law, as well as the CC*

and the 'tate’s guiding principles and policies9Huo, 1@#-0/. he *arty’s control over

the :*C has formed since the establishment of the new China in 1-.

3arly in 1- when :ational *eople’s Congress convened, Central *arty and ;ao

=edong have pointed out emphatically that not only the CC*’s leadership should be

insisted on but also democracy should be promoted, and underlying principle is Knot only

the CC*’s leadership is guaranteed but also the spirit of democracy is cultivated’. :o

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matter it is the meeting of public figures from various circles or the *eople’s Congress,

the members of CC* won’t be too many, so as to guarantee the adoption of the resolutions

Huo, 1@#1EE/.

he *arty in power reali8es its leadership in the :*C in the following ways# )irst,

the *arty proposes suggestions of policies and personnel affairs to the government

authority agency& second, the *arty’s members and cadres should guarantee the *arty’s

suggestions and opinions being converted to the will of the 'tate, being converted to law

and being implemented by their own efforts, as the most important posts are held by the

*arty’s cadres, maority of the representatives in *eople’s Congress are *arty’s members,

by *arty’s members’ e(plaining, persuading and propagating to the non5*arty’s members

in the Congress to gain the support and to achieve the agreement with the *arty’s

suggestions and maintenances& and finally the *arty’s representatives in Congress are

disciplined strictly so as to make sure all the *arty’s representatives to act in unison. he

*arty can’t command the 'tate Agencies but can command the *arty’s members and its

cadres in the 'tate Agencies Huo, 1@# 1EE/.

!ased on the features described above, many properties of a totalitarian oligarchy

can be found in China’s situation according to 'hill’s 1DD/ classification on political

systems see Chapter 0/. )rom the properties of China’s legislature, e(ecutive, udiciary,

power elite, opposition, to the mechanism of authority, public opinion, and civil order, all

these aspects reflect that China is under a totalitarian oligarchy political system. )or

e(ample, China’s legislative function is similar to an acclamatory and ceremonial one.

According to the Chinese constitution, the :ational *eople’s Congress e(ercises

legislative rights. $hile the maority of the representatives in the *eople’s Congress are

party members, it should be noted that all legislations and decisions are passed

unanimously according to the *arty’s will. herefore there is no doubt for the saying that

6he *arty committee waves its hand, the government gets to work, the people’s congress

standing committee votes, and the people’s consultative congress claps9 $ang, 1@#F/.

)rom the aspect of e(ecutive and power elite properties, government officials, themaority of whom are party members, are promoted by the CC*. All maor and important

general and specific government policies, and all maor "uestions concerning the

Hovernments work, must first be submitted to the central party/ authorities for

e(amination and approval, and the members of the party should be loyal and coherent to

the *arty, which has set a stringent restriction on its members. As for the aspect of

mechanism of authority, the *arty supervises members, nonmembers, government leader

as well as bureaucracy. hese e(amples show that all aspects of China’s political,

economic, legal and cultural life are under the CC*’s tight control, and this may welldemonstrate the characteristics of a totalitarian oligarchy political system.

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he situation has changed much since 1F& the 'tate, under the guidance of 4eng

?iaopings theory, has undergone a series of political and economic reform. Although hard

and tortuous, the attempt to separate the function of the *arty and the government has

achieved certain progress. At the 3leventh *lenum of the *arty’s Congress, such problems

as the amalgamated *arty, Hovernment, and business, the *arty taking the place of the

government, and the government taking the place of the business has been addressed. he

new *arty’s Constitution, passed in the welfth *lenum in 1@0, stipulates# he leadership

of the *arty mainly concentrates at the ones of politics, thoughts, and organi8ations. he

party must formulate and carry out the correct lines, policies and strategies, do its best at

*arty’s organi8ational, propagandist and educational work, play the e(emplary role of a

Communist in every work and social activities. he *arty must act within ranges of the

Constitution and the law. he *arty must guarantee that the 'tate’s legislation, udicature,

e(ecutive agencies, economic and cultural organi8ations as well as people’s organi8ations

work actively, independently and coordinately Huo, 1@#0F0/.

