Discourses on public sector accounting reforms in China: A brief history (1949–2019)

Introduction

This article seeks to provide an understanding of the processes and conditions that have driven China’s recent government accounting reform towards accrual accounting by contextualising the reform against a history of China’s government accounting practice. The decision to adopt accrual-based whole-of-government accounting in 2013 represents the most significant change to Chinese government accounting since the establishment of the People’s Republic of China (PRC) in 1949. Government accounting in the PRC has mainly been recorded through a cash-based budget reporting system since 1949. This system provides information on the cash inflows and outflows of the central government in the form of budget revenues and expenditures, producing no other financial accounting statements, such as a balance sheet or income statement. As such, the cash-based system does not report on the government’s financial position or operational performance. In contrast, such financial statements have been common in government accounting practices elsewhere such as in several major Western countries including the United Kingdom, Australia, New Zealand and Canada since the 1990s (Funnell et al., 2012).

In November 2013, the Chinese government announced its goal to establish an accrual-based whole-of-government financial reporting system at the third plenum of the 18th Congress of the Central Committee of the Chinese Communist Party (CCP). In December 2014, the State Council approved and released a reform agenda through the Ministry of Finance (MOF), which proposed the introduction of the new financial reporting system over a seven-year period beginning in 2014. By 2020, every level of Chinese government ¹ as well as numerous government-controlled administrative units and public service institutions, will have to change their reporting practices, producing an entirely new set of accrual-based accounts and financial statements.

From a technical perspective, China’s decision to incorporate accrual-based financial reporting aligns with prevailing practices in many other countries. Since the early 1980s, there has been a seemingly global trend of public sector reform under the auspices of new public management (NPM; Helden and Ouda, 2016; Hood, 1995). Ideas of efficiency in NPM place greater emphasis on involving private sector organisations in the provision of public services through public funding of private organisations (outsourcing) or privatisation (Lapsley, 1999). This led to changes in the understanding of governmental accountability, mainstreaming the use of performance indicators and management systems from the private sector to measure the efficiency of public governance (Carnegie and West, 2005; Guthrie et al., 1999; Hood, 1995; Lapsley, 1999). The accrual-based financial reporting system is widely seen to offer technical support for this cause (Cooper, 2015; Modell, 2014). The underlying rationale is that accrual accounting is able to recognise an entity’s financial position in assets and liabilities as well as accrued income and expenditures. This information was not possible under the traditional cash-based reporting practices used by many governments around the world. Business accounting practices and standards are therefore argued to provide more relevant information on how resources are utilised, enabling greater efficiency and transparency for public sector governance (Carlin, 2005; Guthrie et al., 1999; Heald and Georgiou, 2011).

While China appears to be joining this global movement of public sector reform, we know little about the specific forces that have facilitated China’s transitioning and if the motives for reform are different from those found in other places, and particularly if they are different from a global narrative of NPM adoption. To fill the gap, this article aims to contribute an understanding of the specific sociopolitical dynamics that have underpinned China’s government accounting reform through an analysis of antecedent discourses surrounding the state of government accounting in China.

In doing so, however, this article rejects an empiricist assumption that there is a discoverable ‘truth’ of the reform. At a fundamental level, a reform of such scope is inevitably imbued with complicated underlying conditions, rationales and controversies. Given the opaque nature of the CCP’s policymaking process (Keane, 2017), it is highly implausible to know for certain what the ‘real’ reasons are behind the party’s decision. The vested interests involved in the reform also means that the purpose and/or outcome of the reform may be interpreted differently for various stakeholders. Ontologically speaking, this article considers this reform as a socially constructed historical event subject to widely diverse views as to how past realities have been converted to history (Gaffikin, 2011), and like any other historical study, ‘history comprises narratives of the past’ (Gaffikin, 2011: 241). In this way, historicisation can hardly be conceived of as impartial or objective. Therefore, this article has chosen to analyse professional and media discourses related to the reform as empirical data for investigation, seeking to provide one historical lens to the antecedent discussions prompting the reform. Discourse is a major communicative vehicle for meaningfully thinking and talking, by which we come to understand social reality (Fairclough, 2001). As has been pointed out by many specialists in sociological and linguistic studies, social questions are in part questions about discourse: language is not only a vehicle transporting meaning, but a symbolic mediator that constructs organisational knowledge, practices and structures (Fairclough, 2001; Thompson, 1990; Van Dijk, 1985). An exploration of the discourse enables relationships between detailed meanings of texts and wider social changes to be assessed (Van Dijk, 1985). For this purpose, the discourse this article draws on is the written text only, and the data are not used to deduce a linear causal relationship for the reform. Rather, in tracing common and substantive aspects of academic, government and media discourses, the data serve as a window through which key ideas surrounding the regulatory change can be explored.

More specifically, the data draws upon a range of Chinese archival and public documents, including government regulatory announcements, accounting academic journals and public news items published in the PRC between 1949 and 2019. By analysing the shifting patterns of the discourses on government accounting presented in these sources, this article aims to offer a brief historical account of the changing social conditions and institutional forces that have influenced thought on public finance management in China. In particular, this article will show how Chinese government accounting thought and practice are deeply embedded in the particular social and political concerns for the ongoing development of the socialist market economy in China. Rather than providing the citizenry or external stakeholders with reports for public accountability per the ethos of NPM rationales, accrual accounting has been legitimised and adopted to enhance the central government’s ability to control resources more effectively, thereby enriching its governmental power.

The remainder of this article is organised as follows. The next section explains the research method, including the source of data and the analytical procedure. Following this, a section briefly reviews the early history of China’s government accounting between 1949 and 1976 to provide the essential background needed for better understanding the institutional pressures that have encouraged government accounting reform. Section 4 analyses the discourses, revealing the connection between the reform and the sociopolitical concerns of China’s socialist market economy system. The penultimate section summarises the main findings.

Method

The source of data in this article comes under three categories. The first consists of academic literature by Chinese scholars writing on government accounting practice. The second category consists of official government announcements and regulatory documents. The third is information collated from Chinese news media concerning government accounting. Materials published between 1949 and 1980s were sourced archivally from a university library in China. As will be further explained in Section 2, public discussion on government accounting in both journals and newspapers was scarce during this time, as there were few accounting journals in press and strong political sensitivity over government records. This article reviews literature sourced from: New Accounting (established in 1951 and re-named Industrial Accounting in 1952); Enterprises Accounting (established in 1959); and Accounting (established in 1963).

