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University of Western Sydney Law Review |
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Yuwa Wei[*]
This article sets out to investigate the law and the development of the corporation and corporate governance in the People’s Republic of China. The evolution of the corporate system in China happens in the context of the economic reforms, which started in the late 1970s and are in full swing currently. This occasions the greatest significance to the discussion of this topic.
This article attempts to carry out a research that sets out to answer the following questions: How are the Chinese going to shape their corporate governance system? Has the corporate governance system been influenced and will it be influenced by any existing corporate governance theories and practice? How should a practical corporate governance system with Chinese characteristics evolve? What kind of corporate governance model is practicable for China? In doing so, this article firstly examines the reception and development of the theory and practice of the corporation and corporate governance in China. Then, it proceeds to discuss why and how the Chinese apply corporate mechanisms to reform their state-owned enterprises. Finally, it attempts to put forward an opinion about a rational system of corporate governance in China, as well as to speculate on the future development of the corporate system in China.
Economic reforms in China have reached the stage of reforming and reconstructing its enterprises. This is a key step toward the final success of the entire economic reform process, as has been made clear by the Chinese leadership. In 1997, the Fifteenth National Congress of the Communist Party of China clarified the direction of the enterprise reform of the country. It was decided that the reform initiative of establishing a modern enterprise system should be speeded up, and large- and medium-sized state-owned enterprises should be reconstituted as corporations. Hence, the building up of an efficient corporate system is a vital goal for contemporary China. The main factors that contributed to the decision were, firstly, the need to improve the productivity and performance of state-owned enterprises; and secondly, the need to end governmental capital injections into state-owned enterprises. In this process, ‘corporate governance’, as a study of improving enterprise performance, will inevitably become a centre of attention.
In the past, the productivity and profitability of state-owned enterprises in China have been consistently low. The major defect inherent in the state-owned enterprise system is widely perceived to be that the ownership structure existing in such enterprises is incompatible with the managerial structure of modern firms.[1] Here, a modern firm refers to a traditional corporation in the Western system. Corporations have become the most common business structure in the Western world since the 19th century. The predominance of the corporate structure is due to the fact that it allows a business to be independent from its investors. Furthermore, the investors of the corporation are free from unlimited liability. This enables corporations to pool funds from an ever-larger number of investors and to operate on an ever-larger scale. The advantages of the corporation have resulted in the emergence of a number of gigantic companies around the world. This growth in size and the development of technology has resulted in the separation of ownership and management in companies. Agency costs arise as a side-product of the separation of ownership and control. Hence, the main task of corporate governance in a modern firm is to reduce agency costs so as to increase productivity and managerial efficiency. This includes dealing with the divergence of interest between investors and managers and increasing management accountability. A modern corporation achieves these goals by dividing and balancing corporate powers among its internal organs, namely, the shareholders’ meeting, the board of directors (or supervisory board in some systems) and the management. In other words, this is a process of balancing powers and interests among corporate constituents. It is on this base that the system of modern corporate governance stands.
The ownership structure and managerial arrangement in state-owned enterprises do not follow the logic of governance in a modern firm. Theoretically, the owner of a state-owned enterprise is the State, or the people as a whole. However, there is not an appropriate form for ‘the people as a whole’ as the owner to physically appear in such an enterprise. In practice, state ownership rights in a state-owned enterprise are exercised by administrative departments of different levels. From the viewpoint of modern corporate governance, this type of state ownership amounts to de facto absence of ownership.[2] This is because the power of controlling and supervising the enterprise vested in ‘the people as a whole’ in such a firm is impotent. The owner has no opportunity to use stock market mechanisms on the one hand, and has no real presence in the decision-making organ on the other.[3] Recently, reports about the assets of state-owned enterprises being depleted through neglect and misappropriation have increased.[4] This illustrates that the organisational structure of the state-owned enterprise has hindered China from improving its economic performance at the microeconomic level.[5] It is clear that agency costs relating to this type of governance structure are high, and it is impossible to reduce such costs without a fundamental change in the system.
In some former socialist countries, the problem was solved (theoretically) through a rapid process of privatisation and corporatisation. In the former Soviet Union, the change was made nearly overnight. However, the drastic reforms in these countries have brought many problems at the macro-economic level including high inflation and unemployment. Their enterprise reforms were achieved at a high social cost. So far, this type of reform is not regarded as the desirable solution by the Chinese.[6] Foreseeing the above problems, China has pursued a gradualist strategy of economic reform. Starting from delegating more powers to state-owned enterprises, carrying out experiments with corporatisation, building up stock markets, and completing the corporate legislation, the country is now ready for a nationwide movement of corporatisation and reform.
Since the beginning of corporate practice, China has constantly transplanted corporate notions and initiatives from Western systems. The 1994 Company Law is a combination of Western influence and an effort at innovation. For example, it imports two types of companies, limited companies and stock companies (private companies and public companies) from Anglo-American systems, and adopts the two-tier board structure of the German system. However, the transplantation and innovation at the early stage came as a patchwork. This resulted in insufficient efforts to systematically address some major issues of corporate governance.[7] At a time that enterprise reforms have reached the stage of focusing on improving micro-economic performance, the Chinese are increasingly interested in the issues of corporate governance and are enthusiastic about promoting the best corporate practice.
The current economic reforms in China follow a top-down approach. The Government’s guidance and promotion are essential. A rational model of corporate governance can generate improved economic efficiency and reduce certain unnecessary economic costs. Hence, the Chinese are now facing two tasks. One is to find an advanced, workable model of corporate governance for existing and future enterprises. The other is to literally build up such a corporate governance system within the legal framework. It is a complicated and strenuous project to complete. It requires both theoretical and practical rationality.
