8

General conclusions and future work

The findings and the implications of the study
The specific subject of enquiry in this book is corporate governance in the context of the Chinese economy, with particular reference to the companies listed on the two official stock exchanges. This is the first systematic and comprehensive study of these issues in China from a positive perspective and using econometric methods to analyse rich datasets, some of which were obtained directly from the SZSE. The main theories underpinning the book are the theory of incomplete contracts and agency theory. It is argued that the separation of ownership and control in modern corporations, and the impossibility of foreseeing, writing, and enforcing a comprehensive contract lead to agency problems. The basic argument is thus that corporate governance matters, and that it has an impact upon corporate performance.The specific findings of the individual chapters will now be summarised. The institutional background of the Chinese financial system reform was reviewed and analysed in Chapter 3, and the main findings were:
1 Financial reform in China, and the corporatisation of the SOEs, has been motivated by the expansion of the Chinese economy, and the need for capital beyond the capacity of public fiscal revenues. As local government has taken a greater and greater share of fiscal income, Central Government has found it increasingly difficult to finance projects through the State budget. Given the high levels of personal savings in the State Bank, the Chinese Government first decided to reform the financing of the SOEs by funding new State projects (except some key projects) with debt instead of equity. The underlying motive was to make the project managers accountable for the repayment of debt, that is to make the capital invested by the government a 'hard constraint'.
2 But the corporatisation of the SOEs is not just about the search for new sources of capital, and can only be properly understood in the context of the reallocation of resources. This is also true for the formation of the new governance structures, where there has been a shift from monopoly State control to shared control, even though control is still dominated by various State authorities.

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