The post-1980 materials were largely obtained from internet resources, including the MOF website (http://www.mof.gov.cn/index.htm), the China National Knowledge Infrastructure (CNKI) database and the Factiva database. More specifically, the academic literature draws upon articles published in the top-ranking Chinese accounting journal – Accounting Research. Founded by the MOF and China Accounting Association, the journal commenced publication in 1980. It is the only journal in accounting that has been consistently ranked in the ‘China Academic Journal International Citation Annual Index’ ² as the most influential academic journal in China (CNKI, 2018). The leading position of Accounting Research is well-regarded and it is often considered the most authoritative source that represents the prevailing academic views in China (Zhang and Andrew, 2016). The Chinese news media sources were retrieved from Factiva, a database that captures articles from major newspapers, industry publications and news based websites in China from the mid 1980s to the present (Factiva, 2019).

This article used a relatively broad term – zhenfu kuaiji, or ‘government accounting’ ³ in keyword searches. The nature of the article’s research question requires an actual reading of texts so that the underlying intention and meaning of the writing is understood, thus this research does not rely on computer software such as NVivo to process the data. The texts were read by the author in a chronological order to identify the key themes. The original Chinese texts were translated by the author and checked independently by a research assistant.

Government accounting during the Maoist era (1949–1976)

This section briefly reviews the early phase of the PRC’s history (1949–1976), which forms the essential background out of which the course for change in government accounting practice has evolved. Chairman Mao Zedong presided over this period with a regime that had a clearly defined socialist political system, featuring class struggle, public ownership and a centrally planned economy (Guthrie, 2006). With a promise to restore prosperity after successfully ending corrupt domestic regimes and ceaseless wars of foreign imperialism, the party received enormous support nationwide during the first seven years of the PRC (1949–1956), and this solidarity successfully mobilised a rapid economic recovery as well as the quick centralisation of political institutions (Lieberthal, 2004).

The MOF was established on 1 November 1949 and a division in the MOF was formed to oversee the development of accounting systems on 12 December 1949 (Yang, 1988). For public financial management, a unified principle was adopted to centralise all fiscal revenue and expenditure to be administered by the central government, including food grain output, taxation, trading and banking incomes. ⁴ Under this system, industrial inputs and outputs were centrally determined by the State Planning Committee. Agricultural production also operated under collective ownership. The government, instead of markets, assigned commodity prices and labour costs. Private economy or market mechanisms were largely eliminated as capitalism was deemed a class enemy (Schell and Shambaugh, 1999).

On 9 March 1950, the MOF announced a decision to develop a Soviet-style approach to accounting practice nationwide, which placed a significant focus on cost planning and management. As such, the accounting practices of different sectors were governed by their own industrial accounting systems ⁵ that prescribed specific instructions, including uniform charts of accounts, bookkeeping methods, and formats and procedures of accounting reports (MOF, 1950). In less than two months, 22 such industrial accounting systems were drafted and submitted to MOF for approval by 13 major sectors ⁶ (Yang, 1988).

The system for the government sector was named ‘budgetary accounting’ and it was designed to monitor the execution of overall budgets in the form of cash inflows (collection of revenues) and outflows (appropriations). ⁷ The budgetary accounting system functioned as a managerial tool that presided over a highly centralised budgeting structure. This system managed five levels of government, including the central, provincial, municipal, county and township levels. The process of budget preparation and approval started from the lower levels of government, who would submit their budgets to the next level for review and approval, which were then merged with the upper level budgets and submitted upwards. The central government then combined all the provincial budgets with its own to form the state budget (Zhang, 1999). The mobilisation of fiscal resources was strictly controlled by the central government, where local (provincial level) governments collected most of the budgetary revenues and returned them to the central government for reallocation (Aiken and Lu, 1993). At this time, China had very few types of tax revenue because the majority of the nation’s economy consisted of state-owned enterprises (SOEs), and the budgetary revenue comprised mainly of the profit remittances from the SOEs, tax revenues and other miscellaneous items such as donations (Aiken and Lu, 1993; Xu, 2011).

Although this uniform system was largely maintained throughout the Maoist period, there were considerable modifications to the system after 1957. These changes were indicative of a response to the fraught sociopolitical environment in the first seven-year recovery phase, where material hardship and ideological conflict had become increasingly prevalent among peasants, party cadres and urban intelligentsia (Lieberthal, 2004). These social distresses were exacerbated by China’s worsening relationship with the Soviet Union. In May 1957, Chinese intellectuals unleashed a movement – the Hundred Flowers campaign to refine the moral framework for the Chinese political system, which triggered a series of strike actions from workers, as well as other organised activities targeting local party officials. Mao launched the Anti-Rightist campaign in June 1957 in response. More than 400,000 urban residents were branded as rightists and sent to penal camps or the countryside for forced labour (Lieberthal, 2004). The Great Leap Forward movement (1958–1962) emerged out of these tensions, which was accompanied by the People’s Commune, the Great Famine, and the 10-year Great Proletarian Cultural Revolution (1966–1976) thereafter. These continuous political campaigns radically disrupted social order, which also significantly shaped accounting discourses and practices to heavily focus on the varied political agendas between 1957 and 1976 (Xu et al., 2019).

There were abundant political sentiments that drew upon the class nature of accounting as whether it should serve proletarian or capitalist interests (Xu et al., 2014). After the disintegration of the Chinese-Soviet relationship in 1955, there were strong campaigns to simplify the Soviet-style accounting systems so that they could be easily understood by the masses (Xu et al., 2019). On 18 June 1958, the MOF (1958b) abolished four major accounting systems that covered construction, costing, and auditing for industrial sectors, claiming that ‘the regulations are too rigid, too complicated, and not easy to understand’ (p. 1). Throughout the rest of 1958, a series of regulatory measures were introduced to reduce the requirements for both local and central governments’ budgeting reports. For instance, on 3 July 1958, the MOF cancelled all quarterly budget reports from local governments (MOF, 1958a). In June 1963, the MOF further simplified the accounting requirements for both local and central governments, including the removal of all items related to additional budgetary revenue and expenditure in local government annual budgetary reports and the quarterly report of administrative expenditures from central government departments. The main purpose of these measures, according to the MOF (1963), was to free up staff in financial departments so that they could participate in the ‘political revolutions’ (p. 1). On 26 October 1969, the central government launched the Down to the Countryside movement, in which urban youths were sent to rural areas to live and work in order to be re-educated by peasantry. It brought all higher education institutions to a halt as many higher education institutions (including most of the finance and economics universities) were shut down. The MOF division that was responsible for setting accounting systems also ceased operation and only re-opened on 1 January 1979 (Yang, 1988).