China was a world leading economy for a considerable period prior to modern times. However, it ceased to be innovative and vigorous by the 17th century. Up to the 1800s, China was well behind the Western economic powers of the industrial world. As a result, China’s recent history was subject to commercial and political turmoil. Chinese scholars have been reflecting from different angles on the factors that brought these misfortunes to China. To many of them, the significance of studies on this topic lie not only in teaching the Chinese a historical lesson but also in providing a dynamic and applicable ideology for China’s future development. There are people who attribute China’s economic stagnation at the end of its feudal system to the non-development of corporations at that time.[8]
As early as the late 19th century, some Chinese intellectuals began to introduce corporate concepts into Chinese society. They enthusiastically praised the function of companies and promoted the adoption of a corporate system in China by attributing the rise of Western economies to the practice of corporate activities.[9] They believed that the corporate system could enhance a nation’s strength and increase the wealth of a society. They saw the corporate system as the all-powerful method of developing a nation and considered it to be the only way that China would move to modernisation.[10] For example, there were the following remarks:
Industry and commerce [in China] cannot progress if a corporate system is not developed. Then China will never become rich and strong[11]
The corporation is one of the decisive factors that enable British merchants to dominate the world. As a result, although other countries including France, Spain and Germany have spared no effort in competition, they are no match[12]
Some Qing officials also had the desire of industrialising China by corporate activities. They initiated the ‘foreign affair movement’,[13] which resulted in the establishment of the earliest Chinese corporations and the birth of the first Chinese Company Law (1904).[14] From then until 1949, the corporate concept together with the notion of legal personality and limited liability were well received by the Chinese, and corporate law was gradually completed. However, corporate practice did not develop at a vigorous pace. The reasons were many. The social instability, weak and uneven economic development structure, political corruption and foreign economic monopoly were the external causes.[15] Internally, there was a gap between the Western corporate experience and Chinese culture. Although China transplanted the corporate system from the West through establishing it in law, in reality, people dealt with corporate matters in their own way. There were abundant reports of abuse of power by directors, managers and promoters, the impotence of shareholders’ meetings, and the malfunction of the stock markets.[16] This illustrates the fact that legal acceptance does not amount to social acceptance.
A particular feature of corporate development during this period was that the State showed a strong desire to interfere in corporate practice. At an early stage, the Qing government attempted to control corporate practice by establishing a number of government-controlled companies. In these companies, the government, as a shareholder, had the right to dispose of the corporate assets and to appoint directors and managers.[17] Other shareholders only had the right to receive dividends.[18] The companies had to distribute dividends to their shareholders according to fixed rates, no matter whether they made profits or not. Shareholders, except the government, were in fact like a kind of perpetual debenture holder or creditor. Through these companies the government gained a monopoly over certain trades. In the meantime, some businessmen tried to get the government’s protection by inviting the government to be the supervisor of their companies. This resulted in the existence of companies that were invested in by businessmen but managed by the government (guandu shangban companies).
Later, the Guomindang government promoted state capitalism. The initial purpose of promoting state capitalism was to restrict private enterprises from monopolising important economic sectors such as banking, the railways, electricity and water supply.[19] However, the subsequent implementation brought dismal results. The state monopoly and state-controlled companies had nurtured the most corrupt government in the world. The state-controlled companies became arenas for government officials making personal gains, where they misappropriated public assets by using their authority, creating their own personal shareholdings, taking the positions of directors or managers and appointing their trusted associates.[20] Furthermore, these companies were filled with bureaucracy.[21] As a result, these state-controlled companies severely undermined the healthy development of the corporate system in China and brought disastrous consequences to the nation’s economy. These past experiences may serve as a lesson for today’s enterprise reforms in China.
In 1949, the Communist Party gained power in China. The country started to adopt the planned economic system where there was little place for market mechanisms and private ownership. The old enterprises were nationalised. By 1956, all enterprises with private ownership were transformed into state-owned enterprises.[22] This marked the extinction of the traditional corporate species in China. In the coming two decades, China, like all other socialist countries, experienced economic stagnation. The underperformance and inefficiency experienced by state-owned enterprises were clearly perceived by the Chinese leadership. A few attempts at reforming these enterprises were made but with no consequence. The problem lay in the fact that all these reforms were made within the orthodox framework of state ownership.[23]
Since 1978, China has initiated economic reforms aimed at transforming the planned economy into a market economy. The economic reforms in China have been carried out in a gradual fashion.[24] They have been carried from sector to sector and area to area. When the rural sector underwent a full-scale reform in the late 1970s and the early 1980s, the enterprise reform made an experimental move. The enterprise reform methods, such as increasing enterprises’ autonomy, clarifying enterprises’ financial targets through contracts between enterprises and their administrative departments, and corporatising some enterprises, were trialled one after another. The decision to reform state-owned enterprises through massive corporatisation was finally made by the government in the late 1990s. The reason this decision took so long to make was the presence of ideological obstacles in the way of corporatisation.
Since the start of the economic reforms in the late 1970s, quite a few enterprise reform strategies have been adopted, including greater enterprise autonomy, increased responsibility for factory directors, contracting out and leasing. However, the implementation of these strategies did not bring the expected outcomes.
The idea of corporatisation was not introduced until the early 1980s, when it was first intensively discussed and debated by intellectuals and practitioners in newspapers and periodicals.[25] Trials were carried out in some areas from the mid-1980s onwards. Some of the official documents expressed endorsement of the experiment, while a considerable number of arguments were marshalled against corporatisation.[26]
The major concern of those who rejected the corporate notion was that corporatisation would inevitably lead to privatisation. They believed that corporatisation would dilute state ownership in state-owned enterprises, and that selling the shares of state-owned enterprises to individuals would amount to passing State property into private hands.[27] They also believed that public ownership was superior to private ownership, and that it was crucial to maintain social stability in the course of economic reforms.[28] Economic reforms were means but not ends. The principal goal of China’s economic reforms was to develop the economy and to improve people’s living standards. In other words, the goal was to realise a common enrichment in China. For this purpose, there was a need to uphold social justice. As public ownership was the economic foundation of social justice, it was necessary to maintain the dominance of public ownership in China. If the dominance of public ownership were eroded by economic reforms, polarisation would be inevitable. This would exacerbate all conflicts, including those between different areas, different levels of government, and different ethnic groups, and bring a disastrous outcome.[29]
Some went further to argue that a corporatised state-owned enterprise could never achieve the same economic outcome as a privately owned corporation, because corporatisation could not solve problems such as the de facto absence of owners’ control and the inefficient management which existed in state-owned enterprises. Furthermore, corporatisation would destroy the advantages of public ownership. For example, the system of public ownership created a distribution method that was based on work (contribution).[30] This method was superior to the method of distribution according to capital, which was a distribution system associated with the corporate system. Thus, the opponents of corporatisation warned that corporatisation might place China in a situation where the advantages of public ownership would be diminished on the one hand, and the benefits of corporatisation would not be fully exploited on the other. Hence, optimistic expectations should not be entertained of corporatisation.
The ideological debate over corporatisation developed into a major topic of economic, legal and political literature from the mid-1980s to the early 1990s. During this period, policy makers took a cautious but firm stand in promoting corporatisation. Adjustments were made in corporate trials and efforts were made to improve the environment for corporatisation. Between 1990 and 1991, two stock exchanges were established in Shanghai and Shenzheng. In 1993, the People’s Congress passed the first corporate code, the Company Law. The law has been in effect since July 1994. In 1997, the Fifteenth National Congress of the Communist Party of China made it clear that China would reform its state-owned enterprises through corporatisation. The government’s determination finally ended the debate as to whether or not to reform state-owned enterprises through corporatisation. Since then, Chinese scholars have shifted their attention to issues such as understanding the characteristics of the modern corporate system and corporate property rights, and seeking suitable corporate models for the enterprise reform.
