Skip to main content
SpringerLink
Log in

Corporate Governance at the Chinese Stock Market: How It Evolved

  • Chapter
  • First Online:
Corporate Governance and Business Ethics

Part of the book series: Studies in Economic Ethics and Philosophy ((SEEP,volume 39))

Abstract

Listed firms at the Chinese stock market are typically former state-owned enterprises (SOEs), nowadays characterized by a concentrated ownership structure with the state, represented by its agencies at central and local levels, acting as the controlling shareholder. Over the past 30 years of China’s economic transition, three stages of SOE reforms have exerted great influence on the formation of the current corporate governance model at the Chinese stock market. This contribution reviews the status and changes of the governance practices at each of the three stages in China’s SOE reforms. It further explains how these changes took place by examining the most influential factors in the evolution of governance practices. We argue that there exists a path dependence, mainly driven by a learning process, in China’s corporate governance evolution.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 129.00
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 169.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 169.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Notes

  1. 1.

    The authors cordially thank Mr. André Poddubny for his valuable comments and careful revision of the text.

  2. 2.

    See SAFE 2010 for the data of the respective years.

  3. 3.

    The term “state” is to some extent a vague term. In our paper, it refers to the central government on behalf of all the Chinese people or local governments on provincial and municipal levels, as the case may be. After a wave of administrative decentralization in 1970, most large-size SOEs were delegated to local governments, while the central government supervised less than 150 SOEs. In this context, “the state” rather refers to local governments in the context of managing and monitoring SOEs.

  4. 4.

    Article 4 of the Real Rights Law states: “The real right of the state, collective, individual or any other right holder shall be protected by law, and may not be damaged by any entity or individual.”

  5. 5.

    Very recently, Wu Bangguo, chairman of the Standing Committee of the National People’s Congress (NPC), proclaimed during NPC’s annual meeting in 2009 that China will never become a Western-style democracy in terms of a multiple party system and a separation of legislative, executive, and judicial powers (cf. Zhu 2009).

  6. 6.

    The banking institutions include policy banks, state-owned commercial banks (SOCBs), joint stock commercial banks (JSCBs), city commercial banks, rural commercial banks, urban credit cooperatives (UCCs), rural credit cooperatives (RCCs), postal savings, foreign banks, and non-bank financial institutions (NBFIs).

  7. 7.

    Bank of Communication, China Citic Bank, China Everbright Bank, Hua Xia Bank, Guangdong Development Bank, Shenzhen Development Bank, China Merchants Bank, Shanghai Pudong Development Bank, Industrial Bank, China Minsheng Banking Corp., Evergrowing Bank, China Zheshang Bank.

  8. 8.

    Before 2005, state-owned shares belonged to the non-tradable share types. With the 2005 non-tradable share reform launched, most of state-owned shares have become tradable ordinary A-shares and are not reflected in the official market statistics any longer. But the state maintains its control, as long as the shares are not sold (cf. the sections “Chinese Capital Markets” and “Corporate Goverance in China” below).

  9. 9.

    Though foreign banks have been operating for some time in China, their market share is, compared with domestic banks, still small. Thus, we focus in our brief description on the Chinese banks.

  10. 10.

    China Great Wall Asset Management Corporation, China Cinda Asset Management Corporation, China Orient Asset Management Corporation, China Huarong Asset Management Corporation.

  11. 11.

    In 2003, Shanghai Pudong Development Bank sold 5% stake to Citigroup, while Industrial Bank sold 24.98% stake to a consortium made up by Hang Seng Bank Ltd. and others. In 2004, Shenzhen Development sold about 18% stake to Newbridge Capital Ltd, while Bank of Communications sold 19.9% stake to HSBC.

  12. 12.

    The CCB sold 9% stake to the Bank of America, 5.1% stake to Temasek in 2005. The BOC sold 20% stake to Royal Bank of Scotland and Temasek in 2005. ICBC sold 10% stake to Goldman Sachs Group Inc., Allianz AG, and American Express Co. in 2006.