As revealed by Xu et al. (2019), the general feature of accounting discourse during this period mainly focused on the political nature of accounting, with particular reference to industrial enterprises or People’s Communes. The Chinese accounting literature rarely ventured into discussions about government budgetary performance or its associated accounting practices. The radical politicisation of the period also inhibited free discourse on governmental affairs, including understandably financial accountability, as it might be perceived to challenge the political leadership and be branded as ‘counter-revolutionary’ and harshly penalised (Fenby, 2008). Under such circumstances, it is hard to imagine that the government’s financial records were able to be easily scrutinised or discussed by the general public. Indeed, there had been a long-held view that government financial information was a national secret (Zan and Xue, 2011; Zhang et al., 2013). Commenting on this feature, Zan and Xue (2011) remarked,

the whole public sector accounting system is to a large extent a mystery to Chinese accounting scholars themselves who rarely have access to accounting figures; and, in general, everything should be ‘handled with care’ because of possible implications. (p. 54)

As this article shows below, serious discussions over government accounting thought and practice only started to emerge when the post-1978 economic reforms shifted the broader discursive focus in the PRC from politics to economy.

Government accounting reform and the socialist market economy (1978–2019)

The early history traced earlier illustrates the close relationship between China’s changing public sector budgetary accounting practices and the highly centralised political and economic system in place. When China decided to move away from the centrally planned economic system to embrace a market economy, government accounting practice was seen to experience new difficulties, which laid out the discursive conditions that legitimise the later reform. This section will examine the shifting conceptual patterns on government accounting found in the Chinese discourse throughout the economic reform period to the present (see Table 1). As discussed previously, discourses produced by government, leading academics and public media represent an important dimension of social interaction and an examination of them helps reveal insight into the purpose and meanings constituted by external social processes (Thompson, 1990; Van Dijk, 1985). With this understanding informing analysis, this section will illustrate how changes to government accounting in thought and practice can most fully articulate with reference to China’s underlying socioeconomic concerns rather than against global NPM narratives, particularly in the country’s development of socialist market economy during the post-Mao period.

Limitations of budgetary accounting

The political chaos and economic failure of the Mao era prompted the CCP to take measures to save itself from a severe legitimacy crisis following Mao’s death in 1976 (Saich, 2015). Economic reforms were initiated at the third Plenary session of the 11th Central Committee of the CCP held in 1978. These reforms initiated a movement away from the centrally planned economic system to embrace market economics. During the reform era, both the economic foundation of the country and the administrative measures of fiscal management for the government underwent substantial change. The complex dynamics of this evolution created a substantially different social and political context from which growing discussions on government accounting practice began to emerge. A major concern was related to the deficiencies of the old accounting system, and in particular, its cash-based budgetary reporting practice.

The major strategy of the broader economic reforms was to decentralise decision-making powers in the economic system to liberate productive forces (Lieberthal, 2004). Systemic reforms, such as the liberalisation of trade and pricing mechanisms, the opening up of domestic markets to foreign investment and the corporatisation of SOEs were implemented to optimise economic productivity (Lieberthal, 2004). As the reforms unfolded across the 1980s, many SOEs were restructured to share-holding companies. Profits from SOEs that were previously returned to the central government (in the form of profit remittances) reduced significantly, shifting the foundation of fiscal revenue for the central government (Yang, 1994). To cope with this structural change and to reflect the different nature of the SOEs, the MOF started to develop a set of Chinese accounting standards from the 1990s, the Accounting Standards for Business Entities (ASBE), aiming to align business accounting with Western practice (Xu et al., 2018). The ASBE further converged with the International Financial Reporting Standards (IFRS) in 2007 and became mandatory for all listed companies in China. It is worth-noting that all central government-owned enterprises also adopted the ASBE from 2007.

The budgetary reporting system remained in place in the government sector, but with administrative adjustments to cope with changes brought about by economic decentralisation. For instance, departmental budgets were established within all levels of government, payment and collection for government procurement was standardised and centralised, and performance evaluation introduced (Lou, 2002). The MOF also experimented with changes to the budget accounting system from the 1980s onwards, making revisions to accounting methods and account classifications to strengthen the budget management function of the government (Yang, 1988). Although the government called these changes ‘reforms’ (Lou, 2002), they were mostly technical refinements to the existing budgetary system without significant change to its cash-based principle or fundamental reporting purpose.

Across the 1980s and 1990s, accounting discourses remained scarce. As an example, the CNKI database traces Chinese literature published from 1980 to the present, and a general keyword search for ‘government accounting’ from various sources including journals, theses and other materials returned only four items in the 1980s and 20 in the 1990s. Furthermore, these results mostly contained very short commentaries on budgetary accounting and brief introductions to government accounting practices in Western countries. Similarly, the first news item on ‘government accounting’ on Factiva appears only in 2002. From the summary of news items provided in Table 2 of the Appendix, the discussion during the 2000s mainly revolved around the need to initiate reforms over budgetary accounting practice as part of a broader reform agenda for more efficient fiscal management in the public sector overall.

The first academic article concerning government accounting identified in Accounting Research was published in 1997, and from 1997 to 2005, a general theme of the literature on government accounting focused on the changing economic environment and its impact on government budgeting and its associated reporting practice. These papers all recommended certain reforms to yusuan kuaiji (budgetary accounting), or the way in which the government reported its budgetary practice (Li, 1997; Li and Xiao, 2004; Liu, 2002; Su and Wang, 2002; Zhang, 2001). Scholars consistently cited changed institutional needs created by the market economy as the major reason for budgetary accounting practice reform. Advocating the reform, for instance, Li (1997) emphasised, ‘government accounting is fundamentally related to the social, political and economic environments’ (p. 41). While an increasing proportion of the country’s economic resources were no longer coordinated through the central planning system, scholars called for a proper public finance system to supervise state revenue and expenditures and to strengthen its organisational management functions (Cheng, 2003; Liu, 2002, 2004; Zhang, 2001). These included the important steps of, according to Li and Xiao (2004), ‘establishing a new financial management system in government that [would be] compatible with a shehuizhuyi shichangjingji or, “socialist market economy”’ (p. 7).