A literature on reforming state-owned enterprises through corporatisation began in the early 1980s and became fully-fledged after the enactment of the 1994 Company Law. In the beginning, discussion focused on the economic irrationalities that existed in state-owned enterprises and their cures. Later, attention turned to the determination of share ownership structure in state-owned enterprises and how the State would exercise its right of control over them. Much of the discussion relied on modern corporate governance theories, including corporate property theories and the agency theory, to examine problems encountered by state-owned enterprises. The rationality of the governance structure and norms in the modern corporate system were firmly recognised in this literature, and the deficiencies of state-owned enterprises were found to be as follows.
Firstly, the ownership structure of state-owned enterprises did not facilitate the economic efficiency of the enterprises.[31] Traditionally, ownership was absolute and it consisted of a bundle of rights including residual claimant rights, the right of disposition, the right of control, and the right to interest.[32] Thus an owner of property had a complete and absolute right over it. Such ownership existed in a classic firm.[33] However, in a corporation the traditional concept of absolute ownership no longer applied. While shareholders had residual claimant rights over the property, the right to use and dispose of property was exercised by salaried managers.[34] According to modern corporate theory, the manager played the role of an agent, and it was normal for a principal and an agent to have different interests.[35] Instead of maximising the interests of the principal, the agent was likely to pursue other interests including their own. The reason that a corporation could survive and develop was because the modern corporate system employed certain mechanisms to restrain the divergence of interest and bring the agency cost down to a reasonable level. An important mechanism was the balancing of power among the internal organs of a corporation. As a result, shareholders exercised their controlling power through the supervisory role of the board. However, in a state-owned enterprise, the owner of the enterprise was the State or the people as a whole. It was not practicable for the people to exercise monitoring functions or to have real presence in an enterprise. The State had to use agents. Hence, the owner had insufficient supervision and control over management in such an enterprise.[36]
Secondly, the State played multiple and conflicting roles in a state-owned enterprise. The State was the owner, supervisor, manager and creditor of an enterprise at the same time. Moreover, the State exercised macro-economic functions (including social, regulatory and policy-making functions) on the one hand, and engaged in micro-economic activities on the other. These two roles are inherently conflicting. The macro-economic role required the State to concern itself with the overall economic performance of all enterprises; the micro-economic role required the State to concern itself only with the performance and economic efficiency of a particular enterprise.[37] It was essential to break this interweaving of conflicting roles in order to make an enterprise focus on its own interests.[38]
Thirdly, there were no discipline or incentive mechanisms that encouraged managers of state-owned enterprises to maximise economic efficiency. A manager was a government official who had no authority to run the enterprise independently and was not personally liable for failing to make sound business decisions. The appointment and promotion of a manager was decided by the administrative department, not the groups interested in the enterprise.[39]
As a result of this analysis, it was found necessary to introduce corporate mechanisms into state-owned enterprises to improve their economic performance. Attention then turned to the question of how to corporatise state-owned enterprises. The status of state ownership and the share structure in a corporatised state-owned enterprise was the first issue to be decided, because state ownership had to exist in the form of equity after corporatisation. This caused debates about who owned the corporation and corporate property and how to clarify State property in corporatised enterprises. One view held that shareholders transferred their ownership rights over the assets to a corporation upon the purchase of its shares.[40] Thus the corporation owned itself and its property, suggesting that public ownership would be converted into corporate ownership after corporatisation.[41] This view was generally rejected. The Chinese have basically accepted the mainstream idea in the Anglo-American system that shareholders are the ultimate owners of the corporation.
By investing in the corporation, the shareholders receive share ownership rights. Share ownership rights include the rights to receive dividends, to vote on important matters concerning the corporation, and to claim residual assets upon termination of the corporation. The ownership rights over a corporation are different from the ownership rights over corporate property.[42] As the owners of a corporation, shareholders cannot directly dispose of corporate assets, but have the right to vote on decisions concerning corporate affairs.[43] Voting rights are an efficient and important monitoring instrument that confer residual power on shareholders to make certain corporate decisions.[44] Therefore, it is believed that state ownership can still exist in the enterprises after corporatisation. A more optimistic view is that corporatisation will strengthen state ownership as a whole, because the State’s overall capacity to control and utilise capital is enhanced by exercising the controlling shareholders’ rights in corporatised enterprises.[45]
Although academics now seem to agree on share ownership rights, corporate legislation has been inconsistent. For example, article 4 of the 1994 Company Law states that ‘the ownership right over the State assets of a company belongs to the State’. This not only contradicts other provisions concerning shareholder status and corporate personality in the Law, but also brings confusion over the understanding of share ownership rights and corporate property rights.[46]
The share structure of a corporatised enterprise is basically designed to include state shares,[47] corporate shares (legal person shares) and individual shares. The difficulty lies in the designation of State shares. Firstly, there is a need to separate commercial activities from the State’s policy-making’, regulatory and social functions. This is solved by setting up the Administrative Bureau of State Assets and State asset management companies who exercise ownership rights over State assets and manage them.[48] The Administrative Bureau of State Assets is responsible for supervising and organising the use of State assets in state-owned enterprises and companies. State asset management companies function as holding companies. They own State shares in companies and utilise their rights as shareholders to get involved in their subsidiaries’ affairs.
Secondly, there is a question of how to clarify the State property in an enterprise. State property is the property received and controlled by the State according to the law.[49] There should be no argument over the fact that the property in a state-owned enterprise is State property. However, the situation has become complicated since China tried various strategies to reform state-owned enterprises after the economic reforms.
In China, state-owned enterprises are those enterprises confiscated from the former Guomindang Government, those purchased from the national capitalists after 1949, and those established by the State since 1949. Before 1984, the property in these enterprises belonged to the State, because the State invested capital in them and received all the profits. After 1984, the State changed the policy. The State’s capital investments were treated as bank debts of the enterprises. After repaying interest to the State, the enterprises could have their own capital reserves. This brought complexity to the task of defining State property in the enterprises. Some suggested that profits derived from investment using bank debts and from the issuance of shares to the public should be treated as the property of the enterprises. Some held that those profits were still State property, as they were made by utilising the policy advantages available to state-owned enterprises. For example, some state-owned enterprises used State assets as guarantees for bank debts.[50] In the end, the 1991 Interim Regulation on Determining the State Ownership Right over State Assets in Enterprises states which profits of an enterprise made by using bank loans guaranteed by the State are deemed to be State property.