!eginning in appro(imately 1@E, more of the bargaining over specific economic

policies was shifted to the government arena. he CC* leadership still set the overall

policy line of economic reform, which was approved in Central Committee meetings, and

the )inance and 3conomics <eadership 'mall Hroup, which straddled party and

government, had to approve the most important economic reform policy decisions 'hirk,

1>#D>/.

In 1@D, with the progressing of political reform, further separation of the work of

party and government was made.

In 1@F the hirteenth *lenum of the *arty proposed the idea and test of separation

of the *arty and the Hovernment, and pointed out the key of the political system reform is

the separation of the *arty and the Hovernment, that is to separate the function of the

*arty and the Hovernment, and the *arty’s leadership is to e(ercise leadership on politics,

that is the leadership on political principle, political direction, and the most important

decisions, and recommendation the most important cadres to state authorityagencies9Huo,1@@#112/.

GIn enterprises, the party took administrative responsibility from party secretaries

and restored it to managers. At the center, the CC* constitution was revised to eliminate

gradually the party groups within government agenciesG G4raft +evisionG1@F/. !ut

these changes are only to improve the "uality of decision5making by putting the

government on a longer leash. And this test stopped in 1@ because of the political

struggle within the party. 6he announcement of strengthening the *arty’s construction

made by Central *arty made the political core and leading position of the party’sorgani8ation clear, part of the leadership systems amalgamating party and e(ecutives

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came back9 Huo, 1@#0F>/. 7ntil the spring of 10, 4eng ?iaoping’s remarksD , which

were made during his inspecting e(cursion in 'outh of China, caused a surge in China’s

reform, and opened China to moderni8ation construction. he political report at the

)ourteenth *lenum of the *arty in 10 defined that in order to correspond with the

reform of economic systems and the developments of the economy, the political reform

must be promoted actively according to the re"uirement of a combination of

democrati8ation and legali8ation. he report at the )ifteenth *lenum of the *arty in 1F

further made clear and definite that from the present onwards, the main task of political

reform was to promote democracy, strengthen the legal system, put the separation of

politics and business into practice, simplify agencies, perfect the system of democratic

monitor, and safeguard stability and unity. he *arty’s Constitution, passed at the

)ourteenth *lenum of the *arty, re5strengthened the *arty’s leadership, and insisted on the

formulation passed in the welfth *lenum that the *arty’s leadership mainly concentrated

on the ones of politics, thoughts, and organi8ations Huo, 1@#0F-/.

he 'i(teenth *lenum of the *arty achieved the consensus on the revision of the

*arty’s Constitution, which definitely stated that the CC* is the vanguard of the Chinese

worker class, and the vanguard of Chinese people and nationality at the same time, and is

the leading core of Chinese socialist construction with Chinese characteristics. It

represents the developing demand of Chinese advanced productive force, represents the

going forward direction of Chinese advanced culture, and represents the essential interest

of Chinese broadest masses he three present/ F & CC* takes ;ar(ism, <eninism, ;ao

=edong’s thought, 4eng ?iaoping’s theory and 6the hree *resents9 as its guide of action,

and strengthened that the important thought of 6three presents9 should be consisted in by

CC* for a long term& and to construct a society with comparatively good living standard is

also written in the CC*’s Constitution. his may demonstrate that even improvements

have achieved much, but the essential characteristics of the totalitarian oligarchy political

D he main contents of the 4eng’s talk include# )irstly, the line, the guiding principles and the policies made in the hird *lenum of the 3leventh *arty Congress should be insisted on and keepunchanged for one hundred years. he key is to insist on one hub, which is economy construction,and two basic points, which is the *arty’s basic line and the )our basic principles, which includeinsist on the *arty’s leadership, insist on the socialist road, insist on proletariat dictatorship, andinsist on ;ar(ism5<eninism and ;ao =edong’s hought. 'econdly, more courage should be givento the reform and opening. rial is to be encouraged. One would dare to trial what to be conceivedfor certain. ;ore plans or more market is not the essential distinction between socialist andcapitalist. hirdly, opportunities should be sei8ed to develop oneself& the key is to develop economy.'cience and technology is the first productive force. o develop economy must rely on the scienceand education. )ourthly, at the same time to the reform and opening, criminal should be hit. )ifthly,