A concept of ‘government accounting’ referring to financial reporting functions did not appear in academic discussions until 2001. Li (2001) criticised the lack of a financial accounting system in the government sector:

The total budget accounting system only reflects the financial status of fiscal revenue and expenditure; it does not reflect the current and continuous impact of budgeting on the government’s overall financial position from a continuous, comprehensive, systematic and complete perspective. (p. 11)

By stating this, Li was among the first to raise concerns about the difference between yushuangkuaiji (budgetary accounting) and zhengfukuaiji (government accounting). Along similar lines, discussions in the journal thereafter largely focused on the different function of these two accounting practices in the new regulatory environment. It was agreed among academics that a lack of financial records on the assets and liabilities of the government was problematic from both a public scrutiny and an internal decision-making perspective (Cheng et al., 2005; Li, 2001; Liu, 2002). Similar to Li’s comments on budgeting, Liu (2002) noted a lack of consolidated financial statements:

the annual fiscal budget submitted to the National People’s Congress reports only the fiscal revenue and expenditure, it does not disclose the substantial amount of fixed assets and their usages as a result of using budget funds; government borrowed money; the outcomes of budget expenditures, & etc. (p. 27)

Not only was it difficult for the legislature and the public to monitor government finances, the finance department itself also lacked important information for macroeconomic decision-making. This lack of financial information, according to (Lu, 2004), ‘is not conducive to strengthening governmental assets/liabilities management, or preventing financial risk-taking, and the provision of public goods’ (p. 5). In a questionnaire survey conducted by Cheng et al. (2005) on attitudes towards budgetary accounting, 89.9 per cent of preparers and 89.3 per cent of users of government financial information advocated for reform.

Similar themes were identified in news media. The amount of news items reporting on government accounting related issues between 2002 and 2010 were few (only 15). These articles mainly commented on the need for reforms to the budgetary accounting system for better fiscal management. The concept of financial accounting does not appear in the news until 2011.

As shown from the earlier discussion, concerns over the technical capacity of government accounting were originally raised in reference and response to changing conditions triggered by the broader transition towards market economics in the PRC. The introduction of decentralisation prompted an overhaul of both the management structure and its productive outcomes of the state-owned sector. These changes form the historical context needed to understand the particular pressures influencing reform to China’s central fiscal governance in which accounting has been perceived as a key aspect.

Functions of accrual-based financial accounting

From 2002 onwards, the concept of NPM started to emerge in Chinese academic discourses, echoing similar ideas articulated by Western scholars on public sector accounting (Christensen et al., 2019; Guthrie et al., 1999). Discussion has mainly focused on the difference between cash-based budgeting (budgetary accounting in Chinese) and accrual-based financial accounting (government accounting in Chinese).

Most Chinese accounting scholars identified in the dataset were critical of the cash-based budgetary accounting system and called for a new accrual-based financial reporting system to improve public financial management. As a distinct feature, their arguments were couched in the language of NPM. For instance, Li and Xiao (2004) wrote,

In accordance with the new public management idea to maximise the public interest, it is clear that budgetary accounting cannot fully account for and reflect the government’s public financial activities, the usage of public funds and the government’s fiduciary duties. (p. 9)

Referring to the need to measure and evaluate efficiency and performance, it was consistently emphasised that government financial reports should be able to reflect the continuous movements of public funds and the outcomes of budget expenditure, as well as their impacts on the government’s financial position (Li and Xiao, 2004; Lu and Li, 2006; Wang, 2004; Zhang, 2008). Cash-based budgetary accounting was seen as unable to achieve these functions (Cheng et al., 2005). Some advocates such as Li in as early as 2001 noted that ‘our government accounting should change to the use of a modified cash-based system, and when conditions are ripe, it shall gradually move to accrual accounting’’ (Li, 2001: 14).

The adoption of accrual accounting was justified in terms of better quality information for decision-making and resource allocation. This emphasis is consistent with Western discourses on the problems of cash accounting in the public sector, where accrual accounting is commonly considered to produce more relevant financial information, facilitating greater transparency and accountability in Western public sectors (Carlin, 2005; Funnell et al., 2012). Consistent with this logic, Zhang (2008: 11) argued, ‘it [cash accounting] only discloses the allocation of fiscal revenue to government administrative departments and institutions, without revealing the actual economic outcomes of the use of public funds’. This means that the assets generated and the investment returned from public resources were absent from accounting records. For instance,

The inventories purchased by administrative institutions are not recognised as assets and are not properly registered in accounting records, which makes it difficult for inventory management and leads to the possible loss of government assets. (Zhang, 2008: 12)

Furthermore, Zhang (2008) warned that cash accounting ‘lacks critical information that links government finance and administration, which leads to corruption and government function failure’ (p. 11).

In terms of accounting for performance efficiency, scholars wrote that it is important that accounting information can and should evaluate the financial performance outcomes of public sector management (Liu, 2002). A general concern repeatedly raised by scholars is that cash-based accounting information may sometimes provide misleading information for the purposes of performance evaluation. As Chen et al. (2002) explained,

Firstly, the information about the central and local governments’ financial situation is distorted. The decision-makers are unable to see the kinds of economic resources at work, assets (such as fixed and intangibles) and liabilities (such as the long-term debt and the arrears of expenses). Secondly, the information of full operating costs and its fluctuation are distorted. (p. 35)

Therefore, it would be biased to use cost information under the cash-based system to assess the efficiency and quality of government public services. Research conducted by the Beijing Finance Bureau (2006) revealed some more specific problems ‘in the expenditures on capital constructions, the depreciation of fixed assets and the government’s present and future obligations, such as arrears of wages or refunds’ (p. 36).