In the process of corporatisation, State assets in state-owned enterprises are to be valued and converted into shares. The Government has enacted laws to provide ways of valuing State assets.[51] The reports from trials are mixed. In some cases, the values of State assets have been over-estimated, and in other cases under-estimated.
For the sake of economic efficiency, it is generally desirable for corporatised state-owned enterprises to have different shareowners. A company with the State as the only shareholder may not easily overcome problematic administrative interventions, which have happened in the past. Thus, it is advantageous to invite corporations and individuals to become shareholders in the company.[52] The participation of outside shareholders in the company’s affairs can enhance the supervisory capacity of shareholders. Hence, many suggest that only those state-owned enterprises that are important to the national economy should be reconstituted as state-owned companies. The rest of them, except a small number of them which are subject to privatisation, should be corporatised as state-controlled or state-invested companies, where the State holds controlling or non-controlling shareholdings.[53]
One important characteristic of shares is that they are freely transferable. This gives shareholders not only the freedom to ‘quit the game’, but also effective governing power. The share price on the securities market is a significant reference point for judging the managerial efficiency of a corporation. For this reason, the corporatisation of state-owned enterprises in China poses a dilemma to the Chinese. If one allows State shares to be freely transferable, the State has to take the risk of losing its residual ownership rights over the State property and the controlling power in state-owned or - controlled companies. Upon the sale of the State shares, the State is no longer the ultimate owner of a particular company and the company becomes a privatised enterprise. If one forbids State shares to be freely transferable, the external control mechanism over corporate management will have little influence on state-owned or -controlled corporations.
Many Chinese are aware of the difficulty of allowing State shares to be transferred freely. There are not only ideological obstacles, but also pragmatic concerns.[54] Many Chinese understand that high social costs will be associated with the departure of State ownership from the companies. They believe the costs to be higher unemployment rates and the risk of increased social instability.[55] Nevertheless, many people accept that State shares in companies that are not essential to the national economy should be permitted to be sold on the securities market to enable the market control mechanism to operate and to provide more financial sources for these companies.[56]
In summary, although the economic and legal framework of corporatisation has been completed in China, many problems remain unsolved in relation to corporate governance in corporatised enterprises. These problems require special attention and detailed treatments, and present new challenges for Chinese policy makers and intellectuals.
The enterprise reforms in China can be divided into three phases. The first phase started in 1978. It focused on decentralising governmental authority in enterprises and on increasing the operational autonomy of enterprise managers. Methods such as the contract responsibility system, leasing and ‘corporatisation’ were used. Managers were given greater autonomy over the allocation of profits and resources.[57] The government also encouraged the development of enterprises with diversified ownership, including Chinese foreign joint ventures, and privately-owned and individually-owned enterprises.
With increasing expectations of improvement in enterprise efficiency, the second phase of enterprise reform began in the mid-1980s.[58] During this period, the government, while continually encouraging managerial autonomy, promoted the formation of long-term contracts between enterprises and their administrative departments. By detailing financial targets for the enterprises in such contracts, it was expected that opportunities for bureaucratic intervention would be reduced, and the managerial performance and economic efficiency of the enterprises improved.
In 1993, the third phase of enterprise reform began. The introduction of modern corporate governance mechanisms into state-owned enterprises was emphasised, and trials of corporatisation and privatisation were carried out in selected sectors and enterprises.
In 1997, the Fifteenth National Congress of the Communist Party of China sketched out the blueprint for future enterprise reform. The Congress confirmed that the next stage of the economic reforms should focus on reforming large and medium-sized state-owned enterprises into modern corporations so as to set up the modern enterprise system in China. Corporatisation and privatisation of state-owned enterprises are to be carried out at an ever-larger scale.
In September 1999, the Fourth Plenum of the Fifteenth CPC Central Committee further defined the major objectives and guiding principles for the reform and development of state-owned enterprises. According to the Decision of the CPC Central Committee on Major Issues Concerning the Reform and Development of State-Owned Enterprises,[59] the objectives up until 2010 are: to complete strategic readjustment and restructuring, to bring into form a more rational layout and structure of the national economy, to establish a relatively perfect modern corporate system, to improve economic performance, to promote scientific and technological development, market competition and risk management, and to make the State sector play an improved, dominant role in the national economy. The guidelines for the reform and development of state-owned enterprises include: the maintenance of public ownership as the dominant form; the strategic readjustment of the State sector and the restructuring of state-owned enterprises; the establishment of a modern corporate system; and the fostering of a competitive mechanism based on survival of the fittest.
Under the current policy, public ownership of enterprises can be reduced to a non-dominant proportion, except in some important sectors.[60] State-owned enterprises will only remain dominant in the following industrial sectors: (1) pillar industries and backbone enterprises in high technology sectors; (2) non-renewable natural resource sectors; (3) public utility and infrastructure service sectors; (4) sectors vital to the country’s national security.[61] This shows the government’s determination to introduce a diversified ownership structure into the enterprise system so as to encourage competition for state-owned enterprises.
After years of reform efforts, the progress of Chinese enterprises is impressive. Up until the late 1990s, the growth rate of total factory productivity steadily increased.[62] The economic efficiency of state-owned enterprises appeared to improve, although not as significantly as that of non-state-owned enterprises.[63] State-owned enterprises remained the key protagonists of the nation’s industrial sector and dominated most capital-intensive sectors.[64] However, the performance of state-owned enterprises was by no means satisfactory. Their profits declined from 6 percent of the GDP in the 1980s to 1 percent of the GDP in the late 1990s.[65]
State-owned enterprises suffer from several major problems. Firstly, the enterprises were excessively burdened by a range of social obligations.[66] Under the planned economy, China did not develop a social insurance and welfare system. Instead, the enterprises were liable for providing such social services to employees, retirees and their families. Since the beginning of the economic reforms, the State has made efforts to relieve the enterprises from such obligations by developing a social insurance and welfare system. However, before such a system was fully completed and functional, many enterprises had to continue to assume social responsibilities. As a result, state-owned enterprises operated with a large number of superfluous employees and retirees. This disadvantaged them competitively. As a result, many state-owned enterprises made net losses. Moreover, because they accepted social responsibilities for the State, they were not able to exit freely. For certain policy reasons, the government had little choice but to inject capital into loss-making or insolvent enterprises continually. This revealed a second major problem of China’s enterprise system: China’s banking system did not operate commercially.
