Corporate Governance At The Chinese Stock Market Introduction - Corporate Governance and Business Ethics

Shortly after the foundation of the People’s Republic of China (PRC) in October 1949, the Chinese government socialized the country’s total economy. By doing so, a planned system in reference to the former Soviet Union was built up and directed the Chinese economy for almost three decades. Upon the end of the Cultural Revolution (1966–1976), China began to reform and open up its economy to the outside world in 1978 under the leadership of Deng Xiaoping (1904–1997), who has been widely regarded as designer of China’s economic reform and opening-up era since 1978.

Initial reform efforts in China were to combine plan and market together. The central government introduced incentives for agricultural productions and to the state sector, aligned prices to the underlying supply and demand, and opened the economy up to the outside world (Qian 1999). The most important reform policy was the dual-track price system, introduced in the mid-1980s. Under this system, any commodity carried a planned price for the production quota set by the state and a market price set by the market supply and demand. Until early 1990s, most commodities were priced by the market, while the planned price track largely phased out (Qian and Wu 2000). In 1992, the central government altered its course from “combining plan and market together” to a “socialist market economy” with “Chinese characteristics”, i.e., a competitive market system in which public ownership predominates. While the adjective “socialist” characterizes the political system in China, the term “market economy” clearly points to China’s overall reform goal.

China had faced in the pre-reform era a number of problems such as enormous population pressure, severe shortages of human capital and natural resources, very poor industrial and infrastructure bases, and the difficulty of maintaining financial stability (Qian 1999b). In 1978, as the reform era began, 250 million Chinese were still living in absolute poverty (GRRB 2008). Since the reform and opening-up policies were adopted, the number of Chinese living in absolute poverty has been substantially cut down and came to merely 14.8 million by the end of 2007 (ibid). Meanwhile, China’s national nominal GDP has achieved nearly a 10% average growth rate and proliferated from 364.5 billion RMB in 1978 to 30,067.0 billion RMB in 2008 (NBSC 2007a, b, 2008b). Starting from almost nil (0.167 billion USD in 1978), its foreign exchange reserves now rank the first in the world (1,946.0 billion USD by the end of 2008). In 2008, China ranked 17th in the World Competitiveness Yearbook of the International Institute for Management Development (IMD 2008) and 30th in the Global Competitiveness Report of the World Economic Forum (WEF 2009), respectively, and thus stood out among all the transition economies and developing countries.

A few remarkable features characterize China’s economic transition over the past three decades. Firstly, China has been following a gradual transition path. Many reforms had been initially carried out on an experimental basis and in some localities, before successful experiences were extended into a wider or even national scale by policies. Almost all important reform policies in China were based on former steps on lower and local levels. Secondly, China’s transition succeeded without complete market liberalization. Though the state sector has been shrinking in its weight in the national economy, the state still holds a big stake in several key industries (transportation, telecom, banking, oil, steel, etc.) and controls their operations. Thirdly, privatization and private property rights were not essential components of China’s first three decades of transition. It was not until middle 1990s that the central government allowed privatization of small- and middle-sized SOEs. As recently as in March 2007, private property rights became demure recognized by the Real Rights Law. Last but not least, China’s transition has been progressing without democratization. The Communist Party of China dominates in governing the country, and this one-party system is supposed to further exist for a long time.

China’s economic success as well as the Chinese characteristics makes its transition path an attractive object for economical researches. One of the most popular research areas is the booming Chinese stock market. Early literature in this area tends to prefer initial public offerings and stock pricings. Recently, more and more researchers have become interested in the corporate governance issues at the Chinese stock market. In this paper, we conduct a study on the evolution of the corporate governance model at the Chinese stock market.

The structure of this paper is organized as follows: the section “Backgrounds of the Financial System in China” briefly describes China’s financial system, including its current structure, the development of the banking system, and the capital markets. It provides important background information for a better understanding of the succeeding parts of this paper. The section “Corporate Governance in China” outlines the major corporate governance issues in China, sketches the corporate governance model at the Chinese stock market, and compares it with classical corporate governance models. It raises some important research questions to be answered in the subsequent sections. The section “Governance Practices in Chinese SOE's: Content of Change” refers to how governance practices changed at different stages along China’s economic transition. The section “Driving Forces in China’s Corporate Governance Evolution: Process of Change” deals with the deep roots of the whole process of the changes in Chinese governance practices. In the summary, we summarize our major views of the corporate governance evolvement in China.


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