In addition to the need to monitor performance efficiency, another key concept emphasised throughout the literature is the government’s shoutuozeren, a term that can be translated as ‘fiduciary stewardship’, meaning the accountability of the government from a stewardship perspective. This is tied to an understanding of government accounting as a mechanism or technique used to disclose the government’s fulfilment of its fiduciary responsibilities. According to Song and Chen (2002),

the accrual basis is the necessary means for the users to evaluate the performance of the fiduciary duties of the government, and it is also the right direction of the government accounting reform under NPM. (p. 58)

Some researchers considered the need to match Western practice (Chang, 2013; Liu, 2004). In referring to international experiences, Zhang (2006) proposed that China should adopt a model that emphasises internal fiduciary responsibility in the executive branch of government, similar to France and Germany, where the central government has a higher degree of control over local governments.

The notion of ‘transparency’ was another central reference point in the Chinese discussion. Here cash-based accounting was criticised for providing insufficient information to agendas similar to NPM (Cheng, 2004; Zhang, 2008). According to this group of scholars, cash-based accounting practices cannot accurately reflect the actual use and efficiency of public goods and services provided by the government, and as a consequence, no improvement in internal efficiency to the provision of public goods and services can be initiated. Some studies referred to the government’s authority and its associated responsibility, such as Zhang (2008) who wrote, ‘the cash-based system results in a mis-match between the power and responsibility of the government during the accounting period’ (p. 12). Because cash-based accounting does not recognise the government’s accrued liabilities, it ‘exaggerates the government’s real disposable financial resources and covers up current financial difficulties, increasing the government’s future financial risks’ (Zhang, 2008: 12). Referring to the use of income raised from government bonds, Chen (2014) hoped that the use of accrual accounting would monitor the use of funds in accordance with their operating purposes. In recounting these benefits, many academics viewed the change to an accrual-based reporting system as ‘inevitable’ (Chang, 2016: 15; Liu, 2010: 12).

On the other end of the spectrum, cautious opinions have also been expressed on the adoption of accrual accounting in public governance. A key focus of this discussion has been on the different nature of the public and private sectors. For example, decision-making in the government sector has been seen as not being oriented towards generating ‘profit’, and thus, the adoption of private sector accrual accounting methods was seen to be fundamentally incompatible with public governance (Chen and Li, 2003; Lu, 2004; Wang et al., 2009; Zhang et al., 2010).

Specific concerns over assets/liabilities measurement and income recognition have also been raised. Some have pointed out that certain types of assets and liabilities in the government sector can hardly be measured in monetary terms. As such, Lu (2004) wrote, ‘many assets of government or public departments in our country have often been acquired at no costs through central remittances or donations’ (p. 8). Similarly, accounting for public land, nature reserves or heritage assets are difficult as neither a historical cost nor a market price can be obtained for accrual-based financial reporting purposes (Lu, 2004). For liabilities, as Chen and Li (2003) remarked, ‘it is often difficult to distinguish between the legal duties, social responsibilities or political promises of the government sector and how to measure them in the financial statements’ (p. 50).

Similarly, some academics commented on the incompatibility of the matching principle in terms of government income recognition. Many of the public goods or services provided by government are funded by taxes rather than fees directly paid by service recipients. Some revenue will be generated without a direct item of expenditure, which means that the underlying relationship in income recognition is different from that in the private sector where operational expenses are directly matched with revenue (Chen and Li, 2003; Lu, 2004).

Other concerns relating to the implementation of accrual accounting included high operating costs (compared to cash accounting; Beijing Finance Bureau, 2006; Li, 2001); technical competency of accounting practitioners (Cheng et al., 2005); and the reliability of accrual accounting, with its increased potential to allow creative accounting practices (Chen et al., 2002; Xu, 2006).

To some extent, these criticisms echo Western debates relating to the technical difficulties and/or controversies of accrual accounting methods in reporting government operations (Christensen et al., 2019; Newberry and Pallot, 2005). It is important to note, however, the common attitude among the Chinese critics was not to reject accrual accounting altogether, but to take a cautious approach of wenbu tuijin or ‘steady progress’. Scholars recommended a partial adoption of the accrual principle to the cash-based system at the early stage of implementation (Chen, 2011; Wang et al., 2009; Zhang et al., 2010).

The advantages of an accrual-based financial reporting system were also advocated by news media (as summarised in Table 2 of Appendix). In essence, media narratives mirrored academic discourses that praised the accrual-based system for the possibility to improve transparency and performance efficiency in governmental fiscal management. It is worth-noting that no negative comments appeared in the news on the government accounting reform. In the extensively censored media environment in China (Roberts, 2018), this narrative indeed represents the view that is sanctioned by the government.

Objectives of government accounting: unified leadership and hierarchical management

The concepts of efficiency and transparency were also highlighted in the narratives that academics used when discussing the objectives of government accounting in China. For instance, Chen and Chen (2005) argued,

the goal of government accounting is to achieve the highest level of economic transparency of the government’s performance . . . in line with the NPM movement in developed countries, it puts forward higher requirements on accounting information in order to strengthen the supervision and evaluation on government performance. (p. 61)

The two key notions of achieving fiscal transparency and fulfilling fiduciary responsibilities are reiterated throughout the discussion on the objectives for reform. Some academics argued, ‘fiscal transparency is the basic practice of a responsible government that is built upon the rule of law’ (Chen and Chen, 2005: 63) and ‘the highest objective of government accounting is to help the government fulfill its fiduciary duties’ (Chen and Li, 2003: 50). Some other functions of the reform proposed by academics included enhanced resource allocation and risk management (Chen, 2014) and internal supervision (Chen and Li, 2015).

In visualising the duties of government through accounting reform, however, one missing topic in the literature has been the need to fulfil the information needs of external users (citizens) as ‘resource providers’, a theme which has been a major concern in Western literature (Broadbent and Guthrie, 2008). The Conceptual Framework of International Public Sector Accounting Standards Board (IPSASB, 2014) is an example developed in the Western context that exhibits this strong emphasis to ‘provide information about the entity that is useful to users of GPFRs for accountability purposes and for decision-making purposes’ (para. 21). While implying enhanced internal control through greater visibility and efficiency, the IPSASB explicitly advocates for the information needs of external users, that is, the legislature (or similar body), members of parliament (or a similar representative body), and citizens who receive services from, and provide resources to, the government and other public sector entities. In contrast, at the core of the Chinese discussion for reform is an explicit connection between government accounting and the needs of tongyi lingdao he guanli – ‘unified leadership and hierarchical management’. This is a feature in the government’s accounting discourse that is specific, characterised by China’s highly centralised political governance system.