The banks in China were not intermediaries between savers and investors like their counterparts in market economies, nor did they assume a disciplinary role like banks in market economies.[67] Under China’s planned economy, a mono-bank system existed where each bank operated as a central bank and a commercial bank. Banks operated according to administrative plans rather than commercial principles. This situation did not improve fundamentally after the economic reforms. The government continued to control interest rates and to impose credit plans on banks. Consequently, banks extended a large proportion of ‘policy loans’ to state-owned enterprises and had to underwrite loss-making enterprises constantly.[68] Sometimes, bank loans were used by enterprises to pay their workers’ wages and bonuses rather than to make profits. The non-commercial operation of the banking system created a fatal problem for the enterprise system: inefficient allocation of capital. If the problem persists, China’s major banks could all be dragged into insolvency.[69]
Price distortion was a third problem that plagued state-owned enterprises. For policy reasons, the State continually exercised the power to set prices for state-owned enterprises. This further disadvantaged state-owned enterprises in market competition. The situation was more serious in the early stage of the reforms. With the expansion of the price reform, the problem was mitigated. However, the government has retained a measure of control over certain products in particular sectors, such as through price ceilings.[70]
Fourthly, the early strategies of enterprise reform created new problems in the enterprise system. While the managers of state-owned enterprises were increasingly given managerial autonomy, the property rights in the enterprises were not clearly defined. This created an opportunity for the management of state-owned enterprises to transfer enterprise assets to non-state-owned enterprises.
Managerial autonomy also created an internal control problem, which led to excessive wage payment in some enterprises. Tax evasion and de-capitalisation also became severe.[71] These problems further contributed to the decline in profitability of state-owned enterprises.
Fifthly, compared with private companies, wholly state-owned companies and state-controlled companies have intrinsic disadvantages. Because the State cannot have real physical presence in companies, in spite of the administrative institutions of State assets or shareholding ministers, there is no equivalent of a private owner.[72] The administrative institutions or the shareholding ministers are, in fact, agents. The agents then hire other agents including State asset management companies and executive staff to run the companies. As a result, agent chains increase. This means that, in a wholly state-owned company or a state-controlled company, the agency cost will inevitably increase. Moreover, State asset management companies are comprised of administrative staff. These people are different from the residual claimants in the private sector, because their personal interests are not tied up with the economic performance of the companies.[73] Hence, they have less monitoring incentives in supervising corporate efficiency.[74]
Sixthly, state-owned companies and state-controlled companies have to make a choice between retaining State control and having the ability to transfer residual claimant rights. At the moment, priority is given to ensuring State control. As a result, State shares are not allowed to be transferred freely. This hinders the function of external supervisory mechanisms.[75]
Finally, it is impossible that state-owned or -controlled companies will be relieved from social goals to pursue optimal profits solely.[76] To separate commercial objectives from social objectives can only be carried out to some degree. In other words, the separation cannot be extended to a degree which matches the private sector.
The reality suggests that by simply taking the corporate form without sophisticated changes in institutions, property structures and public attitudes, a substantial improvement in corporate governance will not happen. In other words, creating a sound corporate governance system in China is a social project that requires far more comprehensive efforts.
Inspired by the foregoing discussions and analyses, this section attempts to develop a desirable model of corporate governance for China’s state-owned or –controlled companies.
The existence of various systems of corporate governance illustrates the truism that a corporate governance system is shaped by the society where it evolves. Economy, politics, culture, and historical events all play important roles in molding the corporate governance system. China has its special social and economic situations. The corporatisation must give special consideration to these particular social and economic conditions. Today, the economic reforms have reached a stage that, for further economic development, China must engage in the global economy. China’s reception into the WTO indicates that China’s enterprises will be thrown into the arena of intensive international competition. Therefore, China has no choice but to standardise its enterprise practice and to bring the competitive mechanisms of the modern corporation into its enterprises. For the purpose of retaining the dominant position of State ownership upon the completion of the enterprise reforms, China has converted and will convert all state-owned enterprises into state-owned or state-controlled companies.[77] A large number of them have taken, or will take, the form of state-owned companies.[78]
The purpose of the enterprise reforms is to solve the problems that existed in previous state-owned enterprises. These problems included the integration of the roles of enterprise owner and administrator of the national economy,[79] and the integration of the roles of enterprise owner and enterprise manager.[80] The enterprise reforms have attempted to introduce the ideology and the governance structure of the modern firm into China’s enterprise system, so as to break up the multiple roles played by the State through division of powers among different government branches. In doing so, the first step is to separate the role of the administrator of the national economy from the role of the owner of state-owned enterprises. In 1988, China established the Administrative Bureau of State Assets as the only authority for exercising the ownership rights of State assets. Since then, the role of the administrator of the national economy and the role of the owner of state-owned enterprises have been separately played by different governmental organisations. While the macro administrative branch is in charge of the nation’s macro-economy, the Administrative Bureau of State Assets is responsible for supervising and organising the use of State assets in state-owned enterprises and companies. It has the power to appoint and dismiss the managers and other personnel of state-owned companies. However, the Administrative Bureau of State Assets does not involve itself in directly managing the State assets. This function is delegated to State asset management companies (management companies).[81] These companies are, in fact, the holding or parent companies of state-owned companies. They involve themselves in the business affairs of their subsidiaries by using their rights as shareholders to control the board of directors.
China has begun the trial of establishing management companies according to trades, i.e. establishing a national asset management company for each trade, since the late 1980s. The three core enterprises of the former enterprise groups in petrochemistry, aviation and nonferrous metal and the two former ministries of electric industry and metallurgical industry were reconstituted as the management companies of their trades. In the meantime, new arguments arose. Some pointed out that setting up a national management company for a trade would lead to a trade monopoly. Therefore, it was desirable to set up more local management companies in different trades, as well as management companies for different corporate groups. Currently, these two types of management companies are also in a trial process.
After all these efforts, there is still the question: how will corporate mechanisms work in these companies? Or, have the old problems been solved by introducing corporate mechanisms into the Chinese enterprise system?
To answer this question we need to identify three issues. Firstly, has the problem of absence of ownership in previous State enterprises been solved? The establishment of the Administrative Bureau of State Assets and management companies has shown the government’s desire to wholeheartedly exercise shareholders’ rights and powers in relation to directing companies. However, it is still problematic. In a conventional Western company, the ultimate shareholders have the residual claimant right over the corporate assets and the ultimate controlling rights (voting rights). In a state-owned company, the Administrative Bureau of State Assets and the State asset management company exercise all the powers of supervision and governance over the company, but do not have the residual claimant right. That right belongs to the State. Furthermore, the Bureau and the management companies are run by either salaried bureaucrats or salaried board members. Hence, theoretically, the shareholders’ monitoring incentives in a conventional commercial company do not apply in the case of a state-owned company.
