Corporate Governance and Financial Reform in China's Transition Economy
Pascoe, Richard, The China Journal
Corporate Governance and Financial Reform in China's Transition Economy, by Jing Leng. Hong Kong: Hong Kong University Press, 2009. xvi + 304 pp. HK$390.00/US$52.50 (hardcover), HK$220.00/US$29.95 (paperback).
The improvement of corporate governance in China, especially in its generally inefficient but still large and protected state sector, is important for the country's economic future and vital if China is going to succeed in creating multinational companies capable of holding their own against their tough competitors in the global Fortune 500. The big challenge for China is to change from being a passive producer for foreign global giants to having successful, high income companies of its own that can compete successfully in world markets.
So far, China's cautious, step-by-step approach to corporate governance reform, just as with its post-Mao economic reforms across the board, has worked much better than the "shock therapy" of rapid mass privatization pursued by Russia, despite many problems. That is the core message of this book by Jing Leng, a Hong-Kong-based law expert educated in China, Japan and Canada.
The way in which privatization was carried out in Russia resulted in incentives to loot, massive self-dealing by insiders and widespread asset stripping by managers - all of which was enabled by an institutional vacuum which imposed few restraints on corporate boards, whose governance record was appalling. While China has not been immune to such abuse, Leng says that Beijing made use of the trend towards globalization and its entry into the WTO in 2001 to implement gradual structural reforms in its state enterprise and financial sectors, of which corporate governance reforms were a key element. WTO entry was, for China, an external lever to constrain the policy options of government and to push forward market-oriented reforms, in particular corporate governance reforms of SOEs and state banks, through shareholding restructuring and public listing in domestic and overseas markets.
For the major SOEs, this was a process of corporatization rather than privatization, Leng argues, as Beijing's goal for these companies was mixed ownership in order to harness market disciplines to improve their performance, while retaining majority ownership for the Party-state (in some 30 per cent of Chinese listed companies overall). Mixed ownership was a way for the state to manage its assets better and to improve the performance of its SOEs as "national champions" so that they could compete globally, while retaining state and Party control over core national assets. She points out, however, that the split share structure necessitated by this approach has caused fundamental problems in the Chinese stock market, including a catalogue of corporate governance failures, many of which are listed in her book.
It was not appropriate for China simply to import global best practices from developed market economies, Leng says, because the operating foundations for such practices were not yet present. Instead, China made use of local solutions or local "institutional innovations" which, though transitional and imperfect, were useful in the early stages of the reform - and a manifestation of Deng Xiaoping's axiom of "crossing the river by feeling the stones".
From China's experience, Leng develops in this book a dynamic theory of corporate governance that stresses proper sequencing and pacing of reform at different stages of development in an economy in transition. She concludes, however, that the path towards a market economy is not a universal "one-size- fitsall" prescription. Policy-makers must accommodate country-specific conditions in designing their transition strategies.
Leng reviews the history of China's enterprise reform, the "zhua da, fang xiao" policy of keeping state control over the larger companies while selling off the smaller SOEs, and the bitter debate over management buyouts in 2004 which resulted in tougher oversight and greater transparency to avoid the under-pricing of state assets. …