In contrast to Western liberal democracies, all legislative, executive and judicial powers in the PRC are under the direct control of the CCP through the central government (Saich, 2015). The appointment of members to the Politburo Standing Committee – the top tier of the CCP – is not determined by a competitive election. Similarly, the governors of all provinces and autonomous regions and the mayors of centrally controlled municipalities are directly appointed by the central government in Beijing. This structure has not changed despite transformations to the national economy.

In the absence of general elections, the various levels of government in China are inclined to be held accountable to their upper echelons, rather than to the public. Compared to Western counterparts, the need to demonstrate financial viability in terms of cost-saving and efficiency to an electorate is not of real concern. Rather, the discourse insists on the function of government accounting information as key to enabling the assessment of the extent to which the government has discharged its ‘fiduciary duties’. Chinese scholars are thus more concerned with the usefulness of the information for control or ‘central supervision’ (Chang, 2016; Zhang and Zhang, 2012).

The principle of ‘unified leadership and hierarchical management’ is also seen as the guiding principle of the fiscal budgetary management system overall. As such, the leadership of the central and higher levels of government ‘must understand the basic financial situation of the lower levels of government in formulating macroeconomic policies’ (Li, 2001: 16). As would be expected, while the literature refers to general terms such as efficiency and transparency, academics spoke of the necessity to place these concepts in China’s unique sociopolitical context, emphasising that efficiency and transparency are needed for unified central management to ensure the leadership of the Party (Chang, 2016; Cui et al., 2015; Li and Zhang, 2015). Zhang and Zhang (2012) rationalised this attitude as such,

Our political system is fundamentally different from that of Western countries: (1) We adhere to the absolute leadership of the CCP (including political, organisational and ideological leaderships). The type of party competition that is common in Western countries is not applicable in our country. (2) We adhere to the people’s democratic dictatorship and a political consultancy system. (p. 28)

As political competition is absent in China, governments no longer aim to ‘maximise the vote’ as the ultimate goal of information disclosure according to the authors (Zhang and Zhang, 2012). Rather, the main driving force for information disclosure is to enable improved financial supervision by higher level governments. Therefore, the objectives and functions of China’s government accounting need not, in the words of Chen and Li (2015), ‘blindly draw on the experiences of international organisations or developed countries’ (p. 19).

The fundamental political difference underlying the perceived objectives of government accounting in China also affects how the concept of ‘reporting entities’ is defined in the literature. The concept of ‘reporting entities’ is different in China to those developed in Western contexts. For instance, according to the IPSASB (2014),

a key characteristic of a public sector reporting entity is the existence of service recipients or resource providers who are dependent on GPFRs of a government or other public sector entity for information for accountability or decision-making purposes. (The Basic for Conclusions, para 4.2)

From this perspective, the major criterion for determining the reporting entity is the existence of external parties including ‘service recipients’ or ‘resource providers’.

In conceptualising the reporting entities, the Chinese discourse takes a different approach, focusing on internal supervision needs, as discussed earlier. In line with this, the reporting entity is defined differently in China. According to the Basic Standard ⁸ issued by the MOF (2015) in October 2015, reporting entities include ‘state organs, the armed forces, political parties, social entities, public institutions and other units, which receive, directly or indirectly, budget appropriations’ (para. 2). The ‘state organs’ refer to the five levels of government and other state institutions, such as the National People’s Congress and the National Committee of the Chinese People’s Political Consultative Conference. Under China’s centralised political hierarchy, the ‘political parties’, ‘social entities’ and ‘public institutions’ ⁹ are all under direct control of the CCP in terms of personnel appointment and other essential administrative functions. In this context, the Western concept of users as ‘resource providers and service recipients’ is not considered for the accountability needs of governments in China.

Such a conceptualisation of reporting entities has affected how SOEs are considered in the government accounting system. As mentioned previously, SOEs were major stakeholders in the fiscal system before the economic reforms. In spite of significant changes to the SOEs’ functions and their relationship with government, scholars still emphasised their importance and the need to maintain public ownership in China. For instance, Ye and Feng (2006) implored,

Our country is a socialist country and it is the fundamental requirement of the socialist economic system to adhere to the principle of public ownership, which is also the foundation to ensure the basic interests and common prosperity of all people. (p. 73)

This commitment to public ownership may sound paradoxical considering the extensive practice of capitalist-style market economics in China. However, a closer examination of China’s contemporary political economy sheds further light. Despite the restructuring of many Chinese SOEs since the 1990s, the central control of the state has not been transformed at a fundamental level. The CCP has never publicly committed to a comprehensive privatisation programme for the Chinese economy. Rather, the government has reiterated the significance of maintaining the public ownership of economic relations. Li (2002: n.p.), the then chairman of the Ministry of Commerce highlighted,

Public ownership, as the foundation of the socialist economic system, is a basic force of the state to guide and promote economic and social development and is a major guarantee for realising the fundamental interests and common prosperity of the majority of the people.

The Chinese government now retains direct control over 150 large SOEs in major sectors, such as telecommunications, transportation and power generation. It also maintains indirect control in other sectors through the financial system and through other regulatory measures (Hersh, 2012). According to a report by the US–China Economic and Security Review Commission, the visible state sector – SOEs and entities directly controlled by the SOEs – accounted for approximately 50 per cent of China’s non-agricultural gross domestic product (GDP; Szamosszegi and Kyle, 2011: 1). As of 2011, 35 per cent of business activities and 43 per cent of profits in China came from companies in which the state owned a majority interest (Handa, 2014: 72). The decentralisation measures introduced throughout the economic reforms created confusion over the strategic priority of a state-led growth model. It is increasingly recognised, however, that the party has directed significant flows of resources to prioritise the state sector, particularly since President Xi assumed office in 2012 (Lardy, 2019). Empirical evidence has consistently shown a marked deceleration of private investment compared to state investment in China from 2012 to 2018 (Lardy, 2019). While advocating the role of the market in allocating resources, the highest economic decision made by the party explicitly called for

unswervingly consolidating and developing the public economy, persisting in the dominant position of public ownership, given full play to the leading role of the state sector, continuously increasing its vitality, controlling force and influence. (CCP, 2014: n. p.) ¹⁰

Within this context, if one follows the concept of reporting entities that prevails in the Western public sector such as in the IPSASB Conceptual Framework, it becomes difficult to include a Chinese SOE as a reporting entity in the whole-of-government financial reports. The IPSASB framework implies a ‘control’ principle in determining the inclusion of an entity or activity within a public sector group reporting entity. More specifically, it explains,

A government or other public sector entity may (a) have the authority and capacity to direct the activities of one or more other entities so as to benefit from the activities of those entities, and (b) be exposed to a financial burden or loss that may arise as a result of the activities of those entities. (IPSASB, 2014: BC4.8)

This means that government-controlled business undertakings are most likely to be considered as part of a public sector reporting entity under the framework.

