Since China started its economic reform in the late 1970s, its gross domestic product has been growing at an average annual rate of 9.73 percent. Chinese stock markets have also been growing rapidly, especially since late 2005, when share merger reform started. Today, there are more than 1,500 publicly traded Chinese companies, and the total market capitalization surpassed 24.5 trillion renminbi (RMB) in August 2007.

Despite this rapid growth, corporate governance has been very weak in China. In a survey by the World Economic Forum, China ranked 44 out of 49 studied countries in terms of corporate governance (Liu, 2006). Corporate governance is critically important to a country’s economic growth and stability, because it provides the credibility and confidence in management that is fundamental to capital markets.

To date, research on Chinese corporate governance has been sparse. This report begins to address this gap by providing a basic overview of the status of corporate governance mechanisms in China.

PREFACE
The recent history of economic reforms and corporate governance in China has been one of staggeringly swift change, as that nation has moved toward a stronger role for private enterprise and capitalism. As China has aligned itself more closely with the international economy, it has also sought to adopt more Western-style oversight mechanisms and legal standards concerning the operation of its corporations.

This report offers a literature review and analysis of the evolution of corporate governance institutions in China, as well as an examination of continuing challenges and policy implications. This report should be of interest to anyone concerned with Chinese corporations, capital markets, securities regulation, or governance issues.

This report results from the RAND Corporation’s continuing program of self-initiated research. Support for such research is provided, in part, by the generosity of RAND’s donors and by the fees earned on client-funded research.

Visit Chinese Corporate Governance: History and Institutional Framework Download Page

Yong Kang, Lu Shi, Elizabeth D. Brown
Published 2008 by the RAND Corporation
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CONTENTS
Preface . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
Figures and Tables . . . . . . . . . . . . . . . . . . . . . . . vii
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
Acknowledgments . . . . . . . . . . . . . . . . . . . . . xiii
Abbreviations . . . . . . . . . . . . . . . . . . . . . . . xv
CHAPTER ONE
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
CHAPTER TWO
The Development of Corporate Governance in China . . . . . . . . 5
1949–1983: Dominance of State-Owned Enterprises . .. . . . . . . . . 5
1984 –1993: Separation of Government and Enterprise . . . . . . . . . . . . 5
1994–2005: Experimentation in the Modern Enterprise Structure . .. . . . 7
2006 Onward: Continued Pursuit of Corporate Governance . . . . . . . 8
CHAPTER THREE
The Institutional Framework .. . . . . . . . . . . . . . . . . 11
Shareholders’ General Meeting .. . . . . . . . . . . . . . . . . . . 11
Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Regulators . .. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Auditing System .. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Legal System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Stock Exchanges .  . . . . . . . . . . . . . . . . . . . . . . . . . 22
Institutional Investors . . .  . . . . . . . . . . . . . . . . . 23
CHAPTER FOUR
Problems of Corporate Governance in China . . . . . . . . . . . 27
Concentration of State Ownership . . . . . . . . . . . . . . . . . . . 27
Weak Supervisory Board and Independent Directors . . . . . . . . . 29
Insider Trading .. . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Fabrication of Financial Reports Among Listed Companies  . . . . . . 31
Immature Capital Market .  . . . . . . . . . . . . . . . . . . . . . 32
CHAPTER FIVE
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . 35
References . .  . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

The RAND Center for Corporate Ethics and Governance

This research was conducted within the RAND Center for Corporate Ethics and Governance,which is part of the RAND Institute for Civil Justice. The Center is committed to improving public understanding of corporate ethics, law, and governance, and to identifying specific ways that businesses can operate ethically, legally, and profitably at the same time. The Center’s work is supported by voluntary contributions from private-sector organizations and individuals with interests in research on these topics, and government grants and contracts.

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