China's largest state-owned companies face stiffening competition as they shake off the shackles of a planned economy set in motion by the Open Door policy twenty-five years ago. More recently, the loosening of monopolistic restrictions under the WTO brings a change in the role of both the CEO and CFO in China, as the Euromoney China CFO Survey shows, in addition to strong a multinational as well as private presence.

The Euromoney China CFO Survey sets a benchmark for the criteria that define the CFO's activities. Fifty-three nominees herald from 17 categories covering banking, insurance, accountancy, tax, consultancy, law, express delivery, accounting software, business cars and finally, the preferred city for business. The rankings highlight a new trend emerging: these CFOs are becoming empowered, which is reflected in the attention the large service providers are giving to the results of this survey. It is these service providers that are taking part in the empowerment of China's CFOs, helping them streamline their operations by providing them with the kind of professional services they had reserved previously for more mature markets.

In the past, China didn't have CFOs in the recognized sense. The chief accountants managed the finances but were effectively emasculated when it came to setting strategy or appointing professional advisers. These key decisions were reserved for the CEO. In today's increasingly complex and mature market, China's CEOs are devolving such responsibilities to their CFOs, who are in turn taking a more active role in setting the strategic direction of the business.

There are still plenty of fundamentals to get right, including the effectiveness of systems and internal controls. “If you do not have the right numbers, then how can you make the right decisions?” asks Charles Chao, CFO of the Nasdaq-listed internet portal Sina Inc.

The struggle between servicing the short and long term is encountered by CFOs across the world, but is particularly acute in China. The pace of change in China's markets is affecting traditional as well as the new economies, making accurate forecasts increasingly difficult. “The biggest headache for a CFO in China is the inherent uncertainty underlying the returns of the group,” admits Lu Yong, CFO of Shanghai-based Bailian Group, China's largest retail group with sales last year of close to US$6 billion.

Domestic strength

ICBC, with the largest network of branches in the country, won the Preferred Domestic Bank category, stealing the limelight away from Bank of China. China Merchants Bank's third place demonstrates its aggressive strategy, eating away at the market share of the big four, thanks to its innovative e-banking infrastructure. Many of the state-owned companies have relationships with all the key domestic banks, such as Shanghai's Baosteel whose CFO, Huang Kongwei, puts this down to “the long history of the group”.

In the Preferred International Bank category, the anticipated battle between Citibank and HSBC ensued as they ran away with the top two places. Standard Chartered, the emerging market specialist, came in a creditable third. Neil Shen, president and CFO of Nasdaq-listed Ctrip, summarizes the more sophisticated services of the international banks: “The Chinese banking system is good at assessing assets, but is not sophisticated when it comes to assessing credits and cash flow. This is where the international banks come into their own.” Both Citibank and HSBC are expanding aggressively into China: Citibank with its 9% stake in Pudong Development Bank and HSBC with recent speculation linking it to a US$1 billion for a 20% stake in Bank of Communications. Both Pudong Development Bank and Bank of Communications receive commendations in the Preferred Domestic Bank category.

Cash management services are still at a relatively unsophisticated level in China, although Baosteel's Haung believes this industry to have “huge potential”. The domestic banks lead the way, but again both Citibank and HSBC are aware of the benefits a global bank can offer the domestic Chinese players with their international markets. “With a global business such as ours, we have had to opt for a bank with a global network, choosing HSBC,” says Alexander Jiao Wenjun, Tianjin-based Tiens Group CFO. “We compete against the domestic banks by taking the large state-owned companies out of China,” admits PD Yip, head of HSBC's China business.

In the category for FX, Bank of China's former monopoly in foreign exchange won by a huge margin. A number of banks – most notably ICBC and HSBC – are breaking into the market, which will surely be giving the Bank of China, the domestic bank with the largest international network of branches, cause for concern in the long run.

One of the trends coming out of the IPO and M&A categories is the increasing establishment of the global players, despite their higher cost structure. In the Preferred Bank for IPO category, Morgan Stanley took the honours, followed by Goldman Sachs. Hong Kong-based Jonathan Zhu, managing director of Morgan Stanley, says that he was not surprised at the result: “We have probably done more international IPOs than anyone else. This year alone we have already completed four international IPOs and have another four or five in the pipeline.”

One of the big competitors to the leading M&A advisers are the companies directly involved in the M&A themselves, who often conduct the deal in-house. When the Shanghai-based Fuxing Group took over the listed Nanjing Iron and Steel for US$200 million, it chose not to use a third party.

