Abstract
The extraordinary rise of China’s economy has made understanding Chinese corporate governance an issue of global importance. A rich literature has developed analyzing the Chinese Communist Party’s (CCP) role as China’s largest controlling shareholder and the impact that this has on Chinese corporate governance. However, the CCP’s role as the architect—and direct and indirect controller—of institutional investors in China has been largely overlooked in the legal literature. This Article aims to take the first step in filling this gap in the literature by drawing on Chinese sources and fresh hand-collected empirical, interview, and case study evidence to analyze the meteoric rise of institutional investors in China. It provides a taxonomy of institutional investors in China and reveals how the market for institutional investors has grown and has become increasingly “atomized” as different types of institutional investors have proliferated. The Article reveals how the CCP has actively and gradually promoted the growth of domestic institutional investors, in terms of types and size, through the relaxation of policies and law reforms to improve corporate governance and stabilize the stock market, while limiting the influence of foreign institutional investors. It further analyzes all the Activist Campaigns undertaken by institutional investors in China and maps the network of government bodies, regulations, and tactics that the CCP has developed to directly and indirectly control State-Owned Institutional Investors (SOIIs) and Private-Owned Institutional Investors (POIIs) for the purpose of policy channeling. This Article concludes by taking a step back and briefly considering what this examination of institutional investors tells us about China’s unique form of capitalism and system of corporate governance. It suggests that the rise of institutional investors in China has been strategically developed in a way to reinforce the CCP’s ultimate control over the financial system. However, contrary to what some conceptions of “state capitalism” may suggest, the CCP does not micro-manage institutional investors on a day-to-day basis. Rather, institutional investors normally function according to free-market forces and increasingly perform an important corporate governance role—with the CCP using its policy channeling in a targeted way to stabilize the market in times of crisis, execute important legal and market reforms, and to maintain calm in society during critical political events: what this Article termed as the “market within the state” for institutional investors in China.
Highlights
Two decades ago, the United Sates had almost twenty times as many Fortune Global 500 Companies as China.[1]
Institutional investors normally function according to free-market forces and increasingly perform an important corporate governance role—with the CCP using its policy channeling in a targeted way to stabilize the market in times of crisis, execute important legal and market reforms, and to maintain calm in society during critical political events
Institutional investors normally function according to freemarket forces and perform an important corporate governance role— with the CCP using its various mechanisms for policy channeling to execute important policies, which may benefit the market and society, while possibly blunting the effectiveness of efficient corporate governance
Summary
The United Sates had almost twenty times as many Fortune Global 500 Companies as China.[1]. The Contours of Political Conformity in Chinese Corporate Governance, at 3 (EGCI Law Working Paper No 493/2020) (SOEs are expected to expressly give the party’s leadership and party committees formal legal status inside the company) This suggests a lack of awareness of the role of institutional investors in China. Our analysis of these cases revealed that SOIIs have undertaken a significant portion of the Activist Campaigns and that POIIs have succeeded in more than half of their Activist Campaigns targeting SOEs.[30] Over the last decade the number of Activist Campaigns by POIIs, several of which have succeeded in SOEs, are on the rise.[31] based on the searches we have conducted, FOIIs have undertaken only two activist campaigns, none of which were in the last decade.[32] Activist Campaigns overall are clearly on the rise, with three times as many Activist Campaigns in the last decade compared to two decades ago.[33] Taken together, as explained in detail in Part III, this suggests that SOIIs and POIIs are developing into an important corporate governance mechanism to mitigate private benefits of control in China—while the role of FOIIs remains limited. THE RISE OF INSTITUTIONAL INVESTORS IN CHINA – A REMARKABLE, YET OVERLOOKED, HISTORY
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