The second issue is, are all the mechanisms of corporate governance in the modern firm applicable to a state-owned company? A negative example is at hand. If State ownership in a state-owned company is not subject to dilution, then the market mechanism (supervision from the stock market) cannot be exerted in such a company.
The third issue is, will the agency cost be reduced to a minimal degree? It is unlikely. From the State to the Administrative Bureau of State Assets, to State asset management companies, to lower parent companies, then to individual companies, there are too many hierarchical chains of the principal/agent relationship. The agency cost increases as agency chains lengthen.
When designing a corporate governance system for today’s China, all of the above elements must be taken into account. First of all, it is desirable that, with the exception of some trades which are important to the national economy and the people’s livelihood, state-owned enterprises in other trades do not take the form of the state-owned company. It may be more advantageous, if, in a company, the State takes the role of the large shareholder by holding controlling shares. Firstly, this allows the company to raise funds from the public.[82] Secondly, the performance of these companies can be monitored by the market mechanism. Thirdly, this can bring in supervisory mechanisms from the public, as the performance of the companies can be checked by other shareholders including other companies and individuals.
It is also desirable if there is a system of choosing and examining directors and managers. If excessive hierarchical chains and the separation of the residual claimant right and control increase the agency cost in state-owned and -controlled companies, we have to seek for some other mechanisms to improve the situation. Introduction of incentive and penal mechanisms may be a solution. Research reveals that individuals in reality do not totally fit into the description of individuals in economic theories. According to economic theories, individuals pursue their maximum economic interests. In reality, an individual’s needs not only include material interests but also other things such as reputation, position, profession, sense of achievement and future development.[83] If a system of examining directors’ quality and work record is established and a competitive market of managerial personnel exists, cases of ‘shirking’ and ‘stealing’ are likely to be effectively curtailed.
Corporate development has come to a stage where human capital or employees play an important role in creating and increasing corporate value.[84] Employees are physical owners of companies. The outcome of corporate performance directly concerns their interests. China should have a corporate system where employees consciously play a dynamic role in corporate governance. The current Company Law imports the co-determination system into the Chinese corporate system. However, more needs to be done to successfully implement the co-determination system.
The ability of banks to finance and supervise corporations should be maximally utilised. German and Japanese experience has shown that, compared with the securities market, under certain circumstances, banks can be a more efficient and less expensive mechanism of monitoring corporate performance and rescuing distressed companies.[85] At a time when state-owned and -controlled companies play an indispensable role in the national economy, it is desirable to fully exploit banks’ potential in relation to corporate governance. The Chinese government is keen to preserve the dominance of public ownership on the one hand, and allow the securities market function on the other. This has resulted in the creation of a hierarchy of class of shares and a secondary share market in practice. Shares are classified into state-owned shares, state-owned legal person shares,[86] and shares of members of the Chinese public.[87] While the public members can trade their shares among themselves on the securities market, the trading of State shares is prohibited and state-owned legal person shares can only be traded among state-owned legal persons.[88] With such an arrangement, it is not expected that the monitoring function of the securities market will fully operate. In such a situation the role of banks in corporate governance becomes even more important.
The advantages of corporate groups should also be fully exerted. The group structure encourages cross holdings among group companies. This enhances the competitive strength of individual companies. In order to survive in international competition, Chinese enterprises need to aggregate into corporate conglomerates. This is also helpful in relation to enhancing shareholders’ governance power.
In summary, the Chinese corporate system should develop a position somewhere close to German and Japanese practice in relation to banks’ influence, corporate groups and worker participation in corporate affairs. China also needs a comparatively developed stock market. Finally, as state-owned and -controlled companies will account for the bulk of the national economy, it is important to have a specially designed examining and supervising system to govern the salaried bureaucrats and directors in the Administrative Bureau of State Assets, State asset management companies, and state-owned and -controlled companies. The model of corporate governance for state-owned and controlled companies can be illustrated by the following diagram:
It has been widely acknowledged that the governance structure of a state-owned enterprise does not encourage profit-maximising behaviour. This has been thoroughly discussed by Chinese policy makers and scholars. In their discussions, modern enterprise and governance theories were applied to analyse the problems of the Chinese enterprise system. What took a long time to be debated in the early years of enterprise reform were the reform policies and measures. The Chinese were aware of the fact that simple privatisation would not achieve China’s reform objectives. The political, social and economic conditions in China determined that such an approach would increase social costs and jeopardise the prosperity of the whole economic reform program. The Chinese were also uncertain about whether corporatisation without privatisation could bring about much improvement in enterprise performance. As a result, instead of corporatisation, China introduced less radical measures of enterprise reform such as increasing enterprise autonomy and introducing a director-responsibility system.
However, state-owned enterprises continued to deliver unsatisfactory economic performance. Furthermore, these reform programs produced new problems. A severe problem was insider control. These problems persisted and began to have an impact on all-important economic sectors and areas. The Chinese saw no alternative but to take profound measures to reform their enterprises. It was agreed that China must introduce modern corporate governance structures’ into its enterprises so as to build a modern enterprise system. Thus, corporatisation was carried out in steps, from initial trials to a substantial extent.
Today, many enterprises take the corporate form. However, the corporate form does not automatically bring improved economic efficiency and performance. What decides the outcome of the enterprise reform is whether these enterprises are effectively governed so as to produce high economic performance and to benefit all interested groups. At this point, more efforts need to be made by Chinese policy makers, enterprises, investors, managers, and entrepreneurs.
Just as the economic efficiency of an enterprise does not necessarily improve simply because it adopts the corporate form, merely introducing modern corporate governance mechanisms into a company does not necessarily guarantee that the company will be better governed. This is because a good governance model may have little to do with practicability. An economic model is usually built on the assumption that society and individuals, based on perfect information about the costs and benefits of alternative choices, can make rational decisions. However, the reality is that we live in a society of incomplete information, with a complex environment, and where individuals hold their own subjective perceptions of the external world. Hence, there are gaps between a model based on rational choice and efficient market hypotheses, and the practicability of the model. A model of little practicability amounts to a mere scrap of paper. Furthermore, divergent corporate governance models adopted by different systems illustrate the fact that the development of a model in a particular system is shaped by the social, ideological, economic, historical and cultural conditions of that particular nation.
