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Language of Exchange

As in many specialist fields, the world of finance is riddled with its own jargon. I have often thought that jargon is one of the most natural ways for specialists to justify their high fees and to protect their industry (read, jobs). Doctors, lawyers and even your car mechanic come to mind. This is just the way the world works.

The language of finance overlaps very much with the language of accounting. Hence, accountants and finance specialists constantly refer to EBITDA (earnings before interest, taxes, depreciation and amortization), current ratios, and various sorts of profit margins. After this, finance goes off on its own to cover terms such as non-systematic risk,  WACC (weighted average cost of capital), and discounted free cash flows. If you've never been exposed to this, it's a bit of a learning curve, and there are large dictionaries and Web sites that go to a lot of trouble trying to explain all this at the layman's level.

Finance in China adds to the fun. Chinese versions of English words, also known as "Chinglish," invariably pop up. Many of us have seen Chinglish road signs, but here are some examples in finance:

• City bonds versus municipal bonds. Municipals bonds, or "munis," are very common debt instruments sold by local (non-federal) government entities in the United States. They are a popular way to save because of their tax-exempt status. Hence, as a long term investment, they would produce a greater return than taxable bonds because the holder can compound whatever is saved on the tax payments. In China, these bonds have been called city bonds, which suggest they are only issued by cities, but munis are also issued by US counties and states, in addition to cities.
• Tax payments versus taxes payables. One local accountant I was speaking to constantly used the term "tax payments," which is an expense on any company's profit and loss statement, despite the fact that we were clearly talking about "taxes payables," which is a liability on a balance sheet. This was clear because we were both looking at the same balance sheet at the time. At first, I did not mind. But after the ninth iteration, my skin began to crawl and I finally told him to stop saying "payments" and begin using "payables." Accordingly, these are funds a company sets aside to pay the tax bill at a later time. For the record, it's not great English either, but as far as the industry goes, it's a very standard term.
• Devaluation versus depreciation. During the height of the Asian financial crisis in 1997-98, virtually every foreign currency trader in the world heard about and was betting on devaluation for the Chinese renminbi. They reasoned that if the other countries in the region devalued their currency, some by as much as 60 percent, China would have to follow along to maintain its export competitiveness. Devaluation is usually a one-time, sudden and significant adjustment to a country's exchange rate. Depreciation is typically more gradual, taking a longer period of time. While the world debated about the renminbi devaluation, I was amused to see how the Chinese words for devaluation and depreciation, 贬值 (bianzhi) were actually one and the same.

Happy Holidays to All!