The status of Chinese SOEs, however, is much more complicated. There is no clear distinction between ‘private owned’ and ‘government owned’ enterprises in terms of government support in China (Hersh, 2012). There is an intrinsic link between business leadership and government economic positions in this environment (Whiting, 2001). The party also exercises power from within a scope well beyond direct ownership. As such, ‘little takes place in local economies without the explicit or tacit blessing of local officials’ (Hersh, 2012: 3). The decision-making power of the government is extensively distributed throughout the economy.

The relationship between government influence and the business activities of SOEs are comprehensive and opaque. Applying a Western rationale to a consideration of SOEs, particularly with the concept of ‘control’, is neither practical (as it would have to include too many business entities), nor suitable for the purpose of Chinese accounting reform (e.g. for government internal control). This issue of SOEs has received significant attention in the Chinese accounting literature. While acknowledging that the SOEs have often been subsidised by fiscal revenue and administratively affiliated with governments, Li (2001) suggested that ‘considering the large number of state-owned enterprises in China and their different nature compared to other administrative units, it is not appropriate to consider them as reporting entities’ (p. 15). A similar view has been raised consistently in the literature (Pan and Yang, 2018; Ye and Feng, 2006; Zhang et al., 2010).

The ideas of users and reporting entities were conceptualised in the first government accounting standard released by the MOF (2015), which specified users as ‘the Standing Committee of People’s Congress, creditors, governments of all level and the relevant departments, the government reporting entities themselves and other stakeholders’. The MOF (2015) stipulated clearly that SOEs were not included as reporting entities.

Local government debts and fiscal risks

In highlighting the increased supervisory and management capacities available through accrual-based accounting, a major issue that was reiterated across both academic and public media discourses was the issue of local government debt and its related fiscal risks. Academics first raised this concern in the early 2000s. It also became a major discussion point in the media since 2011, such that 20 out of 37 news items found between 2012 and 2014 reported on this issue. Views expressed in the media were consistent with academic discussions (see Table 2 in Appendix).

At a general level, academics agreed that the non-reporting of government liabilities under the cash-based accounting system had brought about adverse effects on government financial risk prevention (He et al., 2011; Liu, 2010; Xiao, 2010). Xiao (2010) argued that ‘government accounting as a professional practice should fulfill its role in preventing financial risk through a comprehensive assessment and calculation of various types of government debt risks’ (p. 20).

Some academics were careful in expressing their concerns about the solvency status of the government (Zhang et al., 2010). Zhao et al. (2010) wrote that

it is worth studying how to define the concept of ‘government bankruptcy’ from the perspective of accounting. Our country’s current budgetary accounting is unable to reflect the government’s solvency and financial risk. (p. 77)

In terms of specific information related to government liabilities, Zhao et al. (2010) pointed out,

Information about land, creditors and non-current assets that administrative institutions might hold is most urgently needed. According to survey statistics, the land use rights for sale, government debts and non-current assets of administrative institutions are the top three items of information that the people’s representatives and government policy makers are most concerned with. (p. 11)

The government debt described by scholars is the result of the particular phenomenon of ‘land finance’, which emerged as a key feature of Chinese fiscal management since the 1990s. As a part of decentralisation efforts, local (provincial level) governments were granted more autonomy in fiscal revenue collection and allocation from the 1980s onwards. This led to significant fiscal difficulties for the central government as local governments started to exercise their autonomy by intercepting fiscal revenue, for example, by lowering tax for local business entities to keep economic benefits at the local level. By 1993, central government fiscal revenue accounted for only 22 per cent of total revenue against 28.3 per cent for total fiscal expenditure (Chen, 2008).

In 1994, the government introduced a tax reform in order to articulate a clear division in fiscal responsibility and tax-collection duties between central and local governments. The new tax-sharing system divided all taxes into three categories: national (collected by central government), local (collected by local governments) and joint (shared between central and local governments). The allocation of taxes into these newly defined sources led to a substantial increase in the central government’s share of total fiscal revenue. For instance, in the first year of the new system the ratio of central to local government fiscal revenue was reversed from 22:78 to 56:44 (Chen, 2008). This arrangement had a significant negative impact on local government fiscal pressures, however, as their responsibilities for providing public services and infrastructure were not reduced (Wu et al., 2015).

Under the current CCP promotion policy, the head of a local government is evaluated on the region’s economic growth measured by GDP. The pressure to improve fiscal deficiencies and boost GDP growth caused local governments in China to rely heavily on land grant premiums ¹¹ and land taxation as extra-budgetary revenue (Chen, 2008; Gong, 2012; Wu et al., 2015). Between 1999 and 2009, for instance, land grant premiums increased dramatically from 51.43 billion yuan (around US$7.61 billion) to 1,591.02 billion yuan (around US$235.25 billion) at an annual growth rate of 40.94 per cent (Wu et al., 2015).

Many have argued that this institutional change has driven massive urbanisation and the explosion of real-estate development across China since the 1990s (Wu et al., 2015). This expansion has caused significant difficulties, particularly after the global financial crisis when the housing market stagnated. Because the central government prohibited local governments from borrowing funds themselves (before 2014), ¹² local governments started to seek debt finance from banks and shadow banking institutions in a ‘hidden’ way under the pressure of reducing local fiscal deficient and recovering GDP growth. A large proportion of the debts were structured as land mortgages from banks through investment companies created by local governments, who then implicitly endorsed the loan payments. These loans were ‘off-book’ in terms of local government financial records and are often described in the literature as ‘hidden local debt’.