the correct organi8ational line should guarantee China’s political line. And finally, ;ar(ism should be insisted on. 'ource# 4eng ?iaoping’s 'outhern 3(cursion alk.http#www.gdmc.edu.cnlibraryd(pE1.htm/F Jiang =emin *roposed the 6three presents9 in 0EEE when he was in Huangdong attending theeducation meeting of 6three stresses9 held for the leader cadres of ;aomin city.

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system in China have not been changed. his may have and will still have e(erted a

strong effect on China’s accounting systems and its development.

3.3 C#!n%0) Aount!n& L$&!)'%t!on S+)t$* %nd Aut#or!t+

A&$n+

he development of Chinese accounting system can be divided into two distinct

periods with different legislation characteristics and contents. he year of 1F could be

the watershed of the two distinct periods.

!efore 1F, China’s economic system had been a planned socialist& the *arty and

the Central Hovernment were the chief designers and conductor of China’s economic

system. he Central Hovernment *olitical !ureau financial committee and the ;inistry of

)inance within the Central Hovernment, which was established at the beginning the *+C,

were authori8ed agencies in managing the national5wide accounting work. 7nified

accounting systems, which was a state controlled and ta( driven financial reporting

system served for the planned economy are e(ercised, but these unified accounting

systems were only unified within the sectors, and were drafted by different sectors of the

national economy, then approved and implemented by the ;O). he 'tate Council and

the ;O) were the only issuers of accounting systems and regulations during this period.

After 1F, the economic system reform and open door incentives gradually evolved

China’s economic and legal system along with an accounting legal system. In 1@2, the

:*C issued *+C Accounting <aw. his was the beginning of the Chinese accounting

legal system construction. he accounting system reform, which turned the Chinese

accounting system to a capital market oriented financial reporting system, served for the

market5oriented economy in 10, and brought China’s accounting system more towards

standardi8ation and internationali8ation. hree tiers of accounting legislations system had

been formed in China so far, which can be shown in figure >5-（ page FF） .

In contrast with the old accounting system, the new accounting regulation system is being developed towards a legal one. he first tier is accounting law, which was issued in

1@2 and revised in 1> and 1 separately by the :ational *eople’s Congress, who

had the highest legislative authority in China. *+C Accounting <aw has become the basic

law of accounting in China, and has become the basis of China’s accounting work and

other related accounting regulations. It defined the essential targets of the accounting

work, urisdiction of accounting management, accounting entity, the essential re"uirement

of business accounting and accounting supervision, the urisdictions and responsibilities

of accounting personnel. he newly revised Accounting <aw in 1 proposed that a stateuniform accounting system should be implemented, and the ;inistry of )inance has the

authority to formulate the uniform accounting system, which included business

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accounting, accounting supervision, accounting agency, and accounting personnel as well

as the management on accounting work.

Figure 3-(: )he Structure of Chinese &ccounting *egislation S'ste!

he second tier is the e(ecutive regulations, which is formulated by the 'tate

Council and the ;inistry of )inance. It forms conceptual framework and general

principles of accounting, which mainly include# Regulations on General Accountants,

issued in 1E by the 'tate Council& The Trial Regulation on Special Position of

Accounting , issued in 1@D by the 'tate Council& Enterprises Accounting Standards,

issued in 10 by the ;inistry of )inance, which also possessed the nature of the

e(ecutive regulations& and Regulations on Business Accounting Statement , issued in 0EEE

by the 'tate Council, as well as the detailed accounting standards. !y the end of 0EE>

;O) had promulgated seventeen5detailed accounting standards.

he third tier is comprised of the uniform accounting systems, authori8ed by the

*+C Accounting <aw and formulated by the ;O). It includes 1> sectors accounting

systems, while there were about -E different accounting systems before the reform. It set

the rules of accounting work for related national departments, and its main contents were

the e(planation of the usage of the accounts, accounting statements and its preparation.

