Globalization, Transparency and Economic Growth - The Vulnerability of Chinese Firms to Macroeconomic Shocks

The process of globalization encompasses economic and financial integration. The abolition
of capital controls and the dismantling of barriers of different kinds will expose previously
sheltered companies to shocks on the global economic arena. Policy-makers in already
globalized countries have learned that market participants should be prepared in due time to
meet the new exposure to fluctuating rates of exchange, interest and inflation. China has
recently adopted a version of the International Financial Reporting Standards (IFRS) in an
effort to improve the quality of information available for risk management and for pricing of
risk. This paper analyzes the gains in transparency from the implementation of IFRS in
Europe as of January 2005 and reports no improvements in regard to the macroeconomic impact on firms. Based on this experience, improvements for Chinese adoption are suggested. The paper presents a framework for how to understand and measure the impact of different scenarios on corporate performance. It also elaborates on how to communicate the macroeconomic effects to external stakeholders of the firm in a way that should foster further economic growth in China.