Corporate governance in China
Recent developments in corporate governance policies and practices
Since the third edition of Tricker – Corporate Governance: Principles, Policies, and Practices published in February 2015, the subject has continued to evolve in regulation, policy, and practice. Some of the more significant developments include: Corporate governance in China
I lived in Hong Kong (now a special administrative region of China) for 14 years and have been visiting regularly since 1982. Over that time, China has changed from an essentially agrarian economy, through massive labour-intensive, low-tech manufacturing, to become the world’s second largest economy, second only to the United States. A substantial car and property owning middle class are now moving the economy from an industrial towards a consumer and service orientated society. Nevertheless, China remains a key manufacturer, increasingly in high-tech fields, backed by R&D. The double-digit economic growth seen in recent years was clearly not sustainable indefinitely, but the economic slow-down has produced some interesting corporate governance issues.
The two Chinese stock markets, in Shenzen (just across the border from Hong Kong) and Shanghai, are predominantly retail markets – institutional investors such as pension funds are relatively new. The markets are also relatively small compared with stock markets in Europe and North America. Seeing dramatic increases in share values and believing government assurances, many individuals borrowed to fund their investments. When the market began to fall, reflecting a slowing economy, and crashed in July 2015 with many shares suspended, the government panicked. In fact, the market had only fallen back to the levels of a year earlier. Yet the government tried to slow the fall by ill-judged interference – prohibiting initial public offerings and providing funds to buy-back shares in an attempt to prop up the market. An unanticipated devaluation of the currency by 2% compounded the problem by triggering panic selling of the yuan around the world.
State-owned enterprises (SOEs) still play a fundamental role in China, even though some of them are partially privatised and quoted on the stock market (3E, p297). The government maintains a tight control over industries which it feels are strategically important, such as oil, steel, and communications. Control is exercised through enmeshed relationships between government and party officials at every level: from the approval of strategic developments, the appointment and remuneration of senior executives, and the oversight of finances at the state or province level, down to Communist party cells in each plant at the employee level. Bureaucracy can hinder corporate development.
Private companies play an increasingly important role in China; for example, the e-business firm Alibaba, the vast conglomerate Dalian Holdings, and computer company Lenovo, (although Lenovo is a subsidiary of Legend Holdings, a conglomerate with SOE characteristics). In such firms, the founding entrepreneurs and top executives, working with shareholders, play the dominant role in setting strategic direction, the appointment of top management, and financial oversight. Private firms have more freedom than SOEs to innovate, respond to market opportunities, and stimulate change. Nevertheless, relationships with the state and party (the often mentioned guanxi) remain essential if a private firm is to prosper.
A recent IMF report in August 2015 calls for a transition in China from slower to better growth. It notes growth slowing as vulnerabilities, particularly credit growth, are reined in, and calls for policies calibrated to ensure orderly slowdown, and structural reforms to create new sources of growth (www.imf.org/external/pubs/ft/survey/so/2015/CAR081415B.htm).
Bob Tricker, January 2016