Holding company risk in China: a final step of state-owned enterprises reform and an emerging problem of corporate governance

Abstract

Public Enterprise Reform in China has reached a plataeu, and is awaiting the last step of privatization. Most of non-regulated industries in China has improved their competitiveness thorough a hard and intense competition, particularly in the home appliance industry. However, it still happened that excellent companies with nationwide brands suddenly fall into severe difficulties and suddenly disappears in the industry, as we seen in the early 1990's. Author argues that this is caused by structure of corporate governance in China, which can facilitate to enhance the control right of the controlling shareholder, that is the government for the most of listed company in China, compared to their holding cash flow right. This corporate structure, which is called “pyramiding” allows an implicit controller of the company, the municipal government, to exploit. In the cases of listed company in China, the “holding company” is the conduit of this risk. Experiences of 2 companies from home appliance industries in China will be documented here.