Therefore, to select a system of corporate governance requires the balancing of a number of considerations. The vitality of a corporate governance system lies in both its economic rationality and practicability. To adopt a model giving insufficient consideration to the special social conditions of a particular society will increase the cost of the institutional change and the cost of reception of the model. Consequently, its adoption becomes undesirable. The most desirable choice is a choice that represents the best economic efficiency after balancing the economic benefits and the cost of reception. Hence, in the process of designing a suitable model of corporate governance for China, important factors that influence corporate behaviour should be taken into account. This model has to give adequate consideration to China’s current economic situation and political system, the Chinese people’s ideological and cultural preferences, the developing path of corporate practice in China, and the significance of the model in relation to sustainable development of the nation’s economy.
Meanwhile, it should always be kept in mind that when we talk about increasing corporate efficiency by improving corporate governance, we are talking about it at the microeconomic level. Corporate governance has a limited influence on macroeconomic development. No matter how perfectly a company is directed, it is still affected by major events that are outside its control. However, better corporate governance should offer a corporation a better chance of survival.[89]
[*] LLB (China University of Political Science and Law, Beijing, China), LLM (Bond University, Australia), PhD (Bond University, Australia); Lecturer in Law, Victoria University of Technology, Australia; Visiting Professor, Harbin University of Science and Technology, China.
[1] See Shenshi Mei, Research on the Structure of Modern Corporate Organs’ Power: A Legal Analysis of Corporate Governance (1996) 32-37. Also see Zhiguang Zhang, Yafan Wang, and Zhenning Wang, ‘A Few Issues about Corporate Property Rights’ (1995) 5 Dong Bei Zheng Gui Da Xue Xiao Bao, 35-37 [trans: in Journal of Normal University of North-East].
[2] See Lijuan Guan, ‘The Problem of the Absence of Shareholder Ownership, and the Legal Countermeasures’ (1998) 1 Fa Zhi Yu Jing Ji, 11-12 [trans: in Law and Economy].
[3] Ibid.
[4] See On Kit Tam, The Development of Corporate Governance in China (1999) 50.
[5] Shenshi Mei, above n 1, 34-35.
[6] See the remarks made by the Chinese scholars Deming Yang and Jinglian Wu in Wenmin Zhang (ed), The Great Economic Debate In China (1997) 131-2. Some Western scholars have also made useful remarks about the relationship between economic productivity and the improvement of social welfare. In Australia at the Crossroads: Radical Free Market or a Progressive Liberalism?, Fred Argy discussed the changing economic policies of the public sector and governmental intervention in the economic life of Australia during the past several decades. He argued that to use GDP as the welfare indicator is inadequate. He pointed out that apart from GDP, the ingredients of a decent society also include the availability of work, quality of life and distribution of welfare. He asserted that Australia is now at the crossroads of economic policy. It can continue to move down the free market road and allow the traditional welfare society to be replaced by one of harsh, competitive individualism, or it can take a more pragmatic consensual approach, i.e. while carrying out market-oriented economic reform, allow the basic ingredients of a decent society to be preserved. He suggested that at the moment Australia tends to choose the latter. See Fred Argy, Australia at the Crossroads: Radical Free Market or a Progressive Liberalism? (1998) 5-30, 249-52.
[7] Shenshi Mei, above n 1, 65.
[8] For example, famous scholars including Chi Chen, Jianzhong Ma, Tao Wang, and Fucheng Xue all made this kind of comment.
[9] See Jianmin Dou, Research on the History of Corporate Ideology in China (1999) 13-17.
[10] Ibid
[11] Ibid 13-14.
[12] Ibid.
[13] This was a campaign of modernising China and establishing national industries by learning from the West.
[14] The first company was established in 1873.
[15] See Yuwa Wei, ‘A Chinese Perspective on Corporate Governance’ (1998) 11 Bond Law Review, 366-7.
[16] A report in the newspaper Shenbo (December 25, 1883) provides an example. It described a common shareholders’ meeting. The Chinese followed the Western system in setting up companies. All processes including the prospectus, board arrangement and constitution were close to Western experience, only the practice was different. When a shareholders’ meeting was held, there had to be a banquet. Even female entertainers were called. When the air was filled with joy, the proposal and other documents were produced by the directors and were passed without questioning.
[17] Jianmin Dou, above n 9, 21-22.
[18] Ibid.
[19] See Zhongshan Shun, ‘The Speech at the Farewell Party for the Members of Tongmeng Society’, in Complete Works of Shun Zhongshen (1982) Vol 2, 322.
[20] See Dixin Xu, The Road of the Chinese Economy (1946) 106-7.
[21] Ibid 103-4.
[22] See Zhongpei Gan, The Law of Enterprises and Companies (1998) 102.
[23] See George Wang, ‘Introduction’ in Economic Reform in the PRC,In Which China’s Economists Make Known What Went Wrong, Why, and What Should Be Done About It (1982) 1-2.
[24] See Andrew Walder, ‘China’s Transitional Economy: Interpreting Its Significance’ in China’s Transitional Economy (1996) 10.
[25] Jianmin Dou, above n 9, 108.
[26] For example, the Regulations on Deepening the Enterprise Reform and Enhancing the Vitality of the Enterprises 1996 (The State Council).
[27] See the comments made by Wu Ge in Wenmin Zhang (ed), The Great Economic Debate in China (1997) 90-91.
[28] See Sun Sangqing, ‘The Dominance of Public Ownership is the Foundation of Fairness’, Jingji Cankao Bao, September 24, 1994. See also Chen Mingwu’s remarks in Wenmin Zhang (ed), The Great Economic Debate in China (1997) 69-70.
[29] See Chen Mingwu’s remarks in Wenmin Zhang (ed), The Great Economic Debate in China (1997) 69-70.
[30] See the remarks made by Yu Weiguo in Wenmin Zhang (ed), The Great Economic Debate in China (1997) 69-70.
[31] Shenshi Mei, above n 1, 32-37.
[32] See Adolf Berle & Gardiner Means, The Modern Corporation and Private Property (1991) 311.
[33] Ibid
[34] Ibid 8-9.
[35] See Arthur Thompson & John Formby, Economics of the Firm: Theory and Practice (1993) 260-1.
[36] Such a function is exercised by relevant administrative personnel or institutions. However, there are no incentives for them to fulfil their duties diligently. Moreover, these people and institutions bring administrative interference which violates economic rules.
[37] See Yiwei Jiang, ‘The Theory of an Enterprise Based Economy’ (1980) 1 Zhong Guo She Hui Ke Xue, 29-36.
[38] Ibid
[39] Shenshi Mei, above n 1, 34.
[40] See Zhiguo Han, ‘The Important Issues on Ownership System Reform’, Guangming Ri Bao, October 10, 1987, 2.
[41] Ibid.
[42] See Shi Jinlei, ‘The Protection of Share Ownership Right’ (1997) 1 Fa Lu Ke Xue 49.
[43] Ibid.