  13. 13.

    Funds raised at stock exchanges outside mainland China are not subject to the 25% restriction on foreign ownership.

  14. 14.

    For example, CSRC issued in December 1996 the Notice of Several Regulations on Share Issuance, which required local authorities to “give preference to the 1,000 key enterprises determined by the state, especially 300 of them, as well as to the 100 enterprises and 56 enterprise groups in experiment with the modern enterprise system” (own translation). The key enterprises were mostly SOEs.

  15. 15.

    The Shenzhen Composite Index was launched on April 4, 1991, taking the previous days as the base of 100 points. SSE took December 19, 1990 as its base of 100 points for the Shanghai Composite Index and launched it on 15 July 1991.

  16. 16.

    Since 2001, domestic residents can trade in B-shares as well.

  17. 17.

    Although SSE alone ranks just six in the annual report and statistics (2007) of the World Federation of Exchanges, we come to this result by adding up the market capitalization of SZSE to it and comparing the total value with the data of other exchanges.

  18. 18.

    According to the Notice Regarding Transfer to Foreign Investors of State-Owned Shares and Legal Person Shares of Listed Companies (CSRC 2002), only those industries that are opened to foreign investors can conduct such a share transfer, while the Chinese controlling shareholder should maintain his (relative) controlling status after the transfer.

  19. 19.

    According to the Measures for Strategic Investments by Foreign Investors upon Listed Companies (MCPRC 2005), foreign investors may acquire A-shares of the Chinese listed firms having finished the reform of non-tradable shares by means of long- and mid-term strategic investment. They may acquire A-shares by means of contract transfer or share offering, while the proportion of obtained shares should be no less than 10% after the first investment and should not be transferred within three years.

  20. 20.

    As a big amount of bank deposits flew into the stock market through bond repurchase business early this year, PBOC ceased bond repurchase and dealing by commercial banks.

  21. 21.

    The futures brokerage was established by China Galaxy Securities Co. and ABN AMRO Asia Futures Limited with 60% and 40% stake, respectively.

  22. 22.

    The CFFEX General Manager, Zhu Yuchen, stated during an interview on 9 March 2009 that the financial crisis hindered the introduction of stock index futures and there was no schedule of launching them (cf. Hu 2009).

  23. 23.

    For more information on the two cases see Chen et al. (2005).

  24. 24.

    For example, Masahiko Aoki and Hyung-Ki Kim published in 1995 the book “Corporate Governance in Transition Economies” (cf. Aoki/Kim 1995).

  25. 25.

    It appears that in reality a number of these accounts are old, inactive, fake, or controlled by some institutions. Nonetheless, the number of small Chinese shareholders is immense.

  26. 26.

    For example, the “Guidelines of Shanghai Stock Exchange on Individual Investors’ Behavior” (SSE 2008b), which were issued in July 2007, insisted on the principle of caveat emptor.

  27. 27.

    For example, Deng noted in 1989: “In China the overriding need is for stability. Without a stable environment, we can accomplish nothing and may even lose what we have gained” (Deng Xiaoping 1989/1994).

  28. 28.

    See for example Roe (2003) for more details of US securities regulation.

  29. 29.

    For example, La Porta et al. (1998) found that “common law countries generally have the strongest, and French civil law countries the weakest, legal protections of investors, with German and Scandinavian civil law countries located in the middle” (p. 1113). Yet Shleifer/Vishny (1997) concluded that “the differences between them [USA, Germany, Japan] are probably small relative to their differences from other countries” (pp. 737–738). In the last two decades, Germany has made a lot of efforts in empowering shareholders, enhancing disclosure and strengthening public enforcement. Thus, its external mechanisms are moving towards the market-based model.

  30. 30.