hough the necessity of these uniform accounting system’s e(istence is still in argument,

they have played a very important part in China’s accounting work after the accounting

reform, thus further reform has been taken. hree accounting systems, including Business

Accounting System, Finance and Banking Business Accounting System and Small

Business Accounting System are going to be promulgated to cover the whole sectors of

national economy and all kinds of business. 'o far, the 6!usiness Accounting 'ystem9

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and 6)inance and !anking !usiness Accounting 'ystem9 have been promulgated in 0EEE

and 0EE1. he 6'mall !usiness Accounting 'ystem9 has been promulgated in

0EE-，and will be implemented in 0EE2.

3. Br!$( H!)tor+ o( C#!n%0) Aount!n& D$/$'o,*$nt

China’s accounting history can be traced back 0EEE years ago. he earliest word of

6accounting9 appeared in $estern =hou 4ynasty 11 th century !C to FFE !C/. 4uring the

ang 4ynasty A4D1@5EF/, there appeared 6account book9 for recording the annual

fiscal revenues. )urther development began from the 'ong 4ynasty A4 DE510F/, such

as the rather scientific bookkeeping method, and the four pillars accounts, was created.

his method formed the basis of traditional Chinese accounting theory. 4uring the ;ing

4ynasty A41>D51D--/, the bookkeeping method improved, and a new method, K<ong

;en =hang,’ which was similar to the double5entry bookkeeping method, was later

created.

*rior to 111, Chinese society had been feudal for three thousand years, Chinas

bookkeeping style, which was single5entry records based on the movement of money or

physical goods5dominated, prevailed, while all book5keepers were the products of the

master5apprentice training method. At the beginning of the 0Eth century, $estern

accounting methods such as the debit and credit double entry system was introduced to

China, and $estern accounting and auditing theories were adopted. ;any $estern

countries had established concessions in China, causing an inflow of $estern technology

and capital, and fostering the development of indigenous industries.

'cholars who had received their education abroad returned to China and pioneered

modern accounting education. Hradually, accounting maors and departments were

established, with bookkeeping and accounting courses taught at the university and college

levels. Contemporary accounting te(ts were introduced and double5entry bookkeeping

was established. he first professional public accountants also appeared at this time.Certification was granted to those passing a "ualifying e(amination and entitled the bearer

to run an accounting firm and to offer accounting services to clients $ei, 11/.

<egislation in finance and accounting were thus improved. 'ome laws such as

Accounting Law 1>2/, Auditing Law 1>@/, Budgeting Law 1>@/, Final Accounts

Law 1>@/, and Pulic !epository Law 1>@/, were publici8ed. he Civil Hovernment

published the "nified Accounting System for All !epartments in #entral in July 1>F@ .

Bowever, modern accounting methods had not been fully developed in either accounting

education or practice, and as being a semi5colonial and semi5feudal society, China’s

@ Huo 4aoyang, China’s accounting reform in 0Ethe century.'ource# http#www.e201.comlibrary1111E0EF0>1EED0F.htm

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economy was not sufficiently developed. All this development stopped and changed to a

new direction in 1-, when the Chinese Communist *arty established *eople’s +epublic

of China.

'ince 1-, China’s economy has undergone three periods of change# a socialist,

centrally controlled, planned economy 1-51F@/& socialist commodity economy 1F@5

10/& and socialist market economy 105present/. In accordance with the development

of China’s economy, the development of China’s accounting system has also e(perienced

change# the 6uniform accounting system9 1-51F@/, which served for the centrally

planned economy& the transition and the construction of accounting norms 1F@510/,

which served for the commodity economy& and the construction of a new accounting

system since10/, which served for the socialist market economy towards

internationali8ation. 4uring the process of China’s accounting development, some

changes and adustments were made in order to respond to China’s political and economic

movements and development. he process of China’s accounting development after 1-

will be narrated and analy8ed in the ne(t chapter.

$ang Huangyuan, $u <iansheng, 6)ifty years of Chinese !usiness Accounting :ormConstruction9. 'ource# fifty years of Chinas accounting.htm

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China accounting development

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