These ‘hidden’ government debts have been seen to have created significant fiscal and banking risk in the Chinese economy, particularly as there are no accounting tools in existing government accounting practices that can account for the scope of the practice of land finance. The debts are thus also out of the control of the central government in Beijing. According to research undertaken by the National Development Institution of Peking University, the borrowings of many local governments exceed their annual fiscal revenue by five to six times (Huang, 2013). The S&P Global Ratings (2018) estimate that China’s hidden subnational debts could be as high as US$6 trillion or more, which is ‘a debt iceberg with titanic credit risks’ (p. 1). World Bank economists estimated that three-quarters to four-fifth of all fixed investment in China were financed from sources that the central government had no direct control over (Cull and Xu, 2008). The sky-rocketing borrowings of local governments have been acknowledged as a major concern by the party. President Xi Jinping (2013: n. p.) stated, ‘ . . . we are soberly aware of potential problems and challenges from falling demand, overcapacity, local debts and shadow banking, and we are paying close attention to possible impacts coming from the outside’.

Without the ability to recognise the accrued proportions of assets and liabilities, the existing cash-based budgetary accounting system fails to disclose the level of debts held by local governments. To provide more credible information about the government’s financial position, the accrual-based system is thus seen as an effective measure to mitigate a potential fiscal crisis (Liu, 2010; Xiao, 2010; Zhang et al., 2010). Many studies pointed out that local government ‘hidden debt’ is a systemic defect and its fiscal risks will eventually become the government’s liability (He et al., 2011; Liu, 2010). Since the central government lifted the ban on local government direct borrowing from financial markets in 2014, it has become even more pertinent that the financial positions of local governments are disclosed for the accurate pricing of debt securities (Jiang et al., 2018). In this context, He et al. (2011) emphasised,

it is imperative to establish a scientific accounting system to accurately measure the government’s economic resources and debt situation. The system could then prevent government debt risk and strengthen financial management and control. (p. 42)

The use of the word ‘prevent’ shows a sense of power about accounting to enact change and mitigate crisis as perceived by the academics. However, such discourses might place too much significance on the functional possibilities of financial reporting practice. Accounting information cannot prevent the problem, but it might give decision makers better information to spur action.

Discussion and conclusion

This article has primarily relied on pre-existing scholarship on government accounting in China to provide a historical narrative on the changing attitudes that have motivated reforms in the Chinese public sector. It has explored Chinese accounting discourses as a vantage point to see the changing sociopolitical dimensions that have led up to the recent calls to comprehensively reform the government accounting practice.

Developed under a socialist political regime in 1949, the Chinese government accounting system mainly involved a cash-based budgetary reporting scheme for a highly centralised fiscal management model. As China transitioned towards a particular type of market economic system (the socialist market economy) and continues to transform, the structure of central fiscal revenue undergoes significant transformation. These broader economic and sociopolitical changes compelled Chinese scholars in the 1990s to interrogate the efficacy of traditional cash-based budgetary practices as they were seen to no longer meet the demands of a new governmental reality. As reflected in the Chinese discourses examined in this article, there has been overwhelming support from academic, government and news media to develop a financial accounting system in the government sector to supplement extant budgetary reporting. While scholars maintained that China should not and could not completely duplicate Western practices, they have consistently argued that the implementation of a new financial accounting system is nonetheless critical to Chinese public governance, enabling an account of the financial position and performance of the government sector under a market economy.

The regulatory changes introduced during the economic reforms post-Mao, such as the budget and tax reforms introduced in the 1990s, have generated a need for greater technical support in public sector accounting. With this key perceived need, the academic discourse made repeated references to a Western concept of NPM and its underlying agenda. The central notions from NPM of transparency, efficiency and accountability were consistently referred to during the discussion of the limitations of cash-based budgetary accounting in China. The initiation of decentralisation implied a shift in the concept of accountability, emphasising fiscal stewardship. A key problem was seen to be how decentralised economic activities might be appropriately accounted for in the newly developed market economic system. It was generally agreed among Chinese academics that an accrual-based financial accounting system similar to the kind developed in the West should be the path that China takes in order to overcome the technical failures of cash accounting.

In spite of using the same language of NPM in terms of efficiency and transparency, important conceptual differences underpin these key terms in Chinese narratives. More specifically, for the objectives of government financial reporting in the Western context, greater emphasis has been placed on external users (or citizens as the resource providers and service recipients) and how to evaluate the performance accountability of the public sector to these users. In contrast, an examination of the Chinese discourse reveals that there is no mention of this conceptual focus on external users. The development of a socialist market economy in China includes the retention of a strong place for public ownership and political leadership by the CCP, where accounting functions to improve the governance abilities over these domains. Within this context, discussions on the objectives of government accounting in China have revolved around the need for internal supervision to ensure effective central managerial control by the CCP. This political structure has also directed Chinese academics to contemplate the definition of ‘users’ in discussions of how Chinese SOEs should be approached in the government accounting reform. Chinese discourses also expressed widespread frustration with the cash-based system in relation to the potential risks that have been generated by local government debt under wider fiscal reforms initiated in the 1990s. With its critical technical capacities, accrual-based accounting reforms were considered to be instrumental for the central government to manage this unprecedented financial risk. As this article demonstrates, in contrast to other global narratives of NPM transitions, the recent government accounting reform in China reflects and responds to distinct sociopolitical and economic particularities. Discussions of public sector accounting reform have focused on how accounting technologies allow the Chinese government to be more accountable financially and politically from the position of stewardship.

In practice, China’s decision to produce accrual-based financial reports in the government sector will align government accounting practice in China with many other countries in the way public finances are managed and reported. However, the conceptual foundations motivating and framing the reform suggest that very different institutional, sociopolitical and economic causes have prompted the adoption of accrual accounting in public governance in China. To understand the transitioning towards NPM-informed accounting practices as a global phenomenon, China represents a particularly important case where NPM ideas are integrated and deployed differently in one of the most authoritative governments in the world. China’s experiences may contain deeper insights on the institutional processes and conditions that have facilitated the widespread programmes of NPM accounting reforms. This article has demonstrated that the current accounting reform is far from a benign financial amendment, but a project that is deeply entangled in the distinctive political and economic needs of the CCP as a socialist government. While this finding has largely remained at an empirical level in this article, hopefully it offers a basis for future research to unpack further theoretical implications, from which we may be able to better understand the nature of accounting beyond the taken-for-granted notions of transparency, efficiency and/or accountability in the public sector reforms.