With many Chinese companies unwilling to pay for expensive international M&A work, it should come as little surprise to find a domestic player like Guotai Junan Securities taking top spot. “We really built up our market position in 1999 after our merger with Junan Securities,” says Zha Song, deputy head of M&A at Guotai Junan.

Global reputations appear to be key when it comes to consultants. “Top management consulting is still an emerging market in China,” says Gordon Orr, managing director of McKinsey Greater China. “We are still at the awareness building stage of the market.” Building awareness is something McKinsey is good at. In China, it published the successful book Valuation. “We have since invested time and effort in communicating this message to the market. Many Chinese companies are still skeptical about paying large fees until the value and impact is shown to be successful. In the end, though, we will only stand out because of what we have done,” adds Orr.

“The professional service firms stand out as some of the most localized of the international service companies,” says Neil Shen of Ctrip. PwC demonstrates its dominance in the industry, taking first place in both the Preferred Accountants and Tax Adviser categories. “As Chinese companies go global, so they recognize the value an internationally recognized firm like PwC can provide,” says Albert Ng, China managing partner of PwC China. Baosteel's Huang could not agree more: “If you want to do anything overseas, then you have to use one of the big four.”

Jun He Law Offices was nominated as the leading law firm, albeit with a low-percentage turnout, reflecting the fact that few CFOs are the decision makers when it comes to hiring legal partners.

There were few surprises concerning the winner of the Preferred Insurance Company – PICC – which has continued to maintain its leadership position in an increasingly competitive market. AIG, founded in Shanghai in the 1920s, is the CFOs preferred international insurance company, demonstrating its unique position in China as the only international insurance company to have a wholly foreign-owned business both for life and non-life insurance until 1996. Ping An, under the capable direction of Ma Mingzhi, comes in third specializing in life insurance.

As the insurance companies in China are gradually building their products, several CFOs have grumbled about the need for more products, especially business interruption insurance. “One of the risks we face is the risk of fire arising from our servers, which would severely impact our business. Nobody offers this service in China today,” says Sina Inc's Chao, a predicament shared by Ctrip's Neil Shen. “The issue about business interruption insurance,” comments an insurance analyst, “is that China needs a mechanism to check this. Few people realize that the largest losses in the World Trade Center attack came from business interruption insurance.”

In the other categories, DHL delivered ahead of its international competitor Fedex and the state-owned EMS in the category for express delivery companies. In accounting software, domestic players UFSoft and Kingdee take top places, with SAP the leading international software developer. The challenge now facing the domestic players is to break into the more lucrative ERP market. Their strong customer base ought to assure that they are well positioned to do so. General Motors' Buick won the Preferred Business Car category ahead of Audi.

The undisputed choice of the Preferred City for Business was Shanghai, which garnered the highest percentage of votes for any category – winning 64% of the total votes – followed by Shenzhen and Guangzhou, with Dalian receiving a commendation. Already the centre for the international Chinese community, Shanghai's reputation as the business centre of choice is continuing to grow, especially as some of the large multinationals relocate their Asian headquarters.

Key concerns

So what are the issues that keep the China CFOs awake at night? For William Tam, CFO of Wyeth China, the major issue is still accounts receivable: “No matter how tight the control is, there are still big risks in collection. The level of professional support from the external auditors, tax consultants, and legal counsel are well above acceptable. However, due to regulatory issues, support from the banking and finance sector is still not on par with international standards. Having said that, both local and multinational financial institutions are working hard to improve their service, which is a positive sign.”

China's CFOs are becoming more sophisticated as China's businesses mature. Gordon Orr, managing director of McKinsey Greater China, explains: “In my experience, the IPO is a critical event for CFOs in China, helping them define their roles.”

On the CFO relationship with the CEO, Wyeth China's Tam offers his insight: “The China CFO of a state-owned enterprise still has to be cautious in maintaining a balanced relationship with the CEO since the internal controls of these companies are, in general, still not as strong as expected.” With the services provided by the companies ranked in the China CFO survey, expect the China CFO to take a more prominent role as time goes on.

Survey methodology

The Euromoney China CFO Survey is designed to provide a review of the preferences of the CFOs of China's biggest and best companies. In April 2004, we sent out 960 survey forms to the CFOs of the 1000 largest companies in China by sales as well as some of those promising companies that have not yet achieved high revenues, including multinationals with considerable investment commitment to China and high-flying internet companies. One hundred and forty-six CFOs sent back completed questionnaires.

We asked CFOs to nominate two companies for each question and, when compiling the results, weighted the first nomination twice the weighting of the second. For each category, we determined the winners as those companies with the highest number of weighted nominations, ranking the top-placed companies and commending those that came close.