[44] See Frank Easterbrook and Daniel Fischel, The Economic Structure of Corporate Law (1991) 66.
[45] See Yining Li, ‘The Thought on Ownership System Reform’, People’s Daily, September 26, 1986, 2.
[46] See Jingwei Jiu, ‘Corporate Property Rights’ in Hua Chen & Jingwei Jiu (eds), Research on the State Owned Enterprise Reform and Corporate Law (1997) 13-14.
[47] Here, the term ‘state shares’ is used in a loose sense and includes state shares and state-owned legal person shares.
[48] See Wen Liang, ‘Some Legal Problems of Reforming the State Owned Enterprises into Limited Companies’, in Hua Chen & Jingwei Jiu (eds), Research on the State Owned Enterprise Reform and Corporate Law (1997) 29-30.
[49] Ibid 31.
[50] Ibid.
[51] See the Administrative Methods of the Evaluation of State Assets 1991.
[52] See Xiangyi Xu, Organisation and Management of Modern Companies (1999) 180.
[53] Ibid 118-23.
[54] See Junkuo Zhang, ‘Some Thoughts about the Reform of State-Owned Enterprises’ (1994) 9 Jing Ji Yan Jiu, 38-41. Also see Yang Ruilong, ‘Theoretical Thinking on Shares - System Reform of Chinese State-Owned Enterprises’ (1995) 12 Jing Ji Yan Jiu, 13-22.
[55] Jianmin Dou, above n 9, 184.
[56] Ibid.
[57] Ibid.
[58] Ibid 23.
[59] Issued on September 22, 1999.
[60] The policy was clarified by a decision of the Fourth Plenum of the Fifteenth CPC Central Committee in 1999 and by the State Development Planning Commission in a statement in 2000. See Harry Broadman, ‘China’s Membership in the WTO and Enterprise Reform: The Challenges for Accession and Beyond’, SSRN Journal, May 30, 2000 <http://papers.ssrn.com/paper.taf?abstract_id=223010> .
[61] Ibid.
[62] See World Bank, China’s Management of Enterprise Assets: The State as Shareholder, 1997, 1.
[63] See Theodore Grove et al, ‘Autonomy and Incentives in Chinese State Enterprises’ (1994) 109 (1) Quarterly Journal of Economics, 183-8.
[64] World Bank, above n 65.
[65] Ibid.
[66] Ibid.
[67] See Nicholas Lardy, China’s Unfinished Economic Revolution (1998) 59-61.
[68] Ibid 83.
[69] It is suspected that the major banks are already insolvent.
[70] See Harry Broadman, Meeting the Challenge of Chinese Enterprise Reform (1995) xv.
[71] Harry Broadman, above n 63.
[72] See Linyu Zhai, ‘Agency Theory and Orientation of Reform in Chinese State-Owned Enterprises’ (1995) 4 Jing Ji Yan Jiu, 23-30. Also see Guanghua Yu & Jian Fu, ‘Agency Costs and Supervisory Mechanisms in Stock Companies’ (1994) 3 Jing Ji Yan Jiu, 28-29.
[73] Guanghua Yu & Jian Fu, above n 76.
[74] Ibid.
[75] See Jun Zhang, Modern Property Economics (1991) 203, 229.
[76] See Hua Chen, Haiyun Chen & Zhiqiang Su, ‘Some Legal Issues Involving State-Owned Enterprises’, in Hua Chen, Haiyun Chen & Zhiqiang Su (eds), Research on the State Owned Enterprise Reform and Corporate Law (1997), 74-75.
[77] A state-owned company is a kind of one-man company, in which the State is the only shareholder. In a state-controlled company, the State holds the controlling shares.
[78] In 1996, China put 100 state-owned enterprises into the trial of corporatisation. In the end, 73 of them took the form of state-owned companies. See Maocai Liu & Diankun Xhou, ‘Introspection and Improvement Suggestion on ‘Only Ownership by State and Authorised Management by Firm’ Phenomenon’ (1996) 11 Jing Ji Yan Jiu, 21-26.
[79] In this system, the State, as the administrative authority of the national economy, had the power and duty to make economic plans and supervise their implementation on the one hand, and was the owner of state-owned enterprises on the other. It is believed that these two roles inherently conflict. As the administrative authority of the national economy, the State should concern itself with the overall economic performance of all enterprises; as the owner of enterprises, the State should only concern itself with the economic performance and efficiency of its individual enterprises. Therefore, breaking this combination of administration and management is essential in order to make the owner of the enterprise focus on the interests of the enterprise. See Jiaxiang Wu & Lizou Jing, ‘Corporatisation: A Thought about Further Reform’ (1985) 12 Jing Ji Fa Zhan Yu Ti Zhi Gai Ge 1, 1-12.
[80] As mentioned, State ownership did not have an appropriate appearance in an enterprise. This amounted to de facto absence of ownership. As the owner, the State had to rely on administrative officers as agents to run the enterprise. These agents implemented the State’s policies and plans, and there was very little connection between the economic efficiency of the enterprise and the officers’ work records.
[81] Some proposed that China should reform the previous administrative department of a trade into State asset management companies. Some proposed that the core enterprises of the former enterprise groups should be reformed into management companies.
[82] To fully exploit economies of scale, it is necessary to pool capital from the public into these companies. Currently, large amounts of capital in China lie idle. It is estimated that the amount of bank deposits by individuals reached 50,000 billion RMB Yen in 1997. See Xiangyi Xu, above n 54, 622.
[83] See Shann Turnbull, ‘Corporate Charters with Competitive Advantages’ (Keynote Speech made at the Conference on Alternative Perspectives on Corporate Governance, Columbia University Law School, 1998) 33.
[84] See Margaret Blair, Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century, (1995) 292-330.
[85] See Masahiko Aoki and Hugh Patrick, ‘Introduction’, in Masahiko Aoki and Hugh Patrick (eds), The Japanese Main Bank System: Its Relevance for Developing and Transforming Economies (1994) xxii.
[86] State-owned shares refer to the shares obtained by an institution on behalf of the State. State-owned legal person shares refer to the shares obtained by a state-owned legal person (industrial enterprise or non-industrial entity).
[87] Apart from these categories, shares can be further classified into A shares, B shares, C shares, H shares, and N shares. For detailed discussions about the share structure in China, see Chengxi Yao, Stock Market and Futures Market in the People’s Republic of China (1998) 3-37.
[88] See 12 Gazette of the People’s Republic of China State Council (1994) 459. See also Chengxi Yao, above n 91, 18.
[89] Jonathan Charkham, Keeping Good Company: A Study of Corporate Governance in Five Countries (1995) 353.
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