Getting to Know You
Corporate Governance in China

Therese Niklasson

Focusing on Corporate Governance

China wants to improve its reputation for corporate governance despite concerns about management practices.

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For international investors, the liberalisation of China’s onshore capital markets provides exciting opportunities, but also many challenges, particularly when it comes to assessing local corporate governance practices. The standard of a company’s corporate governance structures and mechanisms is a vital component of assessing the quality and approach of its management team. But unfamiliar local legal and cultural contexts often present hurdles to investors entering new markets, and China is no exception.

A defining feature of corporate China is the omnipresence of its state-owned enterprises (SOEs), which have historically had limited interaction with their wider shareholder bases. Chinese SOEs have largely had highly concentrated ownership structures, while their non-government shareholders are dominated by retail investors who individually lack the influence or expertise to call management to account. This contrasts to the dispersed ownership structure and significant institutional presence of developed markets, which has resulted in extensive contact between a company’s management and its shareholders.

Unfamiliar local legal and cultural contexts often present hurdles to investors entering new markets, and China is no exception.

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But Chinese corporate governance practices are going through a period of change. The government has focused on enforcing market-abuse regulations and improving business integrity, and it was clear from our recent visit to the Shenzhen Stock Exchange that Beijing is keen to improve the governance reputation of domestic companies to attract overseas capital. Local institutional investors are also showing signs of a more active approach to ownership, and have started to engage with Chinese companies including SOEs. But what will these changes mean, in practice, for companies and investors?

Beijing is keen to improve the governance reputation of domestic companies to attract overseas capital.

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