Has the QFII Scheme Strengthened Corporate Governance in China?

Abstract

Introduction Corporate governance in China has had a difficult journey since economy opened up in late 70s and made gradual transition from a centrally planned economy to a market economy. In 90s, establishment of Shanghai and Shenzhen stock exchanges and promulgation of Companies Law, corporate governance came into vogue. Then, following Asian Financial Crisis in 1997/98, corporate governance assumed greater importance. The China Securities Regulatory Commission (CSRC) is main regulatory body for listed entities and it was set up in 1992. Over last 17 years, it has attempted to institute good corporate governance including transparency, information disclosure, protection of minority shareholders' interests and rules for appointment of independent directors. In an attempt to improve corporate governance in China's listed companies, CSRC established Qualified Foreign Institutional Investor (QFII) scheme reasoning presence of institutional investors on register of shareholders would help improve corporate governance in Chinese companies they invest in. This article seeks to answer whether QFII scheme has in fact strengthened corporate governance in Chinese listed entities. The Qualified Foreign Institutional Investor (QFII) Scheme The QFII scheme was conceived by CSRC and modelled after QFII scheme adopted by Taiwan in 1991.1 Improved corporate governance was a major objective. According to Ferguson and McGuinness, the QFII scheme carries tremendous potential as a vehicle for raising corporate governance standards. (2) Steven Yeo states with advent of institutional investors in PRC market, their more robust due diligence and investment disciplines, it is anticipated QFII Measures will further encourage greater transparency and improve compliance and corporate governance process of A share companies.... (3) Fred Hu opines the participation of global investors in China's domestic securities market has introduced professional funds management expertise and provided a new advocate for improving corporate governance.... (4) This view was further echoed by Richard Ward, Chairman of UBS Warburg who remarked on 26 November 2002 that QFII will be an important stimulus for improving corporate governance in China because increasingly Mainland companies will be benchmarked against their international peers. (5) It was hope of CSRC QFII scheme would contribute to better corporate governance. The Director General of CSRC stated at a seminar in Hong Kong on 8 November 2002 promulgation of QFII scheme, foreign institutional investors would be able to play a positive role in improving corporate governance in China. It was presumed by CSRC QFII participants, all of whom would be from countries well regulated financial systems, would require sound corporate governance in their target companies to justify their long term investment horizons. This article seeks to ascertain what areas of corporate governance were impacted after some five years of operations. Specifically, how did QFIIs impact shareholders, management, board of directors and market discipline? The QFII Scheme--Rules and Regulations The legal basis for QFII scheme is laid out in Provisional Measure on Domestic Securities Investments by Qualified Foreign Institutional Investors--Decree No. 12 of 5 November 2002. The objectives as stated in Article 1 are twofold: (6) (i) To govern Qualified Foreign Institutional Investors' investments in China's securities market (7) and (ii) To promote development of China's securities market (8) What can QFII invest in? Article 18 of Measure states QFII can invest in following RMB financial instruments: (i) Shares listed in China's stock exchanges (excluding B shares) (ii) Treasuries listed in China's stock exchanges (iii) Convertible bonds and enterprise bonds listed in China's stock exchanges and (iv) Other financial instruments as approved by CSRC Conditions of Scheme The rules are very clear. …