21 IntCorp ch6-2.qxd
Neng Liang and Michael Useem
Corporate governance in China has undergone significant change
during the past three decades as the Chinese economy has liberalized and developed. Prior to the historic reforms initiated in 1978
the economy had been structured as a state-owned, centrally
planned economy; practically all enterprises were government or
commune owned. Today, many companies are partially or wholly
privately owned, and that historic change has brought a sea change
in Chinese corporate governance, with securities policies well in
place and governing boards well established.
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China opened its equity market to
foreign institutional investors in 2003, and in 2005 it initiated a
programme to convert untraded state and company-held shares
into tradable securities.
With China’s market reforms and accelerating growth, the stock
exchanges have come into their own over the past decade. By
mid-2008 the Shenzhen Stock Exchange by listed 540 companies
with a total market value of RMB 1 trillion, and the Shanghai
exchange listed 1,172 companies with a collective value of RMB 15
trillion. The combined 1,712 companies with a capitalization of
RMB 16 trillion (£1.3 trillion) remained modest by comparison
with the New York Stock Exchange’s 2,800 companies and £11.4
trillion ($20 trillion) capitalization, and the London Stock
Exchange’s 3,000 companies and £3.5 trillion capitalization. The
Chinese exchanges were expanding rapidly, however, and the
basic institutions of an actively traded public equity market had
been put in place.
In just two decades, China had created a capital market that
measured up reasonably well by Western standards. Virtually all –
98 per cent – of the state- and company-held shares, for instance,
had become tradable, eliminating the privileged ownership rights
that had initially been reserved for state and company shareholders. The World Bank and the International Monetary Fund gave
high marks to China’s many reforms, and a study conducted in
2006 by Canada’s Centre for International Governance Innovation
(CIGI) concluded that China rated first among 10 Asian nations in
adopting a set of governance principles put forward by the
Organisation for Economic Co-operation and Development. Much
remained still to be done, however, with company compliance and
public enforcement of the reforms far from complete. The same
CIGI study rated China’s actual governance practices ninth among
the 10 Asian countries.
21 IntCorp ch6-2.qxd
__________________________________________________ CHINA ᔡ 169
Distinctive Features of Chinese Corporate
Corporate governance practices in many countries have displayed
some convergence towards Western standards in recent years (often
emulating Britain’s 1992 Cadbury Code and the United States’ 2003
Sarbanes–Oxley Act), but countries generally retain a set of distinct
practices. In building its own system, China has been no exception.
Four distinctive features of Chinese corporate governance in the
late 2000s are particularly notable: 1) highly concentrated ownership; 2) strong state ownership; 3) pyramid ownership structures;
4) weak markets for corporate control.
Highly Concentrated Ownership
Company ownership is generally diffuse in the United Kingdom,
the United States and other Western economies, with relatively few
shareholders controlling more than a few per cent of the shares of
any given firm. By contrast, ownership in China’s listed firms is