    After the third round of China-U.S. Strategic Economic Dialogue in December 2007, both sides promised to further open up its financial markets to the other. China agreed to allow, in accordance with relevant prudential regulations, qualified foreign-invested companies, including banks, to issue RMB-denominated stocks; qualified listed companies to issue RMB denominated corporate bonds; and qualified incorporated foreign banks to issue RMB denominated financial bonds. See U.S. Department of The Treasury (2007).

  31. 31.

    By 1994, many Chinese joint-stock companies had been founded through non-public offering by 1994. Yet this is not allowed since the Company Law was brought into effect in July 1994.

  32. 32.

    Article 15 of the Chinese Constitution of 1982 declared, “The state practices economic planning on the basis of socialist public ownership”.

  33. 33.

    The external free market was established as the government allowed peasants to sell their surplus products.

  34. 34.

    The central government required SOEs to split their retained profits into funds for housing, bonuses for employees and funds for production development, while the government would not interfere with the use of these funds.

  35. 35.

    The proportion of profit retention was to be bargained yearly in the incentive model.

  36. 36.

    However, in case the SOEs had not achieved a satisfying profit, they were still liable for paying the fixed amount to the state.

  37. 37.

    See the the Central Committee of the Chinese Communist Party’s “Decision on Reform of the Economic Structure” (CPC 1984).

  38. 38.

    Shareholders of modern SOEs are entitled to enjoy their shareholders’ rights in proportion to their shares and are obligated to transfer ownership of their investment to the corporation. Rights, obligations, and liabilities between and among the corporation, shareholders, employees, creditors, consumers, and other stakeholders should be delineated clearly. The government should separate itself from SOEs’ operation. SOEs should avoid random decision-making, relaxed management, undisciplined job performances, and low-level managerial abilities and implement democratic decision-making processes, efficient execution, and strong supervision over decision-making.

  39. 39.

    The slogan emerged in the central government’s work report at the Ninth NPC. Yet the practices had been ongoing for a period of time. At the last few Plenums of the Eighth, the concept had already been implicitly expressed in the central government’s work reports.

  40. 40.

    These corporate entities include wholly state-owned corporations, closely held corporations, and publicly held corporations. According to the Company Law of 1993, a wholly state-owned corporation is a limited liability corporation invested and established solely by the state-authorized investment institutions or government agencies. A closely held corporation is a small company with few shareholders and of small capital size. A publicly held corporation, also called a joint stock limited company, is a corporation whose total capital is divided into equal shares, and is owned by shareholders who assume liability towards the company to the extent of their respective shareholdings.

  41. 41.

    In case of small firms with few shareholders, the boards are not indispensable, but a CEO is required.

  42. 42.

    Calculated with data of NBSC (2007a).

  43. 43.

    The plan of this mass movement was that the industrial output of China should surpass that of Great Britain and the United States within 15 years. See Luo (2004, pp. 25f.).

  44. 44.

    Surveys of Chinese scholars assess the number to be in the range of 17 and 40 millions. See Li (2006).

  45. 45.

    So was it explained in the “Resolution on Certain Questions in the History of Our Party Since the Founding of the People’s Republic of China” (CPC 1981).

  46. 46.

    As summarized in “Resolution on Certain Issues in the History of Our Party Since the Founding of the People’s Republic of China” (CPC 1981), one of Mao’s core thoughts was following the mass line (zou qun zhong lu xian).

  47. 47.

    For example, steel production was required to double within five years (cf. Qian 1999a, p. 27). To achieve the goal of high growth, the central government believed that local initiative must be mobilized through decentralization.

  48. 48.

    Mao assessed that a Soviet invasion and the beginning of World War III was nearing. In consequence, the government proposed dividing the country into 10 cooperative regions, each of which should be a relatively complete and self sufficient industrial system to deal with the war (cf. Qian 1999a, p. 27).

  49. 49.

    The “Communiqué of the Third Plenary Session of the 11th CPC Central Committee” (CPC 1978) stated, “The Plenum decided that (…) from 1979 on, the work of the CPC should focus on the socialist modernizations.”

