Western ideas of corporate governance: China’s reform of large state- owned enterprises

Abstract

Introduction The historical development of ‘Corporate Governance’ (gongsi zhili) in China has gone through four stages over recent decades. In the first stage, from 1949 to 1983, state-owned enterprises (SOEs) dominated the Chinese economy and the state commanded and controlled almost every aspect of its activities. Corporate governance, as understood in the West, did not exist in China. The second stage, from 1984 to 1993, involved the beginning of the separation of government and enterprise in China, under reforms launched by Deng Xiaoping (1904-1997). During this period, China formally established the Shanghai Stock Exchange and the Shenzhen Stock Exchange, and a new government body, the China Securities Regulatory Commission, was created to be the country’s main regulator of the newly born stock market. The third stage, from 1994 to 2005, marked the beginning of experimentation in modern enterprise structure, including passage of the first Company Law – the first comprehensive law that fully delineated the rights and responsibilities for modern companies in China. The Company Law has since had a great impact on corporate governance and the economy as a whole in China. However, state shareholders enjoyed overwhelming favouritism over individual investors. The last stage, from 2006 onward, has witnessed the continuing growth of corporate governance in China, including legislation aimed at balancing the power asymmetry between state shareholders and individual shareholders in companies. As China enters into a new stage of SOE reform marked by the policy of promoting mixed-ownership (hun he suoyou zhi) in 2016, corporate governance continues to be, in our view, the key aspect of the reform. This contribution examines the dissemination of the Western Economic ideas of corporate governance among Chinese economists and policy-makers and their influence on China’s gradualist reform of its largest SOEs. It is divided into four sections. The first discusses the dissemination of the theories of corporate governance since the 1980s, focusing on the ‘principalagent problem’ and mechanisms of board of directors; the second examines the influence of Western ideas on the policy measures of restructuring of the China’s largest SOEs, in the strategic economic sectors in the late 1990s and theestablishment of the ‘modern industrial enterprise’ in the 2000s; the third looks into the key issues involved in the current reform of ownership of the central SOEs (CSOEs), namely the ‘principal-agent’ problem; and fourth, the role of the Chinese Communist Party (CPC) pertinent to the further reform of China’s largest SOEs.