  50. 50.

    In China, land in rural areas is collectively owned, while land in urban areas is state-owned. Before the reform era, pieces of land were allotted by administrative authorities for agricultural and industrial use. Since the 1980s, local governments in urban areas transfer rights of land’s use for a determined period against compensation.

  51. 51.

    Tianjin, Shanghai, Dalian, Qinhuangdao, Yantai, Qingdao, Lianyungang, Nantong, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang, and Beihai.

  52. 52.

    Wuhu, Jiujiang, Yueyang, Wuhan, and Chongqing.

  53. 53.

    Heihe, Suifenhe, Huichun, Manzhouli, Pingxiang, Dongxing, Hekou, Wanding, Ruili, Yining, Tacheng, Bole, and Erlianhaote.

  54. 54.

    Taiyuan, Hefei, Nanchang, Zhengzhou, Changsha, Chengdu, Guiyang, Xi’an, Lanzhou, Xining, and Yinchuan.

Abbreviations

ABC:

Agricultural Bank of China

bn.:

billion

BOC:

Bank of China

CBRC:

China Banking Regulatory Commission

CCB:

China Construction Bank

CEO:

Chief executive officer

CFFEX:

China Financial Futures Exchange

CNPC:

China National Petroleum Corporation

CPC:

Communist Party of China

CSRC:

China Securities Regulatory Commission

FDI:

foreign direct investment

GDP:

gross domestic product

GEM:

Growth Enterprises Market

GLF:

Great Leap Forward

HKD:

Hong Kong Dollar

ICBC:

Industrial and Commercial Bank of China

IMD:

International Institute for Management Development

IPO:

initial public offering

LLDPE:

linear low-density polyethylene

LLSV:

La Porta, Lopez-de-Silanes, Shleifer, and Vishny

m.:

million

NPC:

National People’s Congress

NPL:

non-performing loan

NYSE:

New York Stock Exchange

OTC:

over-the-counter

PBOC:

People’s Bank of China

PRC:

People’s Republic of China

PTA:

purified terephthalic acid

QDII:

Qualified Domestic Institutional Investor

QFII:

Qualified Foreign Institutional Investor

RMB:

Renminbi (Chinese currency)

SEZ:

Special Economic Zone

SHFE:

Shanghai Futures Exchange

SINOPEC:

China Petroleum & Chemical Corporation

SME:

small and medium-sized enterprises

SOE:

state-owned enterprise

SSE:

Shanghai Stock Exchange

SZSE:

Shenzhen Stock Exchange

T-bond:

treasury bond

TVE:

Township and Village Enterprise

USD:

US Dollar

WEF:

World Economic Forum

WTO:

World Trade Organization

YGX:

Yinguangxia (a listed firm’s name)

References

Download references

Author information

Authors and Affiliations

  1. Chair of Microeconomics, University of Rostock, Rostock, Germany

    Junhua Tang (Research Associate)

  2. Institute for International Business Relations, Steinbeis University Berlin, Berlin, Germany

    Dirk Linowski (Director)

Authors
  1. Junhua Tang
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Dirk Linowski
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Dirk Linowski .

Editor information

Editors and Affiliations

  1. Inst. Philosophie, Universität Bayreuth, Universitätsstr. 30, Bayreuth, 95447, Germany

    Alexander Brink

Rights and permissions

Reprints and permissions

Copyright information

© 2011 Springer Science+Business Media B.V.

About this chapter

Cite this chapter

Tang, J., Linowski, D. (2011). Corporate Governance at the Chinese Stock Market: How It Evolved. In: Brink, A. (eds) Corporate Governance and Business Ethics. Studies in Economic Ethics and Philosophy, vol 39. Springer, Dordrecht. https://doi.org/10.1007/978-94-007-1588-2_6

Download citation

Publish with us

Policies and